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The Dilemma Of Russian Oil Production

Since the 90?s oil production has been rising tremendously in Russia. Only in the last 5 years almost 50 percent. In January 2003, it was confirmed that Russia overtook Saudi Arabia, the world biggest oil producer, and became the leading oil extractor.

Since the 90?s oil production has been rising tremendously in Russia. Only in the last 5 years almost 50 percent. In January 2003, it was confirmed that Russia overtook Saudi Arabia, the world biggest oil producer, and became the leading oil extractor. In 2002, Russia extracted 379 million tones of oil which was an increase of 9 percent compared to 2001. The Russian energy ministry predicted that the year 2003 output will rise to 390 tones. It could however be that this forecast was too pessimistic as the Russian crude production rose another 11 percent in the first half of 2003.

It does not seem that the production growth would stop very soon. Russian oil majors have several projects which are to boost oil production further. Lukoil and Gazprom are planning to exploit the Tsentralnoye oil field in the Caspian Sea. The cost of the venture is estimated to amount to $12 billion and the companies hope to find billions of barrels of new reserves. Until 2010 Lukoil intends to boost its output 75 percent until 2007.

Gazprom and Rosneft have recently announced that they plan to tap five Arctic oil and gas fields. This is a tremendous task which will require $35 billion of investments. To raise these funds, foreign companies are invited to participate in the venture. Already interest expressed the French Total, Norsk Hydro from Norway and Finland?s Fortum. Next to 2.8 billions of oil, the fields contain 6.1 trillion cubic meters of gas. This is sufficient to supply the world demand for over 2 years.

For Russian oil majors, it is of highest importance to export as much of their oil as possible, as international crude prices are four times higher than Russian domestic prices. However, Transneft, the Russian pipeline operator, which controls all export routes is unlikely to be able to increase the volume of oil exports through its network in order to keep track with the rising production in the short run.

There are several pipeline projects but they can only ease the capacity problem in the long run. It is basically agreed to build a Russian pipeline which would lead from Angarsk in Siberia to Daqing in China, covering a distance of 2?400 kilometer with an estimated cost of $ 1.9 billion. Under a 25-year deal, the Angarsk-Daqing pipeline would supply China with 400?000 barrels of crude a day, starting in 2005. Japan urges Russia that the Russian pipeline network is extended to Narkhodka. From there, crude could be shipped to Japan. The $5.2 billion Angarsk Narkhodka connection would be 3?800 kilometer long. Another mammoth project is the plan of Lukoil, Yukos, TNK, Sibneft and Surgutneftegaz to construct a 3?600 kilometer link from Western Siberia to Murmansk for $3-$5 billion. The deepwater port of Murmansk would allow Russian oil companies to ship crude directly to Western Europe or to the United States and to circumvent the congested Bosporus Straits. Also currently considered is to integrate the Druzhba and Adria pipelines to open a new export route via the port of Omishal in Croatia.

The timing to receive the necessary finance for such projects seems good as interest rates in the US and Western Europe are on historic low levels to support weak economies. Additionally, investors are attracted by the new stability and the huge oil and gas reserves in the country. If the recent affair around Yukos and its head Mikhail Khodorkovsky can be resolved in a satisfactory way and if there will be no further blows to the economic and political stability of the Russia, the inflow of capital should continue.

In the middle term, Tatneft intends to boost the capacity of the Baltic Pipeline System to around 62 tones by the end of 2004. The company is also increasing the capacity of the oil terminal Primorsk at the Baltic Sea. The volume of the oil refinery will be approximately 6 to 10 million tones a year and the facility should also be operational in 2004.

In the short run, the only way to increase export capacities is the Latvian oil terminal in Ventspils. The terminal has the capacity to handle 16 million tons of crude a year and 12 million tones of oil products. But last spring, Tatneft stopped transporting oil to Ventspils. The move has been interpreted as a tactic to pressure the terminal to sell a controlling stake to Russia which wants to become less dependable on the Baltic States. Until today, the issue has not been resolved and crude supplies to Ventspils not be resumed.

However, Russian oil majors cannot only boost production and hope that Transneft will offer sufficient transportation capacity. Companies should find ways to diversify away from being suppliers of irreplaceable resources in the raw-material market. They have to expand their operations into the downstream business preferably outside the country, in order to diversify their activities and build up a company structure more similar to global oil giants

Author: Andreas Wild

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