The difficulties facing Russian oil and gas companies

Timon Singh

With exploration projects all over the world and many of their number being amongst the world's top producers, you would have thought things were at a high for Russian oil and gas companies. However, declining global oil prices and a decreased demand for raw materials has shaken the Russian economy and for the first time in a long while, Russian oil and gas companies are worried.

Since the beginning of the year, over US$2 billion in investments has reportedly been withdrawn from the Russian market. If this continues unabated, it is possible that Russia will be forced to devalue its ruble.

For the country, Russian oil and gas companies play a massive role; 20.5 percent of Russia's GDP comes from oil and gas exports, a clear over-reliance on a single sector. Currently, gas exports generate more than 60 percent of Russia's export revenues and account for 30 percent of all foreign direct investment in the country.

In order to prevent a potential economic crash, Russia is attempting to increase its imports worldwide. Today it was announced that Russian oil and gas companies are attempting to persuade Japan to increase its imports of Russian oil, in addition to cooperating with his country on the development of its natural resources.

Eastern investment

Russian oil and gas companies have spent billions developing fields in Eastern Siberia with the aim of exporting supplies to Asia. With lucrative contracts with the likes of China, already under their belt Japan is a market where they wish to increase exports.

"Oil produced in eastern Siberia is the best option for Japanese refineries," Russia's Deputy Premier Igor Sechin said, referring to the Russian government's desires for Japan to help develop the region's resources in connection with the recently launched East Siberia-Pacific Ocean (ESPO) oil pipeline.

Phase 1 of the ESPO was launched last December, which saw the pipeline utilise rail delivery to get oil supplies from Eastern Siberian fields to Kozmino on its Pacific coast near Nakhodka.

Russian oil and gas companies already have strong relationships with Japan with about 20 percent of exported from eastern Siberia in 2010 as of May 11 was exported there.

Like many countries around the world, Japan has been trying to wean itself off oil supplies from the Middle East and Russian oil and gas companies have invested heavily in projects such as the Far Eastern-Pacific LNG pipeline project and the ESPO line.

They have very keen to help reduce Middle Eastern dependency and "provide Japanese companies with major business opportunities for importing oil and LNG into Japan and also exporting the products to other countries in Asia."

However Japan has yet to fully make its mind up, especially with the Russian economy proving less than stable and many Japanese businesses stating that "expansion of business operations to Russia, however, is always accompanied by financial risks."

For the Russian oil and gas companies, despite output still being at record levels, they need to continue to open up markets abroad if they are to stabilise the economy.

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