#18 - JRL 7305
ANALYSIS - Saudis to court Russia to stay on OPEC's side
By Peg Mackey

DUBAI, Aug 28 (Reuters) - In the murky world of oil, few know Russia, the world's second biggest crude exporter, better than its top competitor Saudi Arabia.

Saudi Oil Minister Ali al-Naimi has managed to crack the ice with Moscow, where he heads next week to sign an historic energy cooperation pact and persuade this independent producer to side with the Organisation of the Petroleum Exporting Countries.

"The only way you can use persuasion is to have contacts and relationships," said Gary Ross, chief executive of consultancy PIRA Energy. "This is a major accomplishment for the minister."

The oil price boom of the past four years has allowed Russia and other independent producers to erode OPEC's market share.

Naimi has also convinced the royals of OPEC power Saudi Arabia, the world's biggest oil exporter, of the importance of building bridges with Russia -- where output is rising steadily.

Crown Prince Abdullah, the kingdom's de facto ruler, will be the first Saudi head of state to visit Russia when he and several key ministers including Naimi travel on September 1-4.

"This smacks of an attempt to persuade Russia to become an associate member of OPEC," said Julian Lee, senior energy analyst at the London-based Centre for Global Energy Studies.

"But Russia doesn't really have any interest in limiting its production."

For their part, Russian officials may try to soothe Riyadh's concerns over the country's surging output and pay lip service to maintaining price stability.

"Russia is likely to say its output growth is unlikely to be dramatic...and will also promise to keep monitoring the market very closely to have prices at $20-$25 per barrel," said Valery Nesterov, oil analyst at leading Russia brokerage Troika Dialog.

"But as usual it will take no real steps."

In concert with OPEC, Moscow agreed to cut supplies in the first half of 2002, but pumped full blast and boosted supplies further after the deal ended in July 2002.

But even a hollow Russian pledge might be enough to boost oil prices if OPEC needs to call upon Moscow to cut output.

"In this industry, what you say is sometimes even more important than what you do," said PIRA's Ross.

CLOSING RANKS

Russia's oil output is soaring for the fifth straight year and the biggest producer outside OPEC is fast closing in on Riyadh, now pumping some 8.7 million barrels daily versus Moscow's 8.3 million.

Naimi's relationship with Russia got off to a rocky start when prices fell after the September 11, 2001, attacks. He refused then to back price-supporting cuts until Moscow joined an alliance with OPEC to curb exports.

With that experience still fresh in his mind, Naimi may take the opportunity next week to warn Russia of the consequences of failing to cooperate with OPEC.

Naimi has told non-OPEC states in the past that a lack of coordination with the cartel and a large price drop could force high-cost producers to curb output.

While Saudi Arabia boasts the cheapest production costs in the world of $1-$2 a barrel, Russia, heavily dependent on oil revenues, has costs of up to $7 a barrel.

"Russia does not want to find itself in a price war with OPEC," said a senior Middle East oil industry official.

Investment opportunities in Saudi Arabia's massive natural gas sector are also on the agenda.

Russia's gas giant Gazprom, the world's top gas producer, is keen to gain access to new markets and Riyadh has re-launched a gas investment opening after it cancelled projects with Western supermajors in July.

But some analysts say investing in the Saudi gas sector may be of little interest to Moscow, which for now is focusing on Central Asia's upstream and Europe's downstream.

Given the high-powered Saudi delegation, talks are likely to feature politics -- mainly Russia's concerns that Muslim Chechen separatist rebels may be linked with Saudi extremists.

"Saudi Arabia will make clear that it is very supportive of any position against terrorism in Chechnya or anywhere else in the world," said a Saudi source close to the delegation.