3 Jun 2005
The Wall Street Journal
By Bhushan Bahree in New York and Gregory L. White in Moscow
(Copyright (c) 2005, Dow Jones & Company, Inc.)
Russian oil production could stagnate for years, industry officials
are warning, a shift that could help keep world prices for fossil
fuels high.
A 50% jump in Russian output since 1999 has been the largest single
source of new oil for the world market, helping to slake surging
demand from China and keeping prices from jumping even higher. But
Russian output has fallen slightly since last fall as the Kremlin's
crackdown on OAO Yukos and other moves to increase state control of
the sector have caused a sharp decline of investment in the sector.
Most of the production drop has occurred at cash-starved Yukos,
whose accounts are frozen due to $28 billion of back-tax claims. But
industry officials say the chilling effect of authorities'
destruction of the company -- once one of Russia's fastest-growing --
has hurt confidence across the industry just as Russian oil fields
need billions of dollars in new investment.
In a recent interview, Vagit Alekperov, president of No. 1 Russian
producer OAO Lukoil, said he expects industry production to
stabilize between 9.2 million and 9.4 million barrels a day over the
next several years after "slight growth" this year. Rising domestic
demand is likely to leave less crude for export, he said. Government
forecasts also see production stagnating through at least 2008,
after rising 9% or more annually in recent years.
Mr. Alekperov suggested the big production gains of recent years
couldn't be easily repeated because a massive application of new
technologies to update west Siberian fields, which has yielded
bigger flows, had largely run its course. To boost production
further would require much more investment and new fields. Even if
begun now, new projects would take years to complete.
"If we don't work for the future now, the country could see a
decline in output in five to 10 years," Vladimir Bogdanov, chief
executive of No. 4 producer OAO Surgutneftegaz, said in an April
interview with a Russian news agency.
Since 2000, the remarkable rise of about 2.7 million barrels a day
in Russian oil production has met close to half the increase in
global demand of 5.88 million barrels a day, according to data
compiled by the International Energy Agency.
But Russian output peaked in September at about 9.4 million barrels
a day and has been in the doldrums since. Russia produced an average
9.3 million barrels a day in the first four months of this year,
according to official data.
Global supply is tight this year even with producers pumping flat
out to meet strong demand, which is forecast by the IEA to grow by
1.8 million barrels a day to 84.3 million barrels a day. Russia
isn't expected to meet much, if any, of this growth.
The precarious supply situation is reflected in oil prices, which
are just below $54 a barrel for U.S. benchmark crude currently,
typically the year's weakest demand period. Many analysts expect
prices to rise past $60 a barrel later this year unless there is a
sudden drop in demand.
U.S. officials are openly disappointed that hopes of turning Russia
into a reliable alternative source of crude haven't panned out.
Russia exports only about 230,000 barrels a day to the U.S.
"It should be 10 times that or more, given the reserves that are
here," Energy Secretary Sam Bodman said during a visit to Moscow
last week.
Some of the Russian executives' pessimism could be a calculated
effort to push for tax relief and other government help. Surgut, for
example, expects annual growth rates of 5% or better over the next
several years for its production. Lukoil expects its oil output to
rise annually between 3.5% and 4% until 2011, Mr. Alekperov said.
Indeed, President Vladimir Putin has repeatedly promised that
Russian output will continue to grow. His government is working on a
program aimed at stimulating output, though it is still months away
from approval, officials say. The plan calls for steps to encourage
exploration to replace existing fields as they run down -- for
several years, Russia has been producing more oil each year than its
companies have discovered -- as well as tax changes. Current rules
mean the state takes about 90% of the revenue when world prices rise
beyond $25 a barrel. Companies complain that doesn't leave enough
for investment.
The Kremlin also is promising to spend billions over the next
several years to expand export pipelines. Government officials said
as much as three million barrels a day of additional export capacity
could be in place by early in the next decade.
Analysts at Wood Mackenzie Ltd. in Edinburgh, Scotland, estimate
Russian fields are declining at rates of between 5% and 10%
annually. Yet Ian Woollen, senior Russian analyst at Wood Mackenzie,
is bullish about the medium-term prospects for Russian output,
forecasting an output peak of more than 11 million barrels a day in
2010. |
