Natural resources policy

The natural resources policy was approved by the EBRD board on 23 March 1999. Natural resources in this context include oil (covering all the product cycle), gas, coal mining and mining of precious and non-precious metals. Natural resources are an important endowment of several transition economies, particularly in the Former Soviet Union. In Azerbaijan, Kazakhstan, Russia, and Turkmenistan, oil and gas production has accounted for between 10-20 per cent of GDP and generated around half of all foreign exchange revenues. Uzbekistan's and Ukraine's production of natural gas is also sizeable, although the majority of it is consumed domestically. In eastern Europe, Romania produces significant amounts of crude oil, while several other countries have important refining capacity. Mining of precious metals is a major foreign exchange earner in countries such as Georgia, Kazakhstan, the Kyrgyz Republic, Russia and Uzbekistan.

The prospects for natural resource development in the countries of the region are generally considered favourably. Russia and Turkmenistan harbour the world's estimated largest and third largest reserves of natural gas respectively. Russia also ranks among the world's five largest oil producers and significant unexplored structures remain in the northern and eastern Siberian territories. Caspian oil reserves are estimated by several observers to be approximately equal to those in the North Sea, giving the region significant importance as a global producer.

However, reserve estimates provide only an imperfect indication of the economic potential of a country's natural resource endowments. In order to be of economic value, natural resources need to be marketed. The commercial viability of natural resource extraction is thus a function of the availability of competitive technology, transportation routes to major consumption centres, and production costs determined by the geological structure of natural resource reservoirs. In the case of oil and precious metals, prices fluctuate widely on international commodity markets, and substantial financial muscle as well as high flexibility are required to remain competitive on international markets. The natural gas market is less volatile and given the need for extensive investments into pipeline transportation entry costs are high. Nonetheless, given substitution possibilities between various types of fuel and sources of supply, competition in the market for natural gas is also high.

Marginal production costs for oil in Russia are very high by international standards, a reflection of geological factors but also of the relative organisational and technological backwardness of its oil industry. More favourable geological factors, higher levels of foreign investment and more recent development of the major fields lie behind lower production costs in the Caspian, but here transport bottlenecks continue to constrain the development of production. Against this background, the recent fall in oil prices imposes severe adjustment pressures on the oil industry throughout the region and could slow its development at least temporarily. It also highlights the need to attract high calibre international players to the region to make it globally competitive. Appendix III provides a detailed analysis of market supply and demand in the oil, gas and mining sectors of the transition economies, including likely investment needs and required organisational restructuring.

In the Balkans region, the Bank is called on to participate mainly in downstream projects (refining and petrochemicals), as well as corporate restructuring and privatisation. In Romania, the privatisation of Petrom is an opportunity for the Bank to participate in the restructuring and privatisation of the oil and gas sector, so vital in this "oil and gas transit" country.

Central European countries like Poland and Hungary have already successfully restructured (or are restructuring) their operations. The main areas of interest for the Bank are in direct equity investments and other "advanced products" such as quasi-equity or mezzanine financing.