#6226
#7
Date: Sun, 05 May 2002
From: Mark Aidan Jones <mark@aidan-jones.fsnet.co.uk>
Subject: Re: JRL #6224 Aron on Russian Oil
I respond to Leon Aron's NY Times piece (jrl #6224) hyping up the Russian oil patch. It contains several errors.
Aron says " Russia is the world's single largest non-OPEC oil exporter". But part of the reason for this is that most Non-Opec oil producers are now experiencing production declines (Venezuela, North Sea, Nigeria, Mexico). Another reason is that domestic demand in FSU and former Warsaw Pact states has collapsed. Russian oil consumption has fallen 1992-2002 by almost half, from 4.42 mln. barrels/day to 2.42 mln. barrels/day (source US DoE Energy Information Administration Russia Briefing, April 2002). This has freed oil for export to the West. However in the same period, Russian oil production has fallen by 460,000 barrels/day and this is *after* what Aron calls "A decade of privatization of the Russian oil sector [which] has been a success".
In reality, what happened was a collapse of Soviet oil production by almost half after 1987, and the best efforts of newly-privatised Rusian oil concerns, using Western capital and technology, have been unable to fully reverse the decline. Aron argues that in the future Russia can help guarantee American energy security. Except for the very short-term, this is wrong. The Russian oil industry is in decline in the same way and for the same reasons that the North Sea oil industry is in decline: because when oil fields have been drained of more than half of their recoverable reserve, exponential declines in production do follow. The application of new technology cannot halt this. Production from mature fields can be accelerated by new technology but the result is to induce a sharper fall later on. This is the story of the North Sea, and now also of Russia. Prudent estimates suggest total recoverable Russian oil reserves of 250 gigabarrels (Gb).
The Russians tend to overestimate their reserves. For example, the largest oilfield, Samotlor in Western Siberia, has already produced about 19 Gb, with production having fallen to no more than 400 kb/d. from a peak of 3.4 Mb/d in 1980. The field is reported to contain 28 Gb, but extrapolation of the present decline gives an ultimate recovery of only about 20 Gb. The most extravagant over-estimate of production is that by Yukos, Mikhail Khodorkovsky's oil firm. Yukos has estimated that Russian oil production may peak at about 14 Mb/d in 2010-2020, assuming remaining reserves of 140 Gb and as much as 50 Gb undiscovered for the FSU (termed Russia and Caspian), which gives an ultimate recoverable reserve of 330 Gb. There seems to be scant basis other than wishful thinking for such assumptions. In fact, such wishful thinking is common in the Russian oil and gas sector. Aggregating the reserves asserted by the 5 leading Russian oil companies puts them at 49.4 Gb, but US accounting standards would set these reserves at no more than 26.4 Gb.
140 Gb of fSU oil has already been produced: both Russian and FSU oil production is already well past its peak and can be expected to continue its historical decline. Recent production increases, insofar as they are real, merely represent a partial recovery from the abnormal circumstances following the collapse of the Soviet Union. As Petroleum Review puts it:
>>The evidence suggests that, the countries of the former Soviet Union countries, apart from the offshore, were thoroughly and efficiently explored under the Soviet regime. It follows that the larger productive basins, and most of the giant fields within them, have almost certainly been found, giving a discovery trend that will effectively control future production. How much of this production that is available for export to world markets depends on the growth of domestic demand. It is evident that OPEC has little to fear from Russian competition over the longer term, but in the meantime its exports put pressure on price.<<
["Is FSU oil growth sustainable?" Petroleum Review April 2002 pages 29, 30, 31 & 35 by Jean Laherrere]
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