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Russia ranks third in the world in oil production, after Saudi Arabia and the United States. Estimates place proven and potential oil reserves at 8 to 11 billion tons. Russia's oil production peaked in 1987, then began a decline that continued through 1995. In the latter year, the yield was 741 million barrels, 13 million barrels less than the previous year. Output for the first quarter of 1996 was 182 million barrels.

Wasteful Soviet oil exploration and extraction techniques depleted wells, which often fell far below their potential capacity. Soviet technology was not capable of exploring and extracting as deeply and efficiently as Western technology. These handicaps have been instrumental in Russia's plummeting oil production during the last two decades. In 1994 the number of oil wells drilled was only one-quarter the number drilled in 1983. About two-thirds of Russia's oil comes from Siberia, mostly from huge fields in the northwest part of the region. The main European oil and gas fields are located in the Volga-Ural region, the North Caucasus, and the far north of the Republic of Komi (see fig. 9).

Russian oil companies are vertically integrated units that control the entire production process from exploration to transmission. The largest company is Lukoil, which, according to some measurements, is the largest oil company in the world. The dominance of a few large companies has made all stages of petroleum exploitation and sale extremely inefficient. National and local government policies have discouraged individual retailers from establishing independent gasoline storage facilities and stations; therefore, retail gasoline likely will continue to be in very short supply (only 8,900 stations were operating in Russia in 1995). Until January 1995, government policy applied quotas to oil exports, and until July 1996 tariffs were applied to oil exports. Both policies, resulting from the gap between controlled domestic prices and world market prices, aimed at ensuring a sufficient supply of oil to meet domestic demand; both were lifted as the gap narrowed.

The search for new oil deposits has been a primary force in Russia's foreign policy toward states to the south. Russia has staked its claim to the Caspian oil reserves that Western companies are exploring in conjunction with Azerbaijani, Turkmenistani, and Kazakstani state companies. The presence of Western interests and the strong role being played by Iran and Turkey, Russia's traditional regional rivals, have complicated this policy, which aims to achieve maximum benefit from Russia's position on the shore of the north Caspian. Also a source of international controversy is Russia's insistence that Caspian oil flow northward through Russian pipelines rather than westward via new lines built through Georgia and Turkey (see Foreign Investment in Oil and Gas, this ch.).

Natural Gas

Russia is also one of the world's largest natural gas producers. Its proven reserves have been estimated at 49 billion cubic meters, or roughly 35 percent of the world's total. Natural gas has also been one of the most successful parts of the Russian economy. In the early 1980s, it replaced oil as the Soviet "growth fuel," offering cheaper extraction and transportation. Although output has dropped in the 1990s, the decline has not been as severe as that for other energy sources or the rest of the economy. Natural gas production peaked in 1991 at 727 million cubic meters, then dropped throughout the early 1990s. But 1995 production, 596 million cubic meters, was an increase from the previous year. After European gas fields in the Volga-Ural region dominated the industry through the 1970s, production shifted to giant fields in Siberia. The Urengoy and Yamburg fields in the West Siberia region are among the most productive; the former is the largest field in the world. Soviet plans called for rapid development of new reserves in the Yamal Peninsula in the Arctic Ocean north of Urengoy, but environmental problems and infrastructure costs slowed development. Hasty construction and poor maintenance have caused chronic breakdowns and accidents in the long pipelines of Russia's natural gas delivery system (see Transportation, this ch.).

The State Natural Gas Company (Gazprom) has a virtual monopoly over Russia's gas production and transmission. A vertically organized enterprise, the company has been reorganized into a joint-stock company, in which 40 percent of the shares remain under state control. Company employees hold another 15 percent, managers of the company hold 10 percent, and the remaining 35 percent were sold at public auction. Gazprom controls a network of regional production associations. Its management, which once was headed by Prime Minister Viktor Chernomyrdin, has been accused of corruption and tax evasion.

Data as of July 1996

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