By Ian Armstrong
The status of Russian oil and gas is a factor near the core of many of the world’s most wide-reaching risks and opportunities. Here are three trends set to shape the complicated Russian relationship with oil and gas between now and 2025.
With over 50% of federal budget revenue drawn from the production and export of oil and natural gas, Russia is a country in which considerations on energy are inseparable from broader forecasts.
As a renewed foray into Syria once again propels Moscow to the fore of news headlines, Russian oil and gas pursuits will serve as a hidden conduit for success or failure – a fact that remains true for virtually any geopolitical affair the country enters.
With this in mind, it is clear that Russia’s international energy policy is one with significant implications for investors and nation-states alike.
Observing these three upcoming trends in Russian oil and gas affairs provides a glimpse of what those implications might look like through the next decade.
2015-2016: Iran’s near-term oil challenge
Following a drawn-out diplomatic effort from Russia and five of the world’s foremost powers, the Iran nuclear deal is set to remove the pervasive sanctions that have stifled the sizeable Iranian oil industry since 2012.
In consequence, Iran’s ability to export oil is expected to return to standard capacity by early 2016.
Though some foreign policy analysts predict that lagging Iranian oil infrastructure will postpone significant impacts on Russian energy beyond the short term, the bottomline is that Iran will begin bringing its oil reserves – the fourth largest in the world – to market in months, not years.
This is something that will undeniably impact Moscow.
Prior to Western sanctions, 27.5% of Iranian oil exports went to Europe – roughly 620,000 barrels a day.
After sanctions brought that number to zero, Russian imports into that same European market rose by 420,000 barrels a day – gains that now are at risk of being lost to a re-emerging Iranian oil industry and a European Union eager to ease dependency on Russia.
Such financial losses may call the longevity of Russia’s operations in both Ukraine and Syria into question sooner rather than later.
In addition, an influx of Iranian oil will also keep prices down for 2016, along with the revenues of the Kremlin.
2015-2020: Complications with Ankara
Looking towards the medium term, Russia will face complications in its energy prospects with Turkey, particularly with regard to the planned TurkStream pipeline that would bypass Ukraine to connect Russian natural gas into southern Europe via Turkey.
The original plans for TurkStream aimed to bring 63 billion cubic meters (bcm) of gas through Turkey per year by 2020, with the first pipeline of four set to come online in 2016.
However, these plans have begun to unravel in more than one way since the start of October. On October 6th, Russia’s state-owned energy giant Gazprom announced that the capacity of the TurkStream project was being roughly halved to 32 bcm per year.
Since then, Moscow has also conceded that TurkStream’s first pipe would not be brought online until end-2017 due to the inability of Turkey and Russia to reach an agreement.
The impediments and uncertainties surrounding TurkStream suggest that Turkey has become more emboldened at the negotiating table than Russia had originally anticipated.
Turkish motivations to secure TurkStream are fairly urgent, as domestic energy demand is surging and internal energy sources are extraordinarily limited. However, Turkey also recognizes Russia’s desperation, and is now likely to seek lucrative price cuts on Russian gas imports in exchange for greenlighting the pipeline.
Though Turkey’s need for energy will likely draw the pipeline into fruition eventually, these complications can be expected to continue to continue across the medium-term as Ankara attempts to navigate towards a bolder deal.
In fact, the next five years have just recently become even more difficult for Russia’s energy ambitions with Turkey. In response to Russia’s expansion in Syria and recent violations of Turkish airspace, Turkish President Recep Tayyip Erdogan asserted that Russia’s Syrian efforts risked severing its energy ties with Ankara – even stating that, “if necessary, Turkey can get its natural gas from many different places.”
In short, while Turkey and Russia can still be projected to reach a deal on TurkStream between now and 2020, Moscow’s recent controversial actions may well stand as the turning point for Turkey to begin moving away from Russian energy.
2015-2025: Attempting EU expansion
In the long-term, Russia will be likely to secure a second facet of its strategy to tap deeper into the European thirst for energy: the Nord Stream II pipeline, which links Russian gas directly into Germany and, from there, Western Europe as a whole.
The downside to this is that Russia presently expects the pipeline to “go operational” in the medium term, with current statements from Gazprom setting the launch sometime in 2019.
The crux of this discrepancy between expectations and likelihoods is that European demand for gas is onlyexpected to grow “moderately” in the medium term, a period over which Western-world perceptions of Russia are unlikely to recover into amicable terms.
As a result, Europe’s interest in Nord Stream II will be laden with caution and the kind of hard-line negotiations seen out of Turkey.
Furthermore, the only way that Western European countries can expand Nord Stream in the medium term is by enduring significant damage to its image both within Europe and the broader Western world.
These risks will ultimately lead countries like Germany to forgo an agreement on the pipeline until the controversy surrounding Russian actions in Ukraine has settled and European gas demand is more forcibly on the rise – a dynamic more likely to occur the 2020-2025 timeframe.