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Russia's resurgence reshuffles global oil industry

Reuters, 12 Dec 2001


12-12-01 If the turbulent history of Russian oil is anything to go by, Moscow's ceasefire in an emerging power struggle with the OPEC cartel will not last long. The mighty Russian oil economy's resurgence from its post-Soviet slumber has awakened a rivalry with long-time powerhouse Saudi Arabia and recast the global alliances that oil underpins. At stake are billions of dollars that multinational oil firms are itching to pour into the former Soviet Union and OPEC nations alike as leading producers gradually free rich reserves from decades of state control. "There used to be a phrase about Russia, 'Right oil, wrong country.' Over the last few years there has been a subtle but probably real shift," said Professor Ronald Oligney at the University of Houston. "They do see themselves playing a role on the big stage and have an increased ability to do so."

Home to 9 % of the world's oil production and a third of its natural gas reserves, Russia is by far the biggest power outside OPEC's largely state-run energy ranks. Moscow's recent reluctance to join OPEC in cutting oil supply to lift weak prices spoke volumes about the changed mindset since the state let loose a new breed of private energy giants to run their own show. Russia made grudging concessions to OPEC's demands, acknowledgement that all-out price war against the cartel's low-cost supply would starve Moscow of export dollars needed to service heavy debts. Russia's fledgling oil renaissance means Saudi Arabia -- which took over as leading world producer in 1992 when post-Soviet FSU supply collapsed -- is now looking nervously over its own shoulder. Forced into a series of production cuts by a slowing world economy Saudi Arabia's output is less than a mm bpd above Russia's 7 mm bpd total as Moscow embeds itself once more as base supplier to Europe. OPEC's insistence that Russia pull its weight in the price boosting effort looked to many like a backlash from Riyadh after Saudi Oil Minister Ali al-Naimi failed to win more than token cuts in a Moscow visit last month. Fellow OPEC members like Iran are just as worried about a torrent of new supply looming from FSU republics Kazakhstan and Azerbaijan, where the United States has worked hard to cultivate oil supplies outside the volatile Middle East.

It will hardly be the first time that a sudden rush of Russian oil has sent the global industry scurrying to readjust. As world oil prices crashed in the mid-eighties around 12 mm bpd was gushing out of the USSR. "Time after time in years past the fortunes of Russian oil have had significant global impact, beginning in the nineteenth century when the development of an oil industry around Baku broke the global grip of Standard Oil," wrote Daniel Yergin in his history of the oil industry, 'The Prize.' This time the United States, which gobbles a quarter of the world's fuel, is welcoming Russia's re-emergence as concern over supply security encourages the Bush administration to develop new oil allies.

Strains between Washington and the ruling Saudifamily since the September 11 attacks have intensified US public concern over reliance on Saudi oil, although the Afghan conflict has so far been notable for not disrupting energy supply. "The US-Saudi relationship will muddle through the latest difficulties because both nations are linked strategically and economically. However, Saudi Arabia has appeared to be less inclined to provide moderate oil prices," said consultant Amy Jaffe of the Baker Institute for Public Policy. If a US move against Iraq disturbs Baghdad's supply next year, Washington will look to both Saudi and Russian oil as key back-up options. Moscow's unsteady embrace of the free market has so far made it much easier for domestic firms than outsiders to make Russian oil ventures work. Most famously, supermajor BP 's $ 500 mm investment in local producer Sidanko turned sour within months in a scuffle over ownership of its assets amid widespread reports of cronyism and corruption. While international firms are slowly getting used to thepotential pitfalls, analysts warn the government must improve incentives for foreign technology and financial muscle if Russia's oil revival is to gather steam. "You need a legal environment, a production sharing agreement environment, you need security for your investment, sanctity of contract," said Julia Nanay of Washington's Petroleum Finance Company (PFC).

The Middle East's bigger, cheaper reserves have as yet proved just as frustrating for would-be foreign investors, with Saudi Arabia and Kuwait refusing to let international firms at their oil and Iran making only modest headway. When the fields do open up the new Russian giants will be right there competing for energy prizes -- especially in pivotal Gulf countries where sanctions are holding US firms back. LUKoil has already tied up an enormous production deal in Iraq -- behind only Saudi Arabia in oil reserves -- to be implemented as soon as UN sanctions are lifted. Gas behemoth Gazprom is in Iran. While Russia once did all it could to smother independent Kazakh and Azeri oil projects, Moscow is now poised to build up its role in the region while Iran -- a natural conduit for Caspian oil to Asia -- is shackled by US sanctions. "On the one hand we have Russia becoming the US' oil partner," said PFC's Nanay. "And on the other we have Russian companies that are going to be very serious competitors.

© 2001 Reuters
Reprinted for Fair Use Only.

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