Discussions about the security of the world’s energy supplies have been ongoing for a number of years now. This seems a good
moment for me to stand back and take a detached look at the component elements
involved in delivering energy to the world market and at the interrelation
between these elements. Such an understanding is important, not least because
there is no precise definition of the concept of energy security. That is
because the subject involves different individual groups, each with its own
goals and interests.
The interests of the various parties are brought together and given expression
through the International Energy Agency. This organization conceives energy
security as designed to protect energy consumers from delays in supply caused
by exceptional circumstances, such as terrorism, underinvestment in
infrastructure or poor market organization. However, this is an incomplete
definition, as it mainly reflects the interests of energy consumers.
The global energy system consists of the resources of production, consumption,
transportation and trade. Some companies and enterprises specialize in one of
these operations, while others participate in several of them, with the aim of
increasing the overall efficiency of their economic activities. At the same
time, different groups have their own interests, which over time may coincide,
call for compromise, or be in conflict. But, in general, the system works,
despite the contradictions, and the consensus view of energy security is that
work should be directed towards the stability of the energy market.
Let us begin by looking at the role of energy producers, since they are most
often accused of playing the major destabilizing role by threatening the
security of energy supplies.
It might be thought that the market for a product such as oil, with a high
degree of monopoly and low production costs in most OPEC-countries, might be
noted for its stability. However, since their sharp rise in 1973-74, oil prices
have been subject to fluctuation more than once. The economic situation of most
OPEC-countries cannot be characterized as brilliant, and OPEC
’s member countries are fully aware of their dependence on oil consumers. Their
attempted embargo on oil exports to Europe proved ineffective when the member
states of the International Energy Agency created strategic oil reserves equal
to nearly three months
’ import requirements. They have not attempted since then to exert political
pressure. At present an informal union has been formed in order to support
stability. Causes for concern remain however. They include:
— recurrent disorder and strikes in Nigeria and Venezuela; the unsettled
situation in Iraq; the uncertainty in relations between Israel and Palestine,
and between Israel-Lebanon
— Syria; growing concern about the situation in Iran and the latter’s aggressive stance.
Russia and Norway occupy a special situation among developed countries in that
high oil prices are to their economic advantage. However they recognize that
high prices are often the result of heightened political tension and this may
outweigh the economic gains. They are often willing, therefore, to fall in with
the suggestions of OPEC and the importers on maintaining stability in oil
The self-evident interest of exporters in maintaining high oil prices has to
have a limit and they are prepared to discuss the so called
“fair price” which provides long-term stability in consumption of their product. “Fair price” is understood as a less than maximum price that meets exporters’ reasonable economic requirements, as recognized by the world community, without
exceeding a level that could have negative consequences for exporters and
importers. The concept of a fair price for oil and, accordingly, of natural gas
and other kinds of energy, as they are generally inter-related, is defined as
the oil price corridor. OPEC-countries, for instance, manage this corridor by
imposing extraction quotas on oil for supply to the world market. Too high a
price slows down the rate of economic growth in the net importing countries,
leading to global economic recession which thus hits the interests of the net
exporters of hydrocarbons. Many experts, including those connected with the
’ interests, note that the longer hydrocarbon prices remain high, the more likely
it becomes that alternative energy sources will emerge and be put into
Russia and other net exporters of hydrocarbons are not interested in excessively
high prices as they have a negative influence on economic development within
the country, by increasing energy
’s share in the national economy, as well as favouring accelerated depletion of
mineral resources leading to an eventual decline in oil production and export.
The role and problems of Russia will be considered in greater depth later in my
Some experts believe that in the absence of regulating mechanisms by the net
exporters, the coming two years will see both a continuation of the growth of
oil production and a reduction of the oil price.
Apart from price, where high prices favour exporters and low prices favour
importers, another area in which the interests of the participants diverge is
access to the most favoured markets. To a large extent this is connected with
the development of the corresponding transport infrastructure
— the network of main pipelines, railway transport, terminals, oil refineries and
plants for the production of liquefied natural gas. All this requires huge
investment involving considerable risks for the private sector which it would
like to reduce by receiving some kind of state support.
The creation, maintenance and development of infrastructure are of equal
importance to both exporters and importers. However, exporters face an
additional challenge, the changing geography of their supplies as they enlarge
their raw-material base, by opening up new fields. It should be noted, however,
that although our increased knowledge of geology makes this an attractive
proposition, there are risks involved and those risks might increase over time.
As to the coincidence of the interests of exporters and importers they have,
first of all, a mutual interest in providing for stable economic growth of the
world economy as a whole. Robert Skinner, Director of the Oxford Energy
Institute, describes the interrelation between net exporters and net importers
of hydrocarbons as
It can be seen from the above that a willingness to compromise prevails in the
field of production and supply of energy and this was confirmed by the
discussions at the G-8 summit this year. The outcome of the discussions was a
declaration of mutual readiness to support and strengthen the existing system
for the supply of energy.
The present relative stability of oil production and consumption is under
constant threat of change, though this is not necessarily a bad thing. Weak
points in the existing infrastructure and new infrastructure projects change
the overall picture of the flow of world energy. These include regions where
the density of shipping traffic is especially high (Turkish, Danish, Ormuz and
Malacca straits), as well as transit problems and political instability
resulting from inter-ethnic and inter-state conflict.
Other factors influencing the delivery of energy supplies include alternative
supply routes. New pipelines such as Baku-Djaihan, the North-European gas
pipeline, and the oil pipeline East Siberia-Pacific Ocean, are among the
projects under construction or at the planning stage for the transportation of
liquefied natural gas and other products. Increased oil supplies from Russia to
the APR [Arctic Polar Region] and China of up to 80m tonnes per year might,
during the initial period of this process, reduce Russian supplies to the
European market by several tens of million tonnes of oil per year. [This is
dependent on the success of geological prospecting in East Siberia] Another
— the opening of the Baku-Djayhan oil pipeline will significantly decrease the
volumes of Azerbaijanian oil transit through the Baku-Novorossiisk pipeline and
consequently the freight turnover of Novorossiisk
Apart from the economic risks we see political risks growing in significance.
The development of a reliable system of risk management must be seen as one of
the most important components in achieving security for the world
’s energy supplies.
Risk management has both an economic and a political dimension. From the
economic point of view it means decreasing expenses in the economy of certain
— it means preventing socio-political crises within individual states and
conflicts between states. Conflicts may arise in different spheres
— between net exporters and net importers; among net exporters themselves or
within the group of net importers.
In the past, world energy security has been considered primarily from the point
of view of the leading net importers of energy (consumers), ie from the
standpoint of providing them with a regular supply of hydrocarbons at a
reasonable price. This requires the producers as net exporters to maintain
considerable reserve capacity to deal with times of crisis in the supply of oil
to the world market. Any decrease in supplies from one area would be made up by
other countries increasing oil extraction from their reserves. This is clearly
unsatisfactory. From the producer
’s standpoint, security of energy supplies is associated with significant risks.
These include: the cyclical nature of world economic development (i.e. falls in
demand for energy); large investment in the production and transportation of
energy supplies; attempts by traditional consumers to switch to alternative
energy sources and concern for the safety of energy supply routes. The threat
by some producers to put an embargo on oil supplies is also not helpful
Producers in their turn are no less dependent on consumers. This is seen in the
need to secure budget receipts, which often make up the lion
’s share of OP EC’s income, as well as that of other oil producers. In addition to fluctuations in
demand, producers are also affected by inflation of the US dollar, the major
currency in which oil is traded. If all the factors forming dependence or
security on oil market are weighed against each other, the two sides are, more
or less, roughly in balance. The situation in energy security is perhaps best
“fair economic interdependence”.
Specialists, however, point out that excessive emphasis on providing security of
supply from the consumer
’s point of view has a negative influence on the interests of producers.
Russian oil extraction has entered a period of rapid growth: production has risen in 2000 — by 6.1%, in 2001 — by 7.7%, in 2002 — by 9.1%, in 2003 — by 11.1%, in 2004 — by 8.9%, in 2005 — by 2.7%.
It should be noted, that this growth has taken place without bringing into
operation any new large projects. It has come from fields already discovered in
the Soviet period, with other fields still waiting to be fully exploited. This
explains, to a certain extent, the recent slowdown in extraction rates.
High world prices for oil have made exports increasingly attractive. This has
encouraged the oil-extracting organizations and enterprises to produce as much
oil for export as possible, and to implement a programme of development of
their infrastructure for export transportation. In the early 90s Russia
’s extraction capacity was officially estimated at 112m tonnes per year. Exports
beyond the Union of Independent States in million tonnes per year were as
— 125m; 2001 — 125.9m; 2002 — 128.5m; 2003 — 139.5m; 2004 — 182.8m; 2005 — 204m. These figures do not include oil transported by railway.
Oil exports are currently the main trigger and take up the main part of the
growth in Russia
’s oil extraction. It is, therefore, important to determine the opportunities and
limitations that exist in this field. How much oil should be extracted and what
are the optimal volumes for export, taking into account the market situation,
the financial requirements of the state and oil-producers, and the raw-material
base? Naturally, it cannot be assumed that the
“price corridor” will always meet all Russia’s requirements, in relation to the volumes of oil it sets aside for export.
A danger still exists of Russia becoming the raw material appendix of the world
economy. Most analysts think that the currency earnings from raw material
export, mainly oil and gas, are important not only for achieving a satisfactory
level of budget receipts but also for Russia
’s economic growth as a whole. According to approximate estimates, during the
past few years the contribution of petrodollars to its economic growth has
ranged between one-fifth and one-third.
It might be thought that Russia is vulnerable to the so-called “Dutch disease”. It does have a concentration of wealth among a relatively small group of
people and a tendency toward replacing domestic production with imports.
However, Russian oil and gas revenues have a rather more solid foundation than
the short-term supply base in the Netherlands.
If world prices remain at a level which makes extraction profitable, Russia will
have a stable income from oil production and export enabling her to apply these
funds to social needs over a number of years, while maintaining a favourable
balance of payments. During the process of economic reconstruction and
privatization large resources are being released which can be used to meet
domestic demand without exerting inflationary pressures on consumers
The production base of much of Russian industry has become obsolete and is in
need of fundamental modernization. No major new production capacities were set
up during the 90s, except for a number of industries either producing raw
materials or guaranteeing quick returns (such as the food industry). After the
collapse of the Soviet Union the financial establishments newly set up under
the Russian Federation would only look seriously at projects offering a payback
period of not more than a year, or, occasionally, two years. [The explanation
for this enthusiasm for short-term returns is explained by the relationship of
these institutions with government financing, to which most of them owe their
early success.] Now this period has increased somewhat but is still inadequate.
The accepted standard period for seeing a return on industrial investment is at
least five years. Some strategic projects, which are of essential importance
for the Russian economy, might have considerably longer payback periods.
The situation recalls the model for the interaction between producers and
consumers of energy resources, adopted during the Soviet era. During the Cold
War and afterwards, such interaction was founded on the interest of developed
countries in stable supplies of Russian minerals, particularly energy.
The case for good economic relations between Russia and energy consumers has
rested on the following:
- Russia is rich in energy resources and world demand means consumers are
experiencing increasing shortages;
- Russia is close to the most significant consumer markets for energy.
It was therefore of mutual interest that good relations were maintained despite
the problems of protracted confrontation.
There remain many reasons in favour of retaining and developing a relationship
based on the model outlined above. However it has both natural limitations and
Firstly, for consumers, concern about the reliability of supplies plays an
important role alongside the need for diversification of sources of supply. The
rest of the world considers Russia, in the context of energy security, as a
major producer and exporter of energy resources. Russia links its energy
supplies to the receipt of finances necessary for its economic development,
including development of its energy sector. It must therefore be admitted that
Russia and its partners are equally interdependent and their partnership in
this field cannot be used as an instrument of political pressure on either
Secondly, in the short term the capacities of the Russian fuel and energy
complex are limited, particularly in relation to increasing oil supplies.
Finally and most importantly, Russia cannot be content to be seen by the
consumer-countries only as a supplier of energy, even if it is one that is of
strategic significance. Energy exports, even taking into account the
“multiplier effect” cannot guarantee modern living standards in a country with a population the
size of Russia
’s. It is not a matter of refusing to enjoy the natural benefits of possessing
abundant raw materials. It is a question of how to integrate these advantages
into a modern economic structure.
Russia’s need to modernize its economy and increase its energy output runs in parallel
with the demands of consumers for secure and abundant supplies of energy. How
to increase Russia
’s raw material output and adapt its economy to meet global demand could become
the basis for a bilateral agenda stimulating cooperation between the two sides.
There are good reasons why Russia has lagged behind in the development of high
tech sectors; many other nations also face problems of modernization. This is
becoming more acute as modern global competition means that there is no obvious
advantage in locating new production capacities in the developed world. In the
past few years investors have generally looked to Asia, and particularly to
China, that developing
“world factory”, as the home for high volume production, particularly for goods requiring
substantial labour inputs. But where the first stage processing of raw
materials is concerned, China
’s attractiveness becomes questionable. There is a stronger case for locating
such activities closer to the source of the raw materials. In this sense Russia
looks like an extremely promising player.
Naturally, the primary production of raw materials when taken to extremes can
hardly be characterized as ecologically sound. But where restructuring is
concerned, apart from its economic advantages, Russia has other factors working
in its favour.
First, the level of pollutant emissions in Russia is substantially lower than it
was in 1990, giving it opportunities as stipulated by the Kyoto Protocol to
make additional investment in more up-to-date and less ecologically damaging
Second, replacing obsolete equipment which fails to meet modern requirements
could compensate for the negative ecological impact of increasing the scale of
raw material production.
Finally, the growth and expansion of raw material production would provide the
economy with substantial volumes of construction materials, metals, and other
substances used in the manufacture of high-tech products. Growth in supply is
likely to stimulate demand; this in turn would boost those sectors which make
products with a high added value and intended for final consumption.
The result would be to encourage competition for investment in the Russian
financial market which would speed up technological advance in the Russian