#3
The Times (UK)
March 22, 2002
Russia's Siberian crude comes in from the cold
Saudi Arabias dominance of oil production could face a growing threat
By Carl Mortished
THE balance of power in world energy shifted towards Russia last month as America’s new ally become the world’s largest oil producer, pushing Saudi Arabia into second place for the first time in more than a decade.
Russian output soared from 6.5 million barrels per day (bpd) to more than seven million in February, according to figures from the International Energy Agency. At the same time, Saudi Arabia has cut production by one million bpd to 6.9 million bpd to comply with Opec quota reductions.
The revival of Siberian crude follows a surge in Russian investment in an industry starved over the past decade. If investments made last year come to fruition, Russian oil output could soar another 7 per cent this year.
Over the long term, the desert Kingdom retains the most clout in the oil market. Saudi Arabia has the world’s largest reserves and the capacity to boost production quickly to ten million bpd. However the sudden ascent of a long-standing rival to the top of the pile will ring alarm bells.
Riyadh is worried that Russia could gain market share at its expense and the surge in Russian output is occurring at a time when diplomatic relations are poor between Arab countries and the West. The former Soviet Republic’s political credibility, meanwhile, has been steadily growing.
Saudi anxiety about Russia's oil strength meant feverish negotiations last year between Opec and Russia over export curbs. These led to an agreement with the Kremlin to restrict pipeline exports by 150,000 bpd but Russian analysts are sceptical that the cutback will have much long-term significance.
According to Peter Sullivan of United Financial Group, a Moscow brokerage, Russian oil companies are doing all they can to circumvent the export restriction, which applies only to oil routed through pipelines controlled by Transneft, the state pipeline company. “They are refining it and sending products abroad. They are exporting it by barge. I don’t think the export curbs will last well into the second quarter. They don’t want to miss out on the higher oil prices,” he says.
Low US petrol stocks and encouraging signs of signs of economic recovery have sent the oil price climbing above $25 during the past week as expectation grew that demand is rising again.
However, within Russia itself, the oil price has virtually collapsed, falling from the equivalent of $12 to just $4.25 per barrel, as oil companies dumped barrels previously destined for exports into Russian refineries.
Domestic prices are the Achilles’ heel of Russian oil producers, says Mr Sullivan. Russian is currently producing barrels at full throttle as a result of big recent investments by the oligarchs that control the Russian producers.
However, companies such as Lukoil and Surgut, which have production costs of $4 per barrel, will make little money if export curbs continue and the internal fuel price fails to rise. In that event, investment will decline sharply with production growth arrested.
During the decade to 2000, the Russian hydrocarbon industry was looted by asset-strippers and cash generated from oil exports was stashed in foreign bank accounts and real estate. Negligible investment in new drilling caused a steady decline in production.
However, President Putin’s agreement not to threaten the assets of Russia’s oil tycoons in return for their political loyalty has stimulated a new oil boom. The oligarchs who once looted their companies are now investing in the hope of securing respectability and higher share prices.
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