Russian oil needed, but OPEC still rules

  • 2002-04-25
  • Mark Rice-Oxley

Russia can become a major alternative to the Middle East as a source of crude oil but will never challenge the dominance of that region, industry chiefs agreed April 18.

Top executives from Russian and Western oil companies hailed the Russian oil renaissance of recent years, and said that Moscow could capitalize on the current concerns over supplies from the Gulf - and the high oil prices that have ensued.

At an economic forum here, they noted that oil-consuming countries were keen to diversify away from the turbulent Middle East, and that in the medium term Russia stood to gain.

But transportation bottlenecks out of Russia - and the sheer weight of reserves in the Middle East - mean that Moscow will never supplant its Gulf rivals.

"Russia will be a very significant new strategic source, and it will make countries carefully readjust their oil supplies," said Lord Owen, former British foreign secretary and currently chairman of Russian giant Yukos International.

"There is no doubt in the (United States) there is an overwhelming view that they are too reliant on Saudi Arabia and that will be reflected in taking more Russian oil," he said.

Russia's resurgent oil industry has caught the eye as of late. In February, it briefly surpassed Saudi Arabia as the world's largest crude producer.

Earlier this week, its revival was underscored when British Petroleum spent $375 million (425 million euros) increasing its stake in Sidanko - a company that had previously caused it no end of headaches.

Russia has moreover been treated regally by rival OPEC producers, who recognize a resurgent oil power when they see one, and know that Russian output remains crucial to balancing the market.

And yet the revival from the doldrums of 1998, when the industry languished in perilous disrepair, has been done on a shoestring. Foreign direct investment into the sector has persisted at well under a billion dollars annually - peanuts by industry standards.

"The country has attracted only limited foreign direct investment, but oil production has increased by almost 1 million barrels a day over the last 2 years - and by seven percent in 2001 alone - an outstanding achievement," noted Phil Watts, chairman of Anglo-Dutch giant Royal Dutch/Shell.

"Russia in the early 1990s was the largest producer of oil and gas in the world - and might once again lay claim to this status in the future if new and very different challenges can be overcome," he added.

Some see greater volumes from Russia flowing through soon. Moscow has gone along with OPEC-orchestrated output cuts to stop oil prices falling, but with production increasing and market share there to be grabbed, few see the self-discipline lasting.

"Expect more oil in the second quarter from Russia as output continues to rise," said Stephen O'Sullivan, head of research at Moscow's UFG investment bank. "The Russians are coming, and this time the tanks are carrying oil.

"Russia will be an important country because it's in close proximity to large consuming markets and it offers political stability in a world that values that," he said. "In the very long term however, we are going to be dependent on Middle East oil."

Limiting exports has moreover left too much oil sloshing around on the domestic market, driving down prices and making it barely profitable to produce for home consumption.

"In the current situation I would increase exports," said Simon Kukes, president of the TNK oil company. "Russia has more to lose by turning production down which could limit investment opportunities."

But in the long run, Russia needs more pipelines if it wants to realize its international potential.

"The bottleneck will be transportation," said Kukes. "By 2006, Russia will have to construct a new route east to get access to Asian markets and theoretically to the West Coast of the U.S.A."