RUSSIA - The Oil Market.

Russia has 42 oil refineries - mostly being inefficient and old - with a total processing capacity of 5.4m b/d. With Russian domestic oil consumption of 2.503m b/d in 2003 and likely to average 2.55m b/d in 2004 (compared to 3.79m b/d in 1993), refining capacity far outstrips demand for refined products.

Because a barrel of crude oil on the Russian market sells for far below the world price, many Russian oil companies prefer to export their crude rather than to refine it locally. When Russian oil producers do not export their crude - often because of the constraints of Russia's pipeline system or the government's limits on each company's exports - many choose to supply their own refineries rather than sell the oil on the open market.

The Gas Market: Russia holds the world's largest natural gas reserves, with 47 TCM (1,659.1 TCF) - more than twice the reserves in the next largest country, Iran. In 2003 Russia was the world's largest gas producer (578.6 BCF/year), as well as the world's largest exporter (131.77 BCM/year). But unlike the Russian oil industry, Russia's gas industry has not been booming. Both production and consumption have remained relatively flat since independence in late 1991.

Russian consumption of natural gas was 416 BCM/year in 1993 and 405.8 BCM/year in 2003. The low point during the past decade occurred in 1997, when Russia consumed 350.4 BCM/year, while total production averaged 532.6 BCM/year.

Russia's energy strategy, released in May 2003, calls for only modest production growth by 2010, even under its most optimistic scenario. Growth of Russia's natural gas sector has been stunted primarily due to ageing fields, state regulation, Gazprom's monopolistic control over the industry, and insufficient export pipelines.

Gazprom, Russia's state-run gas monopoly, holds nearly one-third of the world's natural gas reserves, produces nearly 90% of Russia's gas, and operates the country's gas pipeline grid. Gazprom is also Russia's largest earner of hard currency, and the company's tax payments account for around 25% of federal tax revenues. But despite its terrific size and significance, Gazprom is seriously encumbered by domestic regulation.

By law, Gazprom must supply the gas used to heat and power Russia's vast domestic market at government-regulated prices - the price averaging about $25 per thousand cubic metres - regardless of profitability. Accordingly, roughly two-thirds of the company's revenue comes from its export sales to Europe, where Russian gas is sold for around $100-$125 per thousand cubic metres. Because exported Russian gas accounts for about 25% of Europe's demand for natural gas, Gazprom is also one of Moscow's main foreign policy tools. But as Gazprom's trade relationship with European consumers grows, contentions issues have arisen.

European trade representatives have denounced Gazprom's monopolistic market position and two-tiered pricing system and have linked the pricing issue to Russia's entry into the WTO. The Russian government has recognised this problem and has been gradually increasing the price for natural gas domestically. Russia hopes to complete negotiations on WTO accession by 2005.

The WTO issue figures prominently in relations between Russia and China. Russia has to negotiate individual deals with WTO members before it enters the organisation. Having finalised a bilateral deal on this with the EU in May 2004, the Russian Economy Ministry in July indicated that it had reached an understanding on this with Beijing. The understanding was then reported to be that, in return for Beijing accepting low Moscow-regulated domestic gas prices, Russia was to supply China with natural gas at mutually "acceptable prices". This gas would be pumped to the Chinese market by pipeline to be built from a huge east Siberian field to be developed by a BP-led consortium (see Gas Market Trends).

Coal, of which Russia has the world's second largest reserves (157,010m tons) next to those of the US (249,994m tons), is an important source of energy for the Russian domestic market. In 2003, Russia consumed 111.3m t/yoe, down from 140.8m t/y in 1993. But under the new domestic energy strategy, coal is to play a greater role at the expense of natural gas (see above).

Russia is the No. 4 coal consumer in the world, next to China, the US, India and Japan. In 2003, China consumed 799.7m t/y, compared to 573.9m t/yoe in the US, 185.3m t/y in India and 112.2m t/y in Japan. China's coal reserves amount to 114,500m tons.

RUSSIAN ENERGY CONSUMPTION

(million tons of oil equivalent)

1987 1991 1995 1998 2000 2001 2003 2004 Oil 249.8

243.4 146.1 123.7 123.5 122.3 124.7 126.5 Natural Gas 347.8 388.0 340.0 328.3 339.5 335.4 365.2 365.0 Coal

205.1 165.6 119.4 102.8 110.4 114.6 111.3 112.0 Nuclear 32.2 27.2 22.5 23.6 29.5 30.9 34.0

34.0 Hydro-power 14.0 38.0 40.1 35.9 37.4 39.8

35.6 35.0 Total 848.9 862.2 668.1 614.3 640.3

643.0 670.8 672.5

Source: BP Statistical Review of World Energy, June 1998 & June 2003

* The 2004 figures are estimates by APS Energy Group.

Russia is the world's No. 5 nuclear power generator and consumer, next to the US (181.9m t/y in 2003), France (99.8m t/y in 2003), Japan (52.2m t/y in 2003) and Germany (37.3m t/yoe in 2003).