How Russia’s energy sector is eyeing a bigger game beyond the Olympics – by Yadullah Hussain (National Post – January 31, 2014)

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The roads to Sochi are paved with oil and natural gas receipts. Winter Olympians striving for medals at Sochi next week can expect to stay at the Mountain Olympic Village, visit the Mountain Tourist Centre and practice their gold-medal performances at the Biathlon and Ski Complex, all built by Gazprom OAO, Russia’s largest natural gas producer.

Meanwhile, the country’s largest oil producer, Rosneft, pledged US$180-million for the privilege of becoming a top-tier sponsor at the XXII Winter Olympics, and Lukoil OAO is the main sponsor of the country’s cross-country ski team, as Russian President Vladimir Putin’s favourite holiday resort prepares to host the world’s top athletes.

Mining and other Russian oligarchs in Mr. Putin’s inner circle have all chipped in to foot the US$51-billion bill to prepare the Black Sea resort — easily the most expensive Olympics. And even before Hayley Wickenheiser steps into the spotlight as Canada’s flag bearer at the Fisht Olympic Stadium on Feb. 7, Sochi has already had the dubious reputation of being labelled as “the most corrupt Olympics in history.”

Still, not every oligarch has lined his pocket. Last year, some companies including Gazprom had reportedly privately requested the government to compensate them for some of the losses they had incurred.

Russian state-owned enterprises have said 75% of their loans for Sochi Olympics-related projects (about 0.3% of GDP) are unlikely to be repaid.

The Olympics are a distraction for the Russian energy sector, which needs to raise its game in other areas.

Russia remains one of the largest producers of oil and natural gas, but the sector has suffered setbacks in its core market of Europe, where competition from new suppliers and regulatory changes has forced Gazprom to lower prices and change its business model.

“Russia is one of the biggest losers of the U.S. shale oil and gas revolution,” said Leslie Palti-Guzman, analyst at Eurasia Group, a political risk consultancy. “Russia had to rethink its marketing and pricing strategy as some of its gas projects such as the Arctic Shtokman LNG projects were shelved as the U.S. no longer needed to import Russian LNG.”

Rapid changes in global energy markets have wrong-footed Russia’s state-dominated oil and gas sector that funds 50%-60% of the country’s budget. Declining oil production from West Siberia, which accounts for 60% of Russian crude output, has also forced Russia to tap its formidable natural gas reserves – the largest in the world.

Moscow-based Energy Research Institute of the Russian Academy of Sciences estimates that Russian oil and gas exports could fall by as much as 15% over the next 15 years “resulting from the profound transformation of global energy markets.”

To stem the decline, the Kremlin has undertaken huge capital investments in the sector, which should reach an unprecedented 6%–7% of GDP (against a global average of about 1.3%–1.5% of GDP).

“For the next 10 years investments in energy projects announced by Russian Energy Minister Alexander Novak will be almost half more than capital investments of Canada, which intends to invest $650-billion during the same period,” president of Global Energy Igor Lobovsky, told an audience of energy executives late last year.

Warily, Moscow has also eyed neighbouring China to secure much-needed funding and market access, and the two countries are slowly putting aside traditional mutual distrust to craft a spate of deals.

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