The Russian energy sector is in need of sweeping economic reform according to a report from the International Energy Agency (IEA). In its Russia Energy Survey, the IEA claims that the country urgently needs to improve the investment climate for both foreign and domestic investors if it is to attract the estimated $550-$700 billion needed over the next twenty years to fuel economic growth and maintain oil and gas exports.
The IEA raised concern over subsidised domestic energy prices which it said would have to be raised. It was also critical of inefficient energy use. This combined with a lack of inward investment could stifle economic recovery. Domestic consumption is rising rapidly and GDP growth until 2020 is predicted to be 5-6 per cent.
Currently energy exports provide Russia with around one third of its foreign exchange earnings. However decades of under investment mean that 60 per cent of Russian oil fields are in decline; new fields in East Siberia require enormous investment to exploit. Production levels today are only half the Soviet-era peak.
The IEA proposes a number of legal and fiscal reforms. It suggests the country should establish a clear and stable legal framework for petroleum licensing and operations. The government should start taxing profits rather that revenues and remove export controls and the disparities which exist between internal and external oil prices. Increases in coal and nuclear generating capacity could be used to cut domestic gas consumption, releasing more for export to the European market.
However the report singled out price reform as the single most important change. Currently Russian consumers pay a few cents a month for their gas and the economy's energy intensity is around three times that of an average developed country. Domestic gas and electricity prices need to be increased, it said, to boost energy efficiency and give the industry a better chance of financing itself. Russia plans to bring its tariffs in line with Europe by 2007.
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