Mining Industry in Russia

                                   Federal Agency of Education

                                         State Educational Institution

                                       of Higher Vocational Education

                                           of the Russian Federation 

                                         Petrozavodsk State University

                                                        Kola Branch 
 

           “Mining Industry in Russia” 
 

                                                       Department: full-time

                                                       Faculty: mining

                                                       Year: second

                                                       Group: 1 (2) 

Discipline: the English              Language

Scientific adviser: Sidorenko V. S.

Made: Sajkina K. I.  
 

  Apatity 2010

Summary:

1. Introduction ……………………………………………………………………………………………………3

2. Legal framework………………………………………………………………………………………………8

3. Structure of the mineral industry………………………………………………………………………8

4. Trade………………………………………………………………………………………………………………..8

5. Mineral resources……………………………………………………………………………………………..9

6. Metals and industrial minerals………………………………………………………………………….9

7. Oil industry of Russia……………………………………………………………………………………...16

8. Uranium………………………………………………………………………………………………………….16

9. Outlook………………………………………………………………………………………………………..…17

10. Russian economy blues………………………………………………………………………………...18

11.The Russian mining industry has returned to the past……………………………………22 
 
 
 
 
 
 
 
 
 

  1. Introduction.

  The Mineral industry of Russia is one of the world’s leading mineral producing countries and accounts for a large percentage of the CIS’s production of a range of mineral products, including metals, industrial minerals, and mineral fuels. In 2005, Russia ranked among the leading world producers or was a significant producer of such mineral commodities as aluminum; arsenic; asbestos; bauxite; boron; cadmium; cement; coal; cobalt; copper; diamond; fluorspar; gold; iron ore; lime; lithium; magnesium compounds and metals; mica, sheet, and flake; natural gas; nickel; nitrogen; oil shale; palladium; peat; petroleum; phosphate; pig iron; potash; rhenium; silicon, steel; sulfur; titanium sponge; tin; tungsten; and vanadium.

  In 2005, the Russian economy benefited significantly from high oil, gas, and metal prices. Oil revenues accounted for about 14% of the GDP. Following the mineral fuel industry, the next leading branch of the mineral industry, in terms of its contribution to the national economy was the metallurgical sector, which contributed 19% of the value of industrial production, accounted for 11.1% of the value of industrial capital stock, and employed 9.3% of the industrial labor force. In 2005, a total of 1,071,000 people were employed in the mineral extraction sector and made up 1.6% of the country’s labor force. Investment in mineral extraction and metallurgy accounted for about 20% of total investment in the Russian economy.

  Russia remains one of the world’s largest mineral producers, accounting for 20% of nickel and cobalt production, 5-7 % of coal and iron ore production, and also a large share of the output of some non-ferrous and rare earth metals, platinum group metals, diamonds, apatite and potassium salts. Russia also contains important reserves of nickel, gold, silver, platinum group metals and diamonds.

  To date, approximately 20,000 mineral deposits have been explored, of which more than one-third are currently being mined or developed. While these deposits account for only five per cent of the country’s explored mineral resources, they contain over 70 percent of Russia’s total natural reserves. Raw metals and aluminum comprise the largest share of Russian exports (65 per cent).

  While this vast resource base has obvious appeal, for many years there was debate about the business stability in Russia’s mining sector. Investors and potential resource developers worried about the absence of clear business rules, the reliability of partners and return on investment. Some companies undoubtedly had their fingers burned, but today the Russian Government and industry are attempting to create a more stable climate to support growth in sales, investment and employment. There are significant opportunities for mining, exploration and investment companies, although obviously some care is required.

  The mining industry is strategically important and is one of the most important industries in the Russian economy. Besides ongoing modernization in the existing mining and refining companies that are active in the mineral sector, a comprehensive effort is currently taking place to prospect for new mineral deposits.

  The latest report 's R'search -Metals and Mining Industry in Russia brings you an entire coverage of the metals and mining industry in Russia. The report covers the major players in these sectors, the recent regulatory changes and how they are affecting the mining industry in Russia, the investment scenario in the industry, and much more. The economics of mining, metal reserves, production of metals and minerals, production techniques, refining techniques, and a lot more technical data is also researched to satisfaction of any investor/researcher looking in to this particular sector.

  The report provides a definition of the Russian Mining Industry with a tabulation of its segments and the overall market overview with the economic contribution of this important industry. The major industry growth drivers and the challenges to growth which are placing a question mark on the future growth speed of this industry are enumerated in the report. The report also indicates the trends running currently in the market and the future projection for growth analysis of the industry.

  The report profiles in detail the major players in the industry along with their financial analysis and company strategies. A future perspective of the Russian Metals & Mining Industry completes the report.

  Russia Mining Report provides industry professionals and strategists, corporate analysts, mining associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on Russia's mining industry.

  As commodity prices increased throughout the year, Russia’s vast coal resources have become attractive to foreign investors. Particular interest has been exhibited from companies in South Korea, Japan and China as companies look to secure long term stable supplies of the energy resource. South Korea’s Hyundai Steel signed deals with Mechel and Siberian Anthracite in February and September respectively and South Korea’s Pohang Iron & Steel Co (POSCO) also agreed to purchase coking coal from Russian company Sibuglemet beginning in 2011.

  It has also been rumoured that unnamed Chinese investors are keen to develop infrastructure in the Far East regions of Russia to exploit the rich resources in the area. Though, Russia’s reliance on its natural resources damaged the country as commodity prices crashed, there is still a lot of confidence that investment will return now that the market is recovering. In October 2009, it was reported that the Federal Service for the Financial Markets (FFMS) would be creating a draft amendment that would make it more difficult for Russian companies to raise funds through Initial Public Offerings (IPOs) in international markets. If passed, this will be a blow to companies who have found raising capital difficult domestically, due to high interest rates on hard to find commercial loans.

  The amendment proposes a reduction in the limits of shares allowed to be issued on international markets. Whilst the move comes as a means to strengthen the domestic market and encourage investment within Russia, it does make it more difficult for companies to raise capital at a time when it is most needed. Analysts anticipate that the draft amendment will simply force companies to search for loop holes as a means to circumvent the new regulations.

  Throughout Q309 and Q409, news about the aluminium industry was dominated by the debt restructuring of giant producer UC RUSAL, and its intention to launch an IPO. By September 2009, it was announced that UC RUSAL, would restart its plans for an IPO on the Hong Kong stock exchange in a move that could raise US$2bn for the company. In order to move forward with the listing, the company still has to agree to the restructuring of its debts with domestic and international creditors. UC RUSAL’s debts currently stand in excess of US$16bn. By the end of October, however, UC RUSAL had managed to pay off or agree repayment terms with its Russian creditors. It was estimated that half of its international lenders were in agreement to the current restructuring plans for the US$7.3bn debt. In November 2009, state support for the company was displayed with the announcement that the government might buy up to 3% of shares in the company through the IPO for between RUB14bn-18bn (US$488mn-627mn) which would give the company a valuation of US$20bn.

  Meanwhile, In September 2009, Reuters reported that Atomredmetzoloto Uranium Holding Company (ARMZ) believed a recovery and hike in uranium prices would be seen in early 2010. As environmental concern sees more countries becoming interested in developing clean fuel sources and moving away from fossil fuels, demand for uranium is increasing steadily. The company also reported that it was meeting with French state-controlled nuclear reactor manufacturer Société des Participations du Commissariat à l’Energie Atomique (AREVA) to consider uranium projects together in Namibia where there are extensive resources of uranium. As well as starting to work with AREVA, the following month, ARMZ stated that they were also in talks with Canadian based Cameco Corp about potential uranium projects in Africa and Australia.

  Industry Forecast In the short term, Russia’s mining sector is facing severe difficulties caused by falling commodities prices. In 2008, the authors estimated the mining sector declined by 11.0% in real terms, and we forecast a significant contraction in 2009. By the end of the forecast period, however, the market should have returned to strength as commodity prices recover and new reserves are developed. In 2014, we forecast the mining sector will be worth US$240bn.

  With bountiful and diverse minerals, Russia, the world's largest country in land area, occupying 75% of the former Soviet Union, had a significant percentage of the world's mineral resources and produced 14% of the world's total mineral extraction. Mining was the country's leading industry in 2002, and Russia was the largest producer of palladium and nickel (20% of world output), and ranked second in the production of aluminum and platinum-group metals (PGMs), third in potash, sixth in gold, and seventh in mine copper. Russia also produced a large percentage of the CIS's bauxite, coal, cobalt, diamond, lead, mica, natural gas, oil, tin, zinc, and many other metals, industrial minerals, and mineral fuels. Enterprises considered part of the mineral and raw-material complex contributed 70% of the budget revenues derived from exports; petroleum, petroleum products, and natural gas were Russia's leading export commodities in 2002; metals and chemicals also were leading export commodities.

  More than half of Russia's mineral resources were east of the Urals. The most significant regions for mining were Siberia, particularly East Siberia, for cobalt, columbium (niobium), copper (70% of Russia's reserves), gold, iron ore, lead (76% of the country's reserves), molybdenum, nickel (becoming depleted), PGMs, tin, tungsten, zinc, asbestos, diamond, fluorspar, mica, and talc; the Kola Peninsula, for cobalt, columbium, copper, nickel, rare-earth metals, phosphate (the majority, in the form of apatite), and tantalum; North Caucasus (copper, lead, molybdenum, tungsten, and zinc); the Russian Far East (gold, lead, silver, tin, tungsten, and zinc); the Urals, with bauxite, beryllium, cobalt, copper, iron ore, lead, magnesite, nickel, titanium, vanadium, zinc, asbestos, bismuth, potash (96% of the country's reserves), soda ash, talc, and vermiculite; and the region near the Arctic Circle (cobalt, gold, mercury, nickel, tin, phosphate, and uranium). The Kaliningrad region contained 95% of the world's amber deposits, and Russia possessed 10% of the world's copper reserves. Metallurgical enterprises in Kola, North Caucasus, and the Urals were operating on rapidly depleting resource bases, and were experiencing raw material shortages.

  A large percentage of Russian reserves was in remote northern and eastern regions that lacked transport, were distant from major population and industrial centers, and experienced severe climates, and enterprises built there in the Soviet era had curtailed operations sharply. Efforts to develop new large deposits of nonferrous metals near the eastern Baikal-Amur railroad were not progressing. One researcher proposed the creation of small mining enterprises to develop the rich small deposits of eastern Russia. Reserves of iron ore were sufficient to last 15–20 years; those of nonferrous metals, 10–30 years. Reserves of major minerals included potash, 1.8 billion tons; magnesite, 585 million tons; bauxite, 250 million tons; phosphate rock, 240 million tons; asbestos, 100 million tons; fluorspar, 60 million tons; manganese, 15 million tons; nickel, 6.3 million tons; vanadium, 5 million tons; zinc, 4 million tons; antimony, 3 million tons; and lead, 3 million tons.

  Output of iron ore was 86.63 million tons in 2000, 81.31 million tons in 1999, and 72.34 million tons in 1998; increased demand from the domestic metallurgical sector spurred the rise. Iron ore output was at 77% of the 1990 level (better than other metals), and product quality has been maintained. The largest producer was Kursk Magnetic Anomaly, at Zheleznogorsk and Gubkin, with a 50 million ton per year capacity.

  Output of copper was 570,000 tons in 2000, 530,000 in 1999, and 500,000 in 1998. The Noril'sk complex, in East Siberia, produced 70% of the country's copper, and planned to increase output of cuprous ore from its Oktyabr'skiy underground mine, from 100,000 tons per year to 1.6 million tons, because the cuprous ores were 40% higher in copper content than the nickel-rich ores; the Oktyabr'skiy mine supplied 70% of Noril'sk's copper output, and was planning to decrease production of the nickel-rich ores.

  PGM production included 94,000 tons of palladium (85,000 in 1999, and 80,000 in 1998), and 30,000 tons of platinum (25,000 in 1998). Sixty percent of PGM output came from the Oktyabr'skiy mine, Noril'sk, and a plan to expand output at the mine of cuprous ores by a factor of sixteen was projected to yield more PGMs, as would two new nickel-rich mines, the Glubokiy and the Skalisty, that had a high PGM content; the Skalisty planned to reach a 2 million ton per year capacity by 2002.

  The output of other metals in 2000 was: bauxite, 4.2 million tons (3.75 million tons in 1999, and 3.3 million tons in 1996); nickel, 270,000 tons (230,000 in 1996—40% less than the peak levels of the late 1980s; 96% came from the Kola Peninsula and East Siberia, and 197,300 tons were exported to non-CIS countries); zinc, 136,000 tons (86.7%, from the Urals); lead, 13,300 tons (23,000 in 1996; 62.8% came from the Russian Far East, and the Dalpolymetal mining and benefication complex, in Maritime territory, had a 20,000 ton per year capacity); magnesite, 1 million tons (from the Satka deposit, in Chelyabinskaya Oblast', which had a 3.8 million tons per year capacity); tin, 5,000 tons (7,500 in 1997); titanium sponge, from the Perm region in the Urals, 30,000 tons (24,000 in 1999); molybdenum, 2,400 tons (2,000 in 1998); and cobalt, 3,600 tons. Gold mine output—from Yakut-Sakha, Buryat, Magadan, Krasnoyarsk, Maritime, and Tuva—was 143,000 kg (metal content), up from 125,870 in 1999. Russia also produced the metal minerals alumina, nepheline concentrate, antimony, white arsenic, bismuth, chromium, manganese, mercury, silver, tungsten, and baddeleyite zirconium. Russia, which had the capacity to mine vanadium, stopped mining beryllium in the mid-1990s, and continued producing cobbed beryl.

  Industrial mineral production in 2000 included phosphate rock (apatite concentrate and sedimentary rock), 4.45 million tons (4.04 million tons in 1998, and 3.2 million tons in 1996; 90%, from the Kola Peninsula, where total capacity was 20.7 million tons per year); marketable potash, 3.7 million tons (all from the Verkhne Kamsk deposit, in the Urals, with a capacity of 6.3 million tons per year); mica, 100,000 tons; fluorspar concentrate, 187,600 tons (153,800 in 1999, and 6,200 in 1997); and gem and industrial diamonds, 11.6 million carats each (10.5 million each in 1996; 99.8% was mined from kimberlite deposits near Mirnyy, in the Sakha [Yakutiya] Republic, at a value of $1.623 billion). Russia also produced the industrial minerals amber, asbestos, barite, boron, hydraulic cement, kaolin clay, feldspar, graphite, gypsum, iodine, lime, lithium minerals, nitrogen, salt, sodium compounds, sulfur (including native and pyrites), sulfuric acid, talc, and vermiculite. Russia's only producer of amber, Kaliningrad Amber Works, was the world's largest producer, yielding 441.8 tons in 2000, 364.5 in 1999, and 512.2 in 1998.

  Despite decreased metal output compared with the Soviet period (e.g., 20% as much tin), Russia was producing more aluminum, lead, and zinc in 2000 than during the Soviet era. Ten percent of the technology employed in the nonferrous mining and metallurgy sector was rated as world class, labor productivity was one-third below that of advanced industrialized countries, and energy expenditures were 20%–30% higher. Another problem was that the resource base for metallurgical enterprises was not competitive in terms of quality, with the exception of antimony, copper, nickel, and molybdenum. More than one-half of industrial mineral output was exported, depriving the domestic sector of needed supplies, especially barite, bentonite, crystalline graphite, and kaolin. Russia has not been successful in attracting foreign investment for developing its mineral deposits, because of high and unpredictable taxes, an unreliable legal system, insecure licensing, inequity in the treatment of domestic and foreign partners, a weak banking system, and the inability to directly export commodities.

  2. Legal framework

  A new subsoil law remained under discussion as of 2005. The current law of 1992, as amended, does not impose any special restrictions on companies with foreign participation, with the exception of diamond and radioactive materials, but this appeared likely to change to the disadvantage of foreign companies, especially those interested in investing in large or strategic deposits, such as the Udokan copper deposit or the Sukhoi Log gold deposit.

  As proposed, the new mining law under discussion would include certain restrictions on foreign participation, limiting it to 49% for some commodities. This restriction would apply to deposits with large reserves of more than 150 metric tonnes (t) of oil, 75 billion cubic meters of gas, 10 t of copper, and 700 t of gold; to strategic raw materials, which include diamond, nickel, high-purity quartz, rare earths, and uranium; and to mineral deposits located near defense and military facilities and frontier areas. Also, discussions were underway to lower the quantity of reserves from the above specified quantities for restricted deposits.

  In 2005, the value of mining and quarrying production, including extraction of mineral fuels, increased by 1.3% compared with that of 2004; when mineral fuels are excluded, it fell by 3.2%.

  3. Structure of the Mineral Industry

  Production in the mineral sector was highly concentrated as of 2005. For more than 10 minerals, the majority of production was conducted by one company. Gazprom controlled almost the entire production of natural gas in Russia, Noril’sk Nickel Mining and Metallurgical Company (MMC) produced more than 90% of Russian nickel and platinum-group metals (PGM), and ALROSA Company Ltd. produced almost all the country’s diamond. The Ministry of Natural Resources reported that the copper and other mineral industries also are highly concentrated, but that the situation is better for coal and alluvial gold. Despite this concentration, Russian metallurgical and mining companies were medium-sized compared with those in other countries; in the steel sector, Russian producers are generally smaller than their international counterparts. 

  4. Trade

  The value of mineral exports to the Russian economy has been increasing in recent years; and, in 2005, the minerals sector accounted for more than 70% of the value of exports. Mineral fuels were by far the leading category of exports in terms of value. In 2005, mineral products accounted for about 12% of the total value of imports, of which metals imported from both inside and outside the CIS accounted for more than 70%.

  5. Mineral Resources

  Approximately 20,000 Russian mineral deposits have been explored, and more than one-third of these have been mined. The Ministry of Natural Resources cited serious problems in the sector, which included the depletion of reserves and the low discovery rate of new reserves. The system of reporting reserves in the Soviet Union (and which Russia very often employed for its resource reporting) was based on establishing drilling parameters to ascertain the certainty of reserves. Unlike the method used in market economy countries, this method does not include the use of market-based economic criteria to establish the feasibility of developing these resources using current technology at prevailing market conditions. Thus, reserve data based on the Soviet method cannot be compared to market economy definitions of reserves. Furthermore, Soviet data on reserves for many mineral resources was either kept secret or was difficult to obtain, and the same holds true for Russian mineral resource data. By 2005, however, Russian companies had begun to seek exposure to Western markets and stock exchanges to raise money in larger quantities and more cheaply than in Russia. A number of state secrecy laws were repealed, which has led some Russian companies to start reporting their reserves and resources according to the Australasian Joint Ore Reserves Committee (JORC) code of the Australasian Institute of Mining and Metallurgy.

  6. Metals and industrial minerals.

  Aluminum

  RUSAL was Russia’s leading domestic aluminum producing company and, along with SUAL, which was the second ranked domestic aluminum producer and the leading domestic bauxite producer, controlled all Russian aluminum, alumina, and bauxite production enterprises. Plans for RUSAL called for merging its resources with that of SUAL and with Swiss-based Glencore International AG to become the United Company RUSAL. This merger would start a new stage in the development of RUSAL and make it the global leader in aluminum production.

  RUSAL was investing to expand and modernize its production facilities. It was engaged in commissioning the Khakas Aluminum Smelter with a capacity of 300,000 t/yr. Plans for RUSAL also called for modernizing the Sayanogorsk aluminum smelter in 2006 to increase output of aluminum and alloys and to modernize the Nikolayev Alumina refinery in Ukraine to increase output to 1.6 Mt/yr of alumina. RUSAL also planned to continue to expand production capacity at the Achinsk alumina refinery, increasing its output to 1.1 Mt/yr of alumina. Included in the company’s investment project portfolio is the Komi Aluminum project, which was initiated by SUAL. The project foresees the development, construction, and operation of a bauxite-alumina complex in the Komi Republic, using material from the Middle Timan bauxite deposit. The design capacity of the complex was 6 Mt/yr of bauxite and 1.4 Mt/yr of alumina. The completion of this project would considerably reduce the Russian aluminum industry’s dependence on foreign countries for raw material supplies.

  Copper

  More than 50% of Russia’s copper metal production was produced by Noril’sk Nickel from ore mined by the company. The remainder came from a much smaller amount of ore mined in the Ural Mountains and a large amount of secondary material. As nickel-rich ores at Noril’sk Nickel become depleted, Noril’sk Nickel will switch to mining larger quantities of ores, which will be primarily copper-rich ores that have a higher copper content relative to their nickel content than the nickel-rich ores, but are lower in metal content for both metals. This change could increase copper output as Noril’sk Nickel tries to maintain its level of nickel production. Noril’sk Nickel’s strategy up to 2010, however, appears to be to maintain its production of nickel-rich ores which may delay the significant increase in copper production.

  The leading copper producer in the Ural Mountain region—the Urals Mining and Metallurgical Company (UMMC)—controls a large number of mining and metallurgical enterprises in the Urals. The company was planning to develop its raw material base and to increase its output of copper in concentrate to 105,000 t in 2010 from 72,000 t in 2003. Mine output in the Urals would also expand as mine development takes place at the Russian Copper Company Limited, which was the country’s third ranked copper producer and which also controlled mining and metallurgical enterprises in the Ural Mountain region. Development of the large Udokan deposit in Chita oblast was still on hold. Reserves at Udokan and neighboring deposits were reported as ranging from 10 to more than 20 Mt of copper in ore at grades of between 0.7% and 4% copper.

  Gold

  Russia was having a difficult time expanding gold production because reserves at existing enterprises were being depleted and gold mining companies were experiencing greater difficulties in obtaining licenses to mine new deposits. Formerly, local Government entities could issue such licenses, but in 2005, these licenses could be obtained only through the Russian Ministry of Natural Resources based in Moscow. Placers contain 18.2% of the country’s reserves but they were being significantly depleted, and most existing placer mining operations were unlikely to survive beyond 2011. However, placers still contributed nearly 50% of annual production. In 2005, no new gold deposits were put into production.

  More than one-half of Russia’s hard rock gold resources occur in the Maiskoye, Natalkinskoe, Nezhdaninskoe, Olimpiada, and the Sukhoi Log deposits in Siberia and in the Russian Far East. More than 66% of Russian gold production comes from just six eastern regions (Amur, Irkutsk, Khabarovsk, Krasnoyarsk, Magadan, and Sakha-Yakutia). During the past 4 years, foreign companies have controlled 15% to 18% of Russian gold production, which was the largest share held for any commodity in the Russian mining industry. These foreign-held enterprises produced a total of between 30 and 36 t/yr of gold. Among Russia’s leading gold producers, Bema Gold Corp., Highland Gold Mining Ltd., High River Gold Mines, Kinross Gold Corp., and Peter Hambro Mining Plc, were foreign-listed and/or foreign-controlled companies. Projects being developed by these foreign firms were expected to contribute significantly to the growth in Russian gold production in the next 5 years and could increase Russia’s gold output to about 250 t/yr if they are all successfully developed. The most advanced international gold project was the Bema Gold Corp.’s development of the Kupol deposit, where production was scheduled to start in 2008. Significant byproduct gold was produced by mining operations of UMMC in the Ural Mountain region and Noril’sk Nickel’s operations in East Siberia on the Taimyr Peninsula (165,000 ounces in 2005).

  Iron and Steel

  Russia is the world’s fourth-ranked steel producer after China, Japan, and the United States. Russia shares the lead with Japan as the world’s leading steel exporter. From 1998 to 2005, Russian steel production increased by more than 50%. Between 1998 and 2005, investment in the steel sector greatly increased, which improved economic indicators for steel enterprises and enabled them to improve product quality. Nevertheless, the steel sector was still in need of investment to improve its ability to compete and to expand production capacity. According to a Russian analysis, the country’s steel mills can be divided into three categories based on the level of technology they employ. The mills in the first category are the country’s three largest (Magnitogorsk, Severstal, and Novolipetsk), which also have the highest levels of technology. For example, this first group of mills has the lowest percentage of open-hearth production, the highest level of continuous casting, and produces the highest quality assortment of steel products. The second tier steel mills consist of the Chelyabinsk, the Nizhniy Tagil, the Kuznetsk, the Oskol, the Uralsk, and West Siberian mills. The country’s leading steel holding company was Evraz (a Luxembourg-registered steel company) that had holdings that include three of the leading steel mills in Russia (Kuznetsk, Nizhniy Tagil, and West Siberian). Russia’s third ranked steel producer, Severstal, was discussing a merger with Arcelor of Luxembourg, in part to thwart a hostile takeover bid for Arcelor by Mittal Steel of India, which was consolidating steel mills worldwide.

  Iron Ore

  Russian steel companies relied on iron ore from domestic deposits. These deposits often were owned by more than one Russian steel company. In 2005, steel companies were acquiring iron ore producers to help make their companies more vertically integrated. Russia’s iron ore mines and iron and steel works often were located far apart. Almost 60% of iron ore reserves are located in the Kursk magnetic anomaly (KMA) in European Russia and about 15% are located in the Ural Mountains region. High-grade reserves at the open pit operations in the KMA were becoming depleted, although the area hosts significant lower grade resources in the weathered zones. These zones were estimated to contain 4 Gt of reserves and up to 60 Gt of potential resources, but exploiting such low-grade ores would require expensive beneficiation technology.

  Iron ore output was expected to be in the range of 100 to 105 t/yr by 2010. A further limited increase in iron ore production was projected to the year 2020 without a significant expansion of the resource base. The resource base for iron ore was not considered very attractive for investment because of the low grade of the ores, technological problems related to mining and processing the ores, and taxation issues.

  Nickel

  In Russia, which was the world’s leading nickel producing country, more than 90% of nickel was produced by Noril’sk Nickel, which mined deposits of mixed sulfide ores mainly near Noril’sk in East Siberia, but also on the Kola Peninsula. The projected long-term ore output for Noril’sk Nickel in 2005 was raised to 22 Mt/yr. The 2005 level of production was 14 Mt of ore. With metal prices and demand at very high levels, the new higher projections were in accord with Noril’sk Nickel’s marketing strategy. To maintain and increase output levels, Noril’sk Nickel was planning to switch to mining a greater proportion of cuprous and disseminated ores rather than nickel-rich ores, which were being depleted. Noril’sk Nickel also was developing new mines to replace depleted reserves of nickel-rich ore. The company’s cuprous ore reserves, which are abundant, have a much lower nickel content and a somewhat lower copper content, and the disseminated ores are lower in all base-metals content than the nickel-rich ores. The nickel-rich, cuprous, and disseminated ores, however, are not greatly dissimilar in their PGM content.

  The Skalisty Mine, which is located on the Taimyr Peninsula, was under development as of 2005; it was expected to achieve its design capacity of 1.2 Mt/yr of nickel-rich ore in 6 to 7 years. Skalisty wasscheduled to produce 310,000 t of ore in 2004. Development of the Gluboky Mine, which is located on the Taymyr Peninsula, was in the planning stage; the mine was scheduled to come onstream to mine nickel-rich ore by 2013-14. Gluboky and Skalisty would produce a combined 2 t/yr of nickel-rich ore.

  Despite its development plans, obstacles were preventing Noril’sk Nickel from making major investments in developing its facilities. The investment in its nickel operations that was planned for the period up to 2010 would result in only modest increases in production, although a significant reduction in production would be averted.

  Platinum-Group Metals

  Noril’sk Nickel’s operations (located mainly on the Taymyr Peninsula) in East Siberia and also on the Kola Peninsula produce more that 90% of the country’s PGM output. About 10 t/yr of PGM consisting almost entirely of platinum was mined from alluvial deposits throughout the country.

  In 2004, Russia repealed the law that kept PGM production data secret and, in 2005, repealed the law that kept PGM reserve data secret. The Government published reserve figures for its major PGM holdings at the Noril’sk Nickel complex in 2005. Based on an independent audit carried out by Micon International Co. Ltd. according to the Australian Joint Ore Reserves Committee (JORC) Code, Noril’sk Nickel’s reserves of combined proven and probable reserves of all six platinum group elements (iridium, osmium, palladium, platinum, rhodium and ruthenium) at Noril’sk Nickel’s holdings in East Siberia as of December 31, 2004, were reported to be 81.791 million troy ounces. Proven and probable reserves were reported to be 62.183 million troy ounces of palladium and 15.993 million troy ounces of platinum with ore grades that ranged from 5.5 grams per metric ton (g/t) to 11.1 g/t. Measured and indicated mineral resources were reported to be an additional 141 million troy ounces of palladium and 40 million troy ounces of platinum. These reserves are adequate for Noril’sk Nickel to maintain current levels of palladium and platinum production for more than 20 years.

  Despite Noril’sk Nickel’s development plan to significantly increase ore extraction, the company was proceeding more slowly than its stated plans would indicate and it appeared that through 2010, Noril’sk Nickel would try to keep output levels at about the 2005 level.

  Industrial minerals

  Diamond

  ALROSA accounted for 97% of Russian diamond production and about 25% of world rough diamond production in 2005. Its major mining operations were located in the Sakha Yakutia Republic but, in 2005, the company began production at the Lomonosov diamond deposit in the northern European part of the country in Arkhangelsk oblast. The company had five mining and beneficiation enterprises in Sakha Yakutia—the Aikhal, the Anabar, the Mirnyy, the Nyuruba, and the Udachnyy.

  In 2005, ALROSA was able to maintain its level of mine output through its program of gradually switching to underground mining to extract low-grade diamond ore reserves. ALROSA had started underground operations at the No. 7/8 Block of the Internatsiolnal’nyy underground mine and was continuing construction of underground mining at the Mir and the Udachny Mines. To maintain stable operations, ALROSA would need to increase its ore reserves by carrying out intensive prospecting for new diamond deposits. The company planned to increase its investment in exploration significantly. A new Mirny Exploration Expedition was established to concentrate on exploration.

  On June 28, 2005, full-scale mining was initiated at ALROSA’s Lomonosov Division OAO Severalamz in the Arkhangelsk region with the commissioning of ore treatment plant No. 1 at the Lomonosov deposit. The plant was designed with the capacity to process about 1 Mt/yr of ore. Diamonds from the deposit are of gem quality, which accounted for the high appraisal value of the reserves at $12 billion. The diamond deposit’s effective life was estimated to be about 50 years from the time the plant was put into operation.The OJSC Apatit enterprise, which is located on the Kola Peninsula, was the leading producer of apatite concentrate in Russia and one of the world’s leading suppliers of phosphate raw material; its core activities were the mining and beneficiation of apatite and nepheline-syenite ores at 10 deposits that have estimated combined reserves of 3.5 Gt. The development plan for Apatit to 2015 assumes an optimal level of apatite concentrate production of 8.5 Mt/yr that would require levels of ore extraction of 27 to 28 Mt/yr. To maintain output, the enterprise would need to develop underground mining significantly. In 2001, the percentage of ore mined underground was 38%; by 2015, this percentage was expected to increase to 75%. Investment to renovate the beneficiation complex, reduce energy expenditures, reduce emissions harmful to the environment, and acquire new equipment to improve labor productivity was also needed.

  Phosphate Rock

  The OJSC Apatit enterprise, which is located on the Kola Peninsula, was the leading producer of apatite concentrate in Russia and one of the world’s leading suppliers of phosphate raw material; its core activities were the mining and beneficiation of apatite and nepheline-syenite ores at 10 deposits that have estimated combined reserves of 3.5 Gt. The development plan for Apatit to 2015 assumes an optimal level of apatite concentrate production of 8.5 Mt/yr that would require levels of ore extraction of 27 to 28 Mt/yr. To maintain output, the enterprise would need to develop underground mining significantly. In 2001, the percentage of ore mined underground was 38%; by 2015, this percentage was expected to increase to 75%. Investment to renovate the beneficiation complex, reduce energy expenditures, reduce emissions harmful to the environment, and acquire new equipment to improve labor productivity was also needed.

  Mineral Fuels and Related Materials

  Projections of Russia’s fuel production are based on the country’s Energy Strategy for Russia for the Period up to 2020 issued in 2003 by the Ministry of Energy of the Russian Federation. This strategy envisions three potential scenarios: optimistic, moderate, and critical. The optimistic scenario is characterized by the growth of GDP at the rate of 4.7% to 5.2% annually, by a sevenfold increase of investment in fixed capital for this period compared with the 2000 level, and by high world prices for oil and gas. The oil prices envisioned by this strategy in 2003, even for the optimistic scenario, were about one-half of the 2005 oil prices. The moderate scenario is characterized by a GDP growth of 3.3% to 3.4% annually to 2020, an increase of investment in fixed capital by 3.6 times, and fixed prices for oil at a little more than one-half of the optimistic scenario and gas prices about 20% lower than in the optimistic scenario. The critical scenario is characterized primarily by low world oil prices. 

  Coal

  The Energy Strategy for Russia for the Period up to 2020 foresees the need for coal production to increase to between 310 and 330 Mt by 2010 and to between 375 and 430 Mt by 2020 to meet expected domestic demand. Russia has 22 coal basins with 114 coal deposits that are unevenly distributed across the country. In 2005, the country had 241 operating coal mines, which included 104 underground mines and 137 open pits with a total production capacity of 315 Mt/yr. Total coal reserves registered in the State Register of Reserves were estimated to be about 200 Gt, and registered reserves in the explored categories A+B+C1 in the reserve classification system that was used in the Soviet Union and later Russia were reported as 106 Gt. These include coal reserves in operating coal mines, in mines under construction, and in areas explored in detail for new mine construction. As foreseen in the country’s energy strategy program, coal production must increase by 10 to 15 Mt/yr between 2005 and 2010 and by a total of 105 Mt by the year 2020. Although the creation of additional coal production capacity through upgrading and expansion of existing mines and development of new mines was possible based on reserves, doing so would require a level of investment in the coal sector far in excess of the historic level of investment in the past 5 years and casts doubt on the feasibility of the planned expansion. At current rates of investment coal production capacity by the year 2020 would be in the neighborhood of 375 Mt/yr. This optimistic investment scenario would depend to a large extent on an increase in foreign investment, particularly from Chinese, Japanese, and South Korean companies.

  Natural Gas

  The country’s energy strategy predicts natural gas production to range between 635 to 665 billion cubic meters in 2010 and between 680 and 730 billion cubic meters in 2020. These gas production goals were to be achieved by development in the traditional gas-producing regions, the main one of which was West Siberia, and in the new oil- and gas-producing provinces in East Siberia, in the Russian Far East, in the European North including offshore in the Arctic Sea, and on the Yamal Peninsula. Along with the development of big fields, the strategy recommends development of small gasfields, primarily in the European part of the country in the Ural Mountains, the Volga, and the North West regions.

  Almost all the country’s gas production was under the control of the company Gazprom. Gazprom’s natural gas production forecast called for only modest production growth of about 1.3% by 2008. Growth in Russia’s natural gas sector has been slowed primarily by aging fields, state regulation, Gazprom’s monopolistic control over the industry, and insufficient export pipelines. Three major fields in Western Siberia—Medvezh’ye, Urengoy, and Yamburg—accounted for more than 70% of Gazprom’s total natural gas production, but these fields were in decline. Although Gazprom projected increases in its natural gas output between 2008 and 2030, most of Russia’s natural gas production growth was expected to come from independent gas companies, such as Itera, Northgaz, and Novatek.

  Reassessment of the energy strategy has been ongoing since the strategy was issued in 2003. A Gazprom subsidiary issued a report recommending a change of export strategy for the Russian gas industry. It determined that Russia should decrease exports of natural gas to European markets and concentrate instead on developing new gasfields to keep up with domestic demand, which was rising faster than was envisioned in the 2003 report and could necessitate the development of new gasfields on the Yamal Peninsula and in other places.

  7. Oil industry of Russia

  The Energy Strategy for Russia for the Period up to 2020 includes several scenarios that predict a range for Russian oil production of between 445 and 490 Mt/yr by 2010 and between 450 and 520 Mt/yr in 2020. Oil production and growth was to be centered in the traditional oil-producing regions, such as in West Siberia, the North Caucasus, and the Volga region and in new oil and gas Provinces in the European North (Timan-Pechora region), in eastern Siberia and the Russian Far East, and in the south in the North Caspian region. Although the base of the country’s oil production for this period would remain the West Siberian oil and gas province, priority areas for new development were to be in the eastern and the southern regions of the country. New field developments were likely to produce almost all Russia’s annual oil growth in the next 5 years and would likely produce more than one-half of the country’s oil in 2020. In the next 5 years, new field developments at the Middle Caspian project at Kurmangazy (OAO Lukoil Oil Co.); the Komsomolskoye and the Vankorskoye projects (OAO Rosneft Oil Co.); the Prirazlomnoye project (Gazprom); the Sakhalin Island projects; the West Salymskoye project (Shell Joint Venture); and the Timan Pechora project (OAO Lukoil Oil Co. and ConocoPhillips) would help compensate for production decreases at older fields.