The Summer 2005 issue of The National Interest, my favorite foreign policy journal, featured three articles on Russian affairs.
While readers will be happy to know that California's farm raised caviar may bring some relief to the overfished sturgeon populations of the Caspian Sea, the most important contribution came from J. Robinson West's analysis "The Future of Russian Energy". West, a top executive for PFC Energy, first delivers the good news: Russian crude oil production has hit a post-Soviet high of 9 million barrels a day, 50% more than just six years ago. Russian oil production now ranks second only to Saudi Arabia's, at 11% of the world market. Then West presents the bad news - Russian oil production has only grown by 3% this year, and Russia may be hitting the upper limit of what its aging derricks and Soviet-era pipelines can handle.
Massive direct foreign investment is the only solution, and would enable Russia to obtain new equipment and explore untapped remote Arctic and Siberian regions. But Putin's destruction of Yukos, in an effort to stifle political opposition and create "national champions" in the energy sector, has scared off many foreign investors. And Russia did not have a good record of attracting investment before the Yukos power grab.
Want to know how bad Russia's efforts at attracting foreign investment in the energy sector have been since the collapse of the USSR? Since 1992, Russia's energy industries have received 15 billion dollars in foreign direct investment (FDI) - while Western Africa has received 113 billion. Russia is losing energy investment dollars to Nigeria, which ranks nearly dead last every year in independent rankings of the world's most corrupt and least transparent economies.
In fairness to the Kremlin, oil in the Gulf of Guinea has lower transportation costs, since it is more convenient for shipping to markets in Western Europe and the American East Coast. West's analysis also doesn't mention many of the recent initiatives Putin has launched to lure foreign investors back. But there is no ignoring the article's indictment of Gazprom as a massive Soviet style bureaucracy, and description of Russia's pipeline operator Rosneft as similarly hamstrung by poor management and deteriorating infrastructure.
Gazprom is hoping for a new pipeline under the Baltic Sea to pump Russian gas to Western European markets, bypassing political obstacles in Ukraine. However, expanding Gazprom's exports of Russian gas to a slow-growing Europe is relatively easy, compared to the challenge of getting oil and gas from Siberia to energy hungry markets in Asia and the entire Pacific Rim, the growth market of the future. Meeting Asian demand will require not just new pipelines across Siberia and China, but massive liquified natural gas (LNG) and tanker terminals at the Pacific ports of Nakhodka and Vladivostok.
