Since 2006 scholars who write extensively on the Russian energy sector have claimed that Gazprom has not invested satisfactorily to meet the demand of long-term contracts signed with major European countries. In terms of investment, experts have continued to argue that Gazprom might be the biggest natural gas producing company with a tremendous amount of reserves; however, the company has failed to improve on these. Alternatively, Gazprom has spent its time focusing on other sectors such as oil and electricity and has invested in overseas projects in Africa, the Middle East and Latin America.
As Gazprom鈥檚 capital did not invest in improving its overall production level or modernizing its old Soviet infrastructure, the question has been raised as to whether the company can meet the increasing future demand and the obligation of long-term-contracts that will go beyond the 2030鈥檚.
The bulk of natural gas production in Russia has taken place in three big fields in West Siberia namely; Yamburg, Urengoy and Medvezh, which accounts for 65 percent of total gas production. These big three fields, developed during the Soviet Union era, are still operational.
Another vital field, Orenburg, which is located in the European part of Russia, is in rapid decline. These fields have reached their maximum potential yield and their production rate has started to fall-off. On the other hand, the Far East and Eastern Siberian gas fields, namely Krasnoyarsk, Sakhalin and Irkutsk were developed with the aim of supplying the East Asian market. Gas flows from this region to the European market seem unlikely given the geographical distance and inevitably high transportation costs.
A prominent study called, 鈥渢he future of Russian gas and Gazprom,鈥� published by Oxford Institute for Energy Studies also demonstrates the overall trend of existing gas fields in Russia. Russia鈥檚 stalled upstream investment has further pushed production down and, even in the long-run, production is not expected to increase to curb the demand deficit. For instance, in 2006 due to limited supplies, domestic consumers were given 6 billion cubic meters (bcm) less gas and thus felt the pinch of inadequate supplies.
Recently, a promising super giant gas field, the Shtokmanovskoye on the Yamal peninsula came to the forefront with estimated gas reserves of 4.9 trillion cubic meters and, to clarify the importance of the gas field, Gazprom鈥檚 Chairman Alexey Miller stated in Decemer 2014, 鈥淵amal is the future of the Russian gas industry.鈥�
However, challenges on this peninsula need to be resolved. In particular, given the harsh and fragile environmental conditions in the Arctic, developing Yamal鈥檚 full potential requires a great amount of capital. It is estimated that the total cost of the Yamal project during its lifetime could reach US$70 billion. A big proportion of this investment needs to be allocated upfront to prepare the required infrastructure, pipelines and compressors.
Technically, logistically as well as from a project-management perspective, the Yamal project has faced difficulties especially after the 2008 financial crises. Difficulties in finding the required capital has further slowed down the project and has prevented the field to be fully exploited in times of supply shortages in Russia.
The other significant challenge for the Yamal project is in accessing the reserves due to the harsh environmental conditions. The question arises as to whether the production cost would be too high even if the entire reserve is accessible.
Keeping the production rate at current levels in the Western Siberian fields to meet Europe鈥檚 gas demand is possible, but it would only occur at the expense of a major increase in the cost of production. However, doubts linger about the future prospects of these fields. Therefore, either Gazprom or other independent gas producers in Russia need to develop and invest in new gas fields to reverse the diminishing rate of gas production.
聽The spare capacity that might have been exported to the European gas market has been consumed domestically in Russia due to the high rate of energy inefficiency, depletion of old gas fields, difficulty in developing new gas fields and weak investment. In recent years, the incremental increase in natural gas consumption in the domestic market in Russia, although major energy efficiency measures have been taken, is unlikely to catch up with the OECD countries鈥� average. It has become evident that Russia鈥檚 weaknesses in its investment strategies in gas production need to be given priority in the years ahead.