Russian Pipelines:
Back to the Future?

Edward C. Chow

In Soviet mythology, the health of the country's economy, national power, and influence in the world are directly linked to the performance of its oil and gas industry. It is ironic, then, that peak oil and gas production in the U.S.S.R. was reached in the late 1980s just as economic collapse brought political disintegration. At the time, the Soviet Union was the biggest oil producer in the world, generating 12 million barrels per day, 11 million in Russia alone. Peak consumption at this time was over 8 million barrels per day in the Soviet Union and 5 million barrels per day in Russia. Considerable volumes of crude oil and petroleum products were exported by the Soviet Union, first to other countries in the Eastern Bloc, and then approximately 3 million barrels per day to those outside of the Comecon.1 Oil and gas were part of the important barter trade in the Communist block and provided economic leverage for Russia in maintaining cohesion of the sphere. Moreover, they served as principal sources of hard currency and geopolitical assets in the Soviet Union's relationship with the outside world.

Given the remote location of many Russian production fields, pipelines have always played a critical role in transporting oil and gas. The construction of a vast system of pipelines was often cited as a crowning achievement of the Soviet oil and gas industry. They were designed to move production primarily within the Soviet Union and Eastern Europe and secondarily for export to the West.

Today's Russia inherited from the U.S.S.R. 46,000 km of these crude oil pipelines, 15,000 km of petroleum product pipelines, and 152,000 km of natural gas pipelines, almost all of which are still owned and controlled by the state. By contrast, the United States, with only 55 percent of Russia's land mass, has over four times more oil pipelines and two times more natural gas pipelines, almost none of which are owned or controlled by the government.2

The Russian oil industry privatized and modernized throughout the mid-1990s. A more competitive cost structure after the ruble collapse of 1998, improved property rights protection leading to greater reinvestment, and the introduction of Western technology and business practice allowed Russian oil production to recover from a low of 6 million barrels per day to nearly 8 million barrels per day. This is still far below the level achieved in the peak production year of 1988. Nevertheless, domestic oil consumption has dropped to only about 2½ million barrels per day with lower economic activity and better energy efficiency. As a result, much more oil is being exported today, and Russia has become the second largest oil exporter in the world after Saudi Arabia.3

Russian oil production is forecast to maintain this rapid growth while domestic consumption is expected to be relatively flat in spite of better economic performance. The existing pipeline system was, however, designed to move oil to now diminished domestic markets and less desirable markets in Eastern Europe. Thus, Russia is desperately in need of new export facilities-large-diameter pipelines and deep-water marine terminals-to transport increasing volumes of oil to higher-value world markets in the large ocean-going tankers favored in international trade.

Edward C. Chow is Visiting Scholar at the Carnegie Endowment for International Peace.