How Russia could fuel Asia’s growth

Growing Asian demand presents a golden opportunity for Russia to diversify away from its primarily European export market, writes Nobuo Tanaka. Read the World Economic Forum’s report: Scenarios for the Russian Federation.

Russia and Asia could be an energy partnership made in heaven. Two thirds of future energy demand growth will come from Asia, while Russia is now one of the biggest oil and gas producers in the world. This is my personal takeaway from the World Economic Forum’s Scenarios for the Russian Federation report, released during this year’s Annual Meeting in Davos, and in which I have been involved over the past 12 months.

China is growing so fast that it will certainly need to import increasing amounts of oil and gas to feed its ravenous economy. This is despite its ambitious efforts in the fields of energy conservation, renewables, and nuclear energy, and notwithstanding the potential of future shale gas and coal bed methane production.

China accounts for about 20% of global energy demand. Its oil consumption has increased by about 7% per year over the past decade, leading to a dependence on foreign oil that is forecast to grow by 2% to 3% each year. About 55% of the oil China consumes already comes from foreign markets and this could reach 70% by 2015. Dependence on foreign gas and coal is also likely to rise.

If India continues on its economic growth path its coal consumption will undoubtedly increase.

The South-East Asian region is now a net exporter of gas, but rising domestic demand is likely to diminish this economic opportunity.  And Japan’s partial decision to turn its back on nuclear energy, following the 2011 tsunami and subsequent disaster at Fukushima, means it will need more gas to plug the energy gap.

So who could supply this energy need? Although North America is now practically energy independent thanks to its new discoveries of shale gas, export volumes are likely to remain low. Australia has potential but rising production costs could make it a somewhat unreliable partner. The Middle East continues to present geopolitical risks, and Africa needs more infrastructure investment.

So the spotlight falls back on the Russian Federation, which remains a titanic “energy empire”.  As Scenarios for the Russian Federation makes clear, Russia’s energy resources are both great and in need of revamping. First, Russia needs huge investments in its energy sector, particularly as regards non-legacy production. Second, Russia has grown increasingly uncertain about the long-term commitment of its European partners to fill Moscow’s export needs.

In both regards, a closer relationship between Russia as a producer and Asia as a consumer represents an invaluable opportunity. Cash-rich Asia could support Russia financially to maintain its oil and gas revenues. While West Siberian oil and gas will be depleted, the focus moves to East Siberia and the Far East where demand is growing.

This growing Asian demand also presents a golden opportunity for Russia to diversify away from its primarily European export market, at a time when the EU is desperately trying to reduce its own dependence on Russia.

Diversification is good for both Asian importers and Russian exporters – it is a win-win situation.

About the author: Nobuo Tanaka is  Global Associate for Energy Security and Sustainability, The Institute of Energy Economics Japan (IEEJ), and  Executive Director, International Energy Agency (2007-11). He is a member of the World Economic Forum’s Global Agenda Council on Energy Security.

Image: Energy-intensive industries, like this steel factory in Dalian, China, will increase demand for foreign imports of oil, gas and coal throughout Asia. REUTERS/Daily China