"Economic Development and the Environment"
on the Sakhalin Offshore Oil and Gas Fields II

Copyright (C) 1999 by Slavic Research Center, Hokkaido University.
All rights reserved

The Russian Far East and Northeast Asia:
Aspects of Energy Demand and Supply Cooperation

Victor D. Kalashnikov

I.Geopolitical Determinants.
I.1. General Geopolitics.
At present, the trends and opportunities for energy cooperation and interacton in the Russian Far East with the NEA countries can be viewed as part of Russia's general economic and political strategy of shifting its geopolitical direction eastwards.
Until the mid-1980s, the main commodity flows from the territory of the former Soviet Union were mainly oriented towards the countries of Western and Eastern Europe, while trade and economic relations with the APR countries lagged behind.
Russia has a strategic problem in the APR, a problem of consolidation in the Northeast Asian subregion, and in the Asia-Pacific region as a whole. The interests of Russia as an Euro-Asian power, undoubtedly, face not only the West, but also the East. The APR's growing importance in the global economy will lead to an increase in the RFE's significance.
One positive concrete example of the RFE's internal geopolitical shift towards the APR is the 1996 Federal Program for the Social and Economic Development of the Russian Far East (hereafter referred to as the Program). The Program consolidates Russia's strategic interests and long-term priorities with regard to its eastern regions. Although the Program has faced obstacles in its implementation, it is a political and institutional recognition of the Russian Far East's importance as a region that has affected the country's eastward geopolitical shift.
I.2. Energy Geopolitics.
Russia as a whole has a powerful industrial and energy resource potential. However, the last few years have seen a marked deterioration in the expansion and maintenance of energy reserves in the traditional energy-producing regions of Russia, especially in West Siberia, where, for a long time, investments in prospecting and production had been made. For example, 20 years ago, average crude oil reserves, calculated per deposit, amounted to about 50 to 53 million tonnes, the average daily extraction of oil from one well was 29 tonnes; in 1996 the average reserves were only 1.5 million tones, and daily production was 10 to 12 tonnes.
The details indicated above are necessary for understanding the geostrategic meaning of the Russian Far East's energy potential, for the necessity of increasing exploration, and for reassessing its role in the 21st century. At present, the amount of potential oil resources explored in the Russian Far East is less than 2.5%, for natural gas - about 10%, for coal - less than 2%. Of these, the average recoverable oil reserves calculated per deposit, for example, in the northeastern areas of the Sakhalin shelf, exceed 32 million tonnes.
II. Economic Determinants.
II.1. Basic factor conditions.
Immense reserves of diverse energy resources are concentrated in the Russian Far East's vast territory. In the region there are not only traditional - commercial energy resources - coal, oil, natural gas, hydropower - but also a wide range of non-traditional energy sources (tidal, geothermal, wind, solar, etc.). The general amount of potential oil resources is estimated to be 29 billion tonnes, for natural gas - 23 trillion m3, for coal 2.2 to 3.5 trillion tonnes. Geological exploration of these potential resources remains low. The discovered reserves of solely commercial energy resources in the RFE amount to almost 23 billion tonnes of coal equivalent (tce), of which over 4 billion tce represents actual transportable crude oil and natural gas resources. The probable output from the RFE's rivers is estimated to be 1008.2 billion kWh annually.
The RFE's known energy reserves are sufficient to provide for the production of primary and transformed energy resources, vastly exceeding the region's maximum internal energy consumption by tens or hundreds of times (Table 9).
Table 9. Reserves/Consumption* Ratio for the Russian Far East
Coal Oil Natural Gas Hydro Total
830 35 785 90 380
*- consumption as of 1990.
Source: Data from ERI
II.2. Supporting infrastructure availability.
The RFE's vast territory and uneven economic development has resulted in the formation of several local types of general-purpose infrastructure in the region. In the more-developed southern districts there is a fairly developed general-purpose infrastructure consisting of railroad networks (the Trans-Siberian and Baikal-Amur railways), seaports, roads, and communications that have unused potential. On the other hand, most of the RFE's prospective energy reserves are concentrated in the remote and less-developed northern districts, as well as the shelf zones of the Far Eastern and Arctic seas, which lack adequate infrastructure and developed transport links with concentrations of industrial districts, population and external markets.
II.3. Domestic demand conditions.
Domestic demand conditions for energy have so far exerted a restraining influence on the establishment of comparative advantages in the production of energy resources.
The RFE's enormous territory, uneven industrial development, and location of key industrial centers in various localities separated by large undeveloped spaces, have hindered the creation of integrated fuel-and-power systems like those in Siberia and European-Russia. The small concentrations of energy consumers (particularly in the vast northern and north-eastern districts) have resulted in the development of relatively small (with some exceptions) energy supply industries. The relatively low demand for homes, which has been decreasing recently, has restricted the RFE power industry's potential economy of scales effect, which is traditionally high in the energy sector.
Proceeding from the most optimistic assessment of internal energy consumption dynamics, it is not possible to rely on the creation of powerful fuel-and-energy projects on the basis of the Elginskii hard coal deposit, the Western and Central Iakutiia hydrocarbon deposits, the eastern and Arctic shelves (including the Sakhalin offshore projects), the Uchur hydro-power plants, the powerful thermal power plants in Sakhalin, and the Tugur tidal power plant. However, even taking into account the grave infrastructure restrictions, these projects are, on the whole, commercially viable due to economies of scale.
II.4. Competitive conditions inside the region.
The region's internal competitive conditions are an important determinant since a strict competitive environment stimulates and promotes the development of comparative advantages.
At present, there is competition in all branches of the energy sector in Russia and the RFE, although there are substantial differences and variations. In terms of operation, strict competitive conditions are present in the oil, and oil-refining sectors, and somewhat less in the coal industry. In the electric power industry a natural monopoly is in force (although not recognized by legislation). However, at the strategic decision-making level, competition in the electric power industry has an influence on the structure of potential investments.
In terms of internal competitive conditions in the RFE's energy sector, it is important to single out one more competitive aspect that results from the Russian Federation's peculiar political and administrative structure. The Russian Far East is an economic zone which has no special administration system, but there are legislative, executive and financial systems which exist at the regional level in the Federation which are included in the Far East.
In a pragmatic sense, regional development aims to maximize the territory's value, increase the region's budget revenues, and secure employment for the population. Thus, the Far Eastern territories are seeking to develop their own energy resource production projects to generate revenues and create employment. Strategically, the regional authorities are compelled to compete strictly for the distribution of resources in favor of their own territory's energy projects, using, together with the concerned energy companies' managers, a diverse set of influential measures in order to distinguish and enhance the comparative advantages of their own projects. In the RFE, the "regional element" behind the internal competitive background is, at present, quite strong and influential.
III. Institutional Determinants.
Russia is performing a fundamental transition from a centralized social-political model to the principles of a democratic state. Russia has adopted a new Constitution that proclaims the citizens' rights and freedoms and guarantees diversity in the forms of property, including private property. Although the institutional transformations still face a number of problems aggravated by the country's economic crisis, the attributes of a democratic state and principles of a market economy are being firmly established in Russia.
The role of institutional factors in the establishment of comparative advantages is varied. Here, the peculiarities of the Russian tax system as applied to the mineral resources sector, including the mineral fuels sector are an institutional advantage. This issue deals with the "Production Sharing Legislation (PSL) Regime", which was completed in March 1999. The PSL Regime in Russia extends the system of civil relations to the use of mineral resources. The government and investors act as equal partners: they establish a contractual relationship and create a pattern of production sharing which satisfies the two parties. The PSL Regime is distinct from the existing administrative system for mineral resource use. For the RFE, the specific nature of the "Production Sharing Legislation Regime" is essential; its flexibility allows the government to regulate the boundaries of the effective use of energy resource deposits, turning complex, remote deposits into profitable development. This is a valuable advantage of the PSL Regime in comparison with a strict fiscally oriented taxation system.