Petroleum

Petroleum is the most convenient and widely useful fuel known to humankind. It is liquid, so it can be piped long distances for a relatively low cost overland, or carried by tankers overseas. It is much cleaner than coal and gives off more energy per unit of weight. It is extremely versatile: Hundreds of products can be made from it, including not only the obvious gasoline, jet fuel, diesel fuel, heating oil, and asphalt tar, but also wax crayons, pharmaceuticals, petroleum jelly, plastics, rubber, and even perfume. For much of the 20th century the oil supply was abundant, so it used to be cheap (except for a few brief periods in the 1970s). Petroleum is found in small quantities in most countries in the world, but in large quantities in only about 20 countries; these include the 12 Organization of Petroleum Exporting Countries (OPEC) members, as well as the United Kingdom, Norway, Mexico, the United States, Canada, and Russia.

The earliest commercial production of oil in the world started near Baku, Azerbaijan, in the Russian Empire, and in Titusville, Pennsylvania, in the United States, in the mid-19th century. The Soviet Union was constantly searching for more oil in the Caspian basin, and the important deposits of the Volga basin (Kuybyshev, Kazan) were discovered just before World War II. The Battle of Stalingrad was so strategically important because the Nazi government badly needed to get to the oil fields in these areas, and the Soviets were determined not to let this happen. During the war, new oil deposits were found in parts of eastern Siberia and on the remote Sakhalin Island in the Pacific. In the 1950s, a massive program of oil exploration was launched in the Arctic and in Siberia. Then, in the 1960s, extraordinary large oil deposits were found in the West Siberia economic region (now technically part of the Urals federal district) not far from Tyumen. For example, the Samotlor oil field, with initial reserves of 20 billion barrels of oil, was about 50% bigger than Prudhoe Bay in Alaska. These fields have been in constant production since the 1970s and remain the main producing areas in Russia today. Outside Russia and Azerbaijan, small deposits of petroleum are located in the Black Sea in Ukraine and a few large fields in western Kazakhstan.

How much petroleum does Russia have? For years, the amount of Soviet oil reserves was a closely guarded secret. The traditional Western sources of oil data, such as the U.S. Energy Information Administration or the experts of Oil and Gas Journal, would base estimates of Russian reserves on a number of assumptions and (frequently erroneous) rumors. Usually these estimates of Russia's oil would turn out to be on the low side. For example, a National Geographic feature article about the end of cheap oil (Appenzeller, 2004) used an estimate of 60 billion barrels of proven reserves for Russia, as compared to 23 billion barrels for the United States, 78 for Venezuela, 99 for Kuwait, and 261 for Saudi Arabia. There is strong evidence now that such estimates of oil reserves for Russia were too low, while those used for many OPEC nations were too high. In the past few years, more information has become available in Russia itself from newly privatized companies and from the government, and more realistic estimates of global oil reserves have emerged as independent experts have improved their assessments. A recent report from the German-based Energy Watch Group (2007) gives a much more realistic estimate of 105 billion barrels for Russia's oil reserves, as compared to 41 billion barrels for the United States, 35 for Kuwait, and 181 for Saudi Arabia. However, this same report observes that all oil-producing regions in the world, except Africa, are now past their peak of oil production and are expected to decline rapidly in the near future. The global oil crunch already seems to be well under way as reflected in skyrocketing prices in 2007–2008. In fact, because virtually all petroleum in Russia today still comes from the same fields developed during the Brezhnev period, it is very likely that Russian oil production will decline dramatically in the next 5–8 years (Gaddy, 2004). A top Russian government official acknowledged late in 2007 that the oil production had in fact dropped a few percent that year from the high level reached in 2006.

Meanwhile, the current rates of petroleum production in Russia are higher than they have been in the 1990s (about 9.5 million barrels per day), although Russia has not reached the alltime peak achieved in 1988 (12 million barrels per day). The latter figure will probably never be reached again. As noted earlier, Russia remains the second largest producer of oil on the planet after Saudi Arabia; in contrast to the latter, however, virtually all Russian petroleum comes from poorly accessible, extremely cold regions near the Arctic Circle, and is piped to the consumers via an elaborate network of heated pipelines. Russian oil (the so-called Urals blend) is cheaper on the global markets than Saudi oil, because it has a higher sulfur content and is of lower quality. Unfortunately, it is also much more expensive to the producers: Instead of pumping up oil in a warm desert near the Persian Gulf, Russia must keep wells in year-round production thousands of kilometers away from the nearest seaport, in areas that stay below freezing for 8 months of the year. To make oil flow through the pipelines in the frozen tundra, some of it must be immediately spent on heating the pipes (this is also done in Alaska). Pipelines must be supported above the permafrost and require frequent and expensive repairs. In the late 1990s, a barrel of Saudi oil cost less than $1 to produce, while the same in Russia cost between $10 and $15. At present, very little of Russia's oil is produced offshore (less than 5%); by contrast, almost one-third is produced offshore in the United States, mostly in the Gulf of Mexico. However, massive investments have been made in the offshore oil fields near Sakhalin Island, and these are scheduled to start producing in the near future.

Russia is second only to the United States in the overall length of its pipelines, but Russian pipes are on average much larger (1,220 mm is the typical gauge) and move a lot more oil for longer distances. An average Russian pipeline moves oil at the speed of 10 km/hour, about half a billion barrels of oil per year. Although most Russian oil companies are now private or semiprivate, all pipelines belong to the state-run monopoly Transneft and its cousin Transneftproduct, thus ensuring the Kremlin's control over oil exports. The Russian state forces all oil exporters to pay a substantial access fee for the privilege of exporting oil; this fee was set at $340 per metric ton in 2009, which is about $45/barrel, or about 50% of the price of the oil on the world's markets. Most pipelines currently run from western Siberia through the middle Volga petroleum basin west to the central part of Russia, and beyond into western and southern Europe. New pipelines are now being built around Lake Baikal to the Pacific Coast and into China, and under the Baltic Sea from St. Petersburg to Germany.

Russia has about 10 large oil companies, all of which are private, vertically integrated corporations except for state-owned Rosneft. A typical one is Lukoil, which has oil fields in western Siberia and in the Volga, Kaliningrad, and Timan-Pechora basins. It also owns a number of petroleum refineries and petrochemical complexes in Volgograd, Perm, and Nizhniy Novgorod, and many retail gasoline stations and other infrastructure abroad. Lukoil was among the first Russian companies to list its stock on international exchanges, and the first to break into the retail gasoline market in the United States with the purchase of 1,300 Getty Oil gas stations on the East Coast in 2000. It has an international presence in about a dozen countries, including Turkey, Iraq, Egypt, Romania, Bulgaria, and Kazakhstan. The brainchild of the career Soviet petroleum engineer turned oil tycoon Vagit Alekperov, Lukoil has managed to remain private despite recent pressures on the oil industry under Putin to renationalize. It maintains an impressive portfolio of accomplishments and is one of the most profitable businesses in post-Soviet Russia, with a net income of $9.5 billion in 2007. However—and this is not a secret—the only way Lukoil and other large companies could survive in the post-Yeltsin period was to distance themselves from open politics and forge alliances with the Kremlin. Companies that did not are no longer around.

Despite improvements in the efficiency of petroleum extraction (e.g., modern methods of deep-field steam injection and better exploration techniques), very little new oil has been found in Russia in the past decade. The supposedly huge deposits of the Barents Sea, eastern Siberia, and well-explored Sakhalin Island will require enormous investments of capital in the very near future, if Russia wants to remain one of the top world oil producers. It is highly unlikely that this is going to happen soon enough to avert a massive downturn in the domestic oil business.

Another problem that has to be overcome is lack of high-quality refineries. Russia has 27 major refineries, all but one built during Soviet times. They remain very dirty and have much obsolete equipment, despite some recent updates. Most are located in the middle Volga basin (Volgograd, Saratov, Nizhniy Novgorod, and Yaroslavl), and also near the termini of the existing pipelines (Tuapse, Achinsk, Angarsk, Omsk). Refineries crack crude oil molecules into usable shorter ones to make gasoline, jet fuel, heating oil, and so on. At best, Russia is only able to refine about half of its crude oil. Most of the gasoline still sold in Russia would not pass European standards for quality and can actually damage Western car engines.

Of course, it makes economic sense to refine petroleum domestically, because the final products generate higher profits than export of crude oil does. Building new refineries, however, is very expensive, and few communities want one in their backyard. Interestingly, the United States likewise suffers from a lack of modern refineries for similar reasons. About three-quarters of the Russian-refined petroleum goes into producing heavy heating oil (mazut), which traditionally was used in power stations. Today, however, it makes more sense for power stations to use natural gas; what is needed instead is high-quality gasoline. Unfortunately, Russia largely lacks the domestic capacity for making decent gasoline. Consequently, domestic gasoline prices inside Russia are at the U.S. level (albeit much cheaper than in Europe), and much of the gasoline is of dubious quality. Current plans call for an increase in modernization of existing refineries and construction of a few new ones, so that by 2020 over 80% of all crude oil will be refined domestically. The environmental impacts of the Russian oil industry are substantial, although not very different from those in many other oil-producing regions. Exploration for and extraction of oil are rarely clean operations. Many wells must be drilled, but only a few become productive. Oil spills are common, both from the producing wells and during the transportation stage. Fires at refineries occur periodically.

All the drilling equipment must be brought in and positioned over fragile wilderness (tundra and bogs in most places). Permafrost melt from oil production results in serious damage to the infrastructure above ground. Most of the natural gas that occurs along with oil in the same wells must be burned off for safety reasons. Passengers flying over western Siberia or Orenburg Oblast at night are treated to the ghastly spectacle of orange flames illuminating the night sky from dozens of wells—visible even from space.

Really large oil spills remain infrequent in Russia, but there are many cases of slow leaks that may go undiscovered for months. Russian pipelines are generally reliable, and with little Russian offshore oil drilling at present, there are as yet few chances for massive spills into the ocean. However, these may become a reality as the massive Sakhalin projects increase production; should spills happen there, not only the Russian but also the Japanese and Korean coastlines will be smothered with oil. To be fair, all Russian oil companies have invested in more modern equipment and extracting/refining technologies in the past few years, so perhaps some of the worst environmental disasters can be averted. Unfortunately, corporate secrecy, greed, and lack of governmental accountability make environmental audits difficult. Of course, none of the new technologies remove the major problem of carbon dioxide emissions from the eventual burning of petroleum products.