Changing oil and gas production and trade patterns influencing international economic development


Oil and gas producers around the world will need to implement new technologies to remain competitive in a changing global marketplace.

Despite the political reforms that have occurred since the fall of the Soviet Union, the United States still often experiences tension with Russia. However, instead of an arms race, the two nations currently find themselves at odds over something else: the development of oil and gas wells.

Russia's economy remains dependent on the oil and natural gas market

For years, Russia's economy grew rapidly as a result of rising oil and gas prices, which were driven by an expanding global economy and a series of events that constrained supplies, including the U.S. invasion of Iraq and disruptions to oil production in the Gulf of Mexico, caused by Hurricane Katrina and the BP oil spill.

In 2012, Russia's gross domestic product (GDP) exceeded $2 trillion. The emerging Russian economy came within $420 billion of matching the United Kingdom's $2.435 trillion GDP. However, the growth of the Russian Federation's GDP has largely hinged upon the expansion of global demand for oil and natural gas.

As former U.S. Secretary of State Condoleeza Rice noted at an investment conference earlier this year, 80 percent of the Russian economy is tied to production of oil, gas and minerals, which means the nation's economic growth is almost completely dependent upon its ability to sell these resources at favorable prices.

Natural gas companies in Russia provide European countries with approximately 25 percent of the gas they consume and Russian oil producers have also struck deals with the Chinese government to supply the country with 100 million metric tons of crude oil over the next decade.

Russia's ability to meet the demand for energy from nations in the eastern and western world has allowed its domestic companies to make badly needed investments in modern oil production equipment. In turn, this has enabled the country to maintain its position as one of the largest oil exporting nations in the world.

However, ensuring the sustainability of this economic model in the future will depend on Russian companies' ability to develop the vast, untapped oil and gas reserves in Siberia and the Russian arctic. This will require a large-scale deployment of advanced technology, which will be costly. As Renaissance Capital oil and gas analyst Ildar Davletshin told Bloomberg, Russian producers "are really behind the curve and need to accelerate" to remain competitive.

Growing U.S. oil and gas production could affect Russia's position in the market

While the Russian Federation exports more oil than the United States, the situation is reversed for natural gas exports and U.S. oil production has been surging in recent years, due to the implementation of contemporary production technologies that have unlocked previously inaccessible reserves trapped in shale formations. The United States' increasing strength in the global energy market seems to have played a role in driving Russian producers and political leaders to try to lock down lucrative supply deals with other nations before an abundance of U.S.-produced gas drives down prices.

In addition to Russia's deals aimed at meeting Chinese crude oil needs, the Russian government has turned to the Chinese market as it looks to bolster natural gas exports. China, often derided for the detrimental impacts that rapid coal- and oil-powered industrialization has had on its environment, has been looking toward natural gas as a cleaner option, and oil and gas well operators in Russia seem to see a profitable opportunity. However, ongoing negotiations between the two countries have failed to produce an agreement on this front.

Worldwide, oil and gas producers face a need to focus on efficiency

"For many years we have had a situation when prices for our main export goods rose fast and almost without interruption, and this made it possible for Russian companies and for the government to cover high expenses," Russian President Vladimir Putin said in June at the St. Petersburg International Economic Forum. "But this situation has changed now. There are no simple solutions and no magic wand we can wave to change things overnight."

Over the long term, Russia will need to diversify its economy by developing other sectors. However, the capital to finance domestic economic growth will likely need to be generated by the oil and gas industry.

This underscores the need for companies to implement technology that enables cost-effective extraction of energy resources. This is particularly vital to the development of untapped oil and gas reserves in difficult drilling environments. Versatile solutions such as the hydraulic jet pump can provide a critical aid to producers in any nation, as it can be deployed in many different types of wells and has minimal maintenance needs.