of gas and oil in 2015, respectively. A major player on
the European scene, it is now expanding its operations
to Asia, currently focused on China. Such expansion is a
long-term imperative for Russia due to Asia’s significance,
being the world’s largest energy consumer with a growing
energy demand. However, Europe – despite its current
undeniable importance for especially Russian gas and oil
exports – is heading in the opposite direction thanks to
its declining economic might, particularly in the face of
Asian economic powerhouses, and its ageing and shrinking
population.
Cooling relationships
The cooling of Russian-EU relations has only strengthened
the wisdom of expanding in Asia, as a strategic objective
surfaced well before the recent rows in those relations.
Lack of an alternative to Russian supplies in the short
term has removed the urgency of finding replacing
markets for Russia.
However, the steady lowering of gas, and especially
oil prices since 2015 – after experiencing the opposite
direction for about one and a half decades with oil prices
even reaching around US$150 at one point of time (2008)
– has hit Russia like other major oil and gas exporters.
Russia’s substantial decline in export revenues (estimated
as high as approximately US$100 billion in 2015) has
been pushing its economy into a period of shrinkage. In
December 2015, Russia’s Economic Development Minister
Alexei Ulyukayev estimated a GDP contraction of 3.7% in
that year, only to predict in January 2016 an additional
shrinkage of 0.8%.
Of course, the freefall of oil prices has been the
main culprit. This has been worsened by various US- and
EU-imposed economic sanctions on Russia over Ukraine,
which costed Russia around US$40 billion in 2015. Russia’s
oil and gas exports to its currently largest export market
(the EU) have not yet been affected by the latter, in
absence of an alternative for Russian supplies. However,
various oil and gas development projects – in particular,
offshore in the Russian Arctic area – have been affected,
as the involving Russian companies’ Western partners have
pulled out because of the sanctions.
In absence of foreign capital and technology, the
resulting cancelled, downsized or postponed development
projects, and the limited domestic capital and technology
to fill the gap, will certainly damage the Russian oil and
gas export capabilities in the foreseeable future.
As surprising as it may sound for a Russian-EU
joint venture (JV), the Nord Stream II seems to be set
for construction. This is in spite of Brussels’ policy of
decreasing the EU region’s heavy dependency on Russian
oil and gas. Provided the continuity of the current
situation, nothing short of a major deterioration of
EU-Russia ties (with Brussels finding alternative long-term
gas suppliers to replace Russia) could shelve the project,
given the continued commitments of the EU and Russian
partners in early 2016.
Depleting cash resources – especially due to declining
oil prices – has aggravated the negative impact of the
mentioned economic and political factors, by further
limiting the availability of funds for energy projects, from
field development to pipeline construction. However,
international pipeline projects meant for increasing
Russian energy exports have not been affected as a result.
Their importance for Russia’s public purse has justified
financing them as priorities, despite Russia’s financial
difficulties. Consequently, Gazprom will spend around
US$1.2 billion (RUB 92 billion) in 2016 on its Power of
Siberia project, for example, as reported by Russia’s
Interfax.
Nevertheless, certain major international projects have
been cancelled or postponed for other reasons. They
include South Stream, which Russia cancelled in December
2014 as Moscow deemed the project not feasible due to
the EU opposition. Brusselss stopped the construction of
its Bulgarian segment on technical grounds (i.e. violation
of the EU competition rules) and this convinced Moscow
as to the futility of continuing the project.
The construction of the West Route gas pipeline,
also known as the Power of Siberia II, is uncertain. China
is unsure about the demand for its gas (30 billion m
3
/y)
upon its planned completion in 2019, thanks to its
lowering economic growth.
Likewise, the construction of the Turkish Stream
pipeline is highly unlikely to start this year as scheduled,
although neither party to the project has officially
cancelled it. As it stands in early 2016, there will need to
be a reversal in the ongoing trend of worsening Russian-
Turkish relations triggered by Ankara shooting down a
Russian military aircraft in November 2015.
The following brief report seeks to highlight the
major Russian pipeline projects in light of the mentioned
economic and political developments.
The East Route gas pipeline
The ongoing East Route gas pipeline (38 billion m
3
/y) is
the most important pipeline project for Russia, not in
terms of its export capacity, but because it ends Europe’s
status as the only major piped gas market for Russia.
Known also as Russian-Chinese gas pipeline and the
Power of Siberia because of its Russian leg, the pipeline
is the largest project for both countries as part of the
US$400 billion Sino-Russian comprehensive energy deal of
2014. Apart from constructing a gas transportation system
in each country to be connected at a border point, the
deal involves the development of Russia’s East Siberian
gas fields and the sale of gas to China for 30 years
(38 billion m
3
/y).
Being built along the East Siberia Pacific Ocean’s route,
the Power of Siberia (4000 km; 52 in.; 61 billion m
3
/y)
14
World Pipelines
/
MARCH 2016
