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Russia Sees U.S. As New Market For Oil Reserves
Deals Could Ease Washington's Reliance On Mideast, Create Windfall for Moscow
By Peter Baker
Washington Post Foreign Service
Sunday, September 8, 2002; Page A25
MOSCOW -- In their hour of need, as the Nazis were marching on Moscow during World War II, desperate Russians received a lifeline from the United States in the form of supply convoys sailing into the Arctic port of Murmansk. Now some six decades later, Russia wants to turn the ships around.
To help the United States in its war on terrorism, Russia may build a deep-water port at Murmansk where it could load up supertankers with plentiful Russian oil and ship it to America. The United States would be less vulnerable to disruptions in the oil supply from the Middle East, and Russia's oil barons would have a massive new market to cultivate.
A year after the Sept. 11 terrorist attacks redefined U.S.-Russian relations, President Bush and Russian President Vladimir Putin are working to turn their new friendship into a tangible new partnership between the world's largest energy consumer and the steward of one of the world's largest energy reserves. Ignoring skeptics, Bush and Putin signed an energy cooperation agreement at their May summit in Moscow and plan to convene an oil and gas conference in Houston Oct. 1-2.
If they succeed, the partnership could be among the most far-reaching changes to the international order in the aftermath of Sept. 11.
For the first time, Russia would provide significant economic goods to the United States, no longer playing the role of financial supplicant as it has since the demise of the Soviet Union. Closer energy ties would also further diminish U.S. dependence on oil from the Middle East and give Bush flexibility in confronting Iraq.
"The United States wants to be prepared for some kind of disruption," said Konstantin Reznikov, the senior oil analyst at Alfa Bank here in Moscow. "The relationship between the United States and the Middle East -- and Saudi Arabia in particular -- deteriorated after the September 11 events, so now they're targeting to get more crude oil from other regions."
Energy Secretary Spencer Abraham echoed that view during a recent visit here to promote cooperation. "Russia will play a pivotal role in ensuring global energy security," he said, adding that "the more diverse the sources of energy are, the less likely it is that disruption on one part of the planet will interrupt supplies."
Some oil executives here estimate that Russia, which currently supplies virtually no oil to the United States, could soon provide as much as 1 million barrels a day, or nearly 10 percent of U.S. imports, replacing most of Saudi Arabia's supplies if necessary. As Russia's surging oil industry recovers from its post-Soviet hangover, it has now surpassed Saudi Arabia in oil production.
No one is more enthusiastic about the prospect than Mikhail Khodorkovsky, head of Yukos, Russia's second-largest oil company. As he studies the situation, he does the math of international crisis out loud and figures the United States could survive with its own oil reserves and Russian help.
"Say a disruption from some Middle Eastern suppliers, say 1 million extra barrels a day from Russia, and the Strategic Petroleum Reserve, and America doesn't have anything to worry about for a year and a half," he said in an interview. "And in a year's time, Russia can increase its shipments by a million barrels a day."
In a move intended to symbolize the possibilities, Khodorkovsky sent the first supertanker of oil directly from Russia to the United States this summer, followed by a second supertanker a month later and by a smaller, third ship last week. "America, here's a gift from Siberia!" trumpeted one Russian newspaper.
Yet some oil executives and analysts dismissed the shipments as little more than public relations, maintaining that the additional cost makes it a bad economic bet for Russian companies and outlining the myriad logistical difficulties of transporting oil halfway around the world from Siberia to the United States. As if to add another caveat about the dangers of doing business with Russian companies, a firm that had sued Yukos for unpaid bills briefly managed to hold up payment for the first oil sent to Houston by going to U.S. District Court.
"The reality is, it's all nice words, but I'm not sure for Russian oil companies it makes economic sense at this point," said Stephen O'Sullivan, head of research at United Financial Group, a Moscow-based brokerage firm. "It's clear that America really wants Russian oil in America, but I'm not sure they're going to be that happy to pay an extra $1.25 per barrel."
Simon Kukes, president of Tyumen Oil Co., Russia's third-largest, falls somewhere in the middle. While he believes the shipments to Houston have been important, he figures it will take five years, not one, to reach an export rate of 1 million barrels a day.
"We're making too much noise about Russia being a replacement for Saudi [Arabia]," said Kukes, who spent two decades working in the oil industry in the United States until returning to Russia after the fall of communism. "In the nearest future, it's impossible and when you do that, you just put a needle in the relationship" with Saudi Arabia.
With the world's largest natural gas reserves, Russia has always been an energy powerhouse, but lately it has become a dominant player in world oil markets again after years of decline. When the Soviet Union fell apart, it lost oil-rich republics such as Azerbaijan and Kazakhstan, and its state-owned petroleum companies became targets for emerging oligarchs who bought them up at rigged auctions and siphoned off assets to overseas accounts.
As a result, oil production plummeted from 12 million barrels a day in the 1980s to 7.7 million in 1992, the first year Russia was a stand-alone nation, to 6.1 million through most of the mid-1990s.
By the end of the 1990s, however, as crude prices began to soar, oil moguls changed course. Having carved up much of the industry and seeing increased political stability with Putin's arrival in the Kremlin, they began investing some of their huge profits back into their companies for the first time, bringing in better technology, shedding costly old systems and developing new reserves. Since 1999, capital investment has tripled and oil production has shot up dramatically, reaching 7.7 million barrels a day in August -- topping even Saudi Arabia. Many believe it could soar as high as 9 million or even 10 million barrels a day within a few years.
The difference is that Saudi Arabia exports nearly all its oil, while Russia sells less than 5 million barrels a day abroad -- making it still by far the second-largest exporter. Moreover, Saudi Arabia has the capacity to produce an extra 3 million barrels a day with the flick of a switch, allowing it extraordinary market influence, while Russia is producing at full capacity, holding nothing back to leverage in a crisis.
Getting Russian oil to U.S. markets is no easy task, either. Khodorkovsky's oil started out in the Siberian town of Nefteyugansk, was shipped via pipeline to three Black Sea ports in Ukraine -- Novorossiysk, Theodossia and Kavkaz -- and loaded aboard three small tankers because a supertanker cannot pass through the Bosporus Strait. The three small ships then made a rendezvous at the Greek port of Agio Theodori on the Aegean Sea, where they off-loaded their oil into a single supertanker, which then sailed out of the Mediterranean and across the Atlantic to Houston.
Khodorkovsky maintained that the venture was more economically feasible than critics believed, but he and other oil executives are searching for less convoluted routes.
Russia plans to build a shipping terminal near St. Petersburg set to open next year, which would help; however, the big tankers have trouble navigating the channels around Denmark just as they do the Bosporus. Khodorkovsky's Yukos oil company is exploring a plan to reverse the flow of the Druzhba-Adria pipeline so that oil can flow from Russia, through Ukraine and Hungary, to the Croatian port of Omisalj, where it could be loaded aboard supertankers that can easily head out to sea.
And there is the Murmansk port, where Lukoil, Russia's largest oil company, has proposed building a deep-water, ice-free shipping terminal. Supertankers loaded there could head up into the Barents Sea and directly out to the Atlantic. Khodorkovsky is intrigued and has said he may join Lukoil in the venture.
Yet the idea provokes strong opposition from other sectors of the Russian oil industry. Transneft, the state-owned company that controls the country's pipeline network, opposes a new Murmansk port and has pushed instead for a pipeline to the Pacific coast that could be used to load ships bound for California.
Another plan seems to have been rejected already. The Rosneft oil company this year sent a proposal to Putin to create a strategic petroleum reserve of 70 million to 80 million barrels as an emergency supply for the West in case of crisis. But Putin's fuel and energy minister recently said he sees no need for such a reserve.
In an interview, Vladimir Milov, Russia's deputy minister for fuel and energy, said the Murmansk project and other ideas are all under consideration as part of a strategic energy plan he expects to submit to the government by the end of the month. Russia needs to modernize and upgrade its port facilities and improve the pipelines that serve them, he said. In particular, he said, Russia plans to try to increase its pipeline capacity by 70 percent by 2020.
"We still have problems with infrastructure," said Milov, who co-chairs a U.S.-Russian energy working group set up at the Bush-Putin summit in May.
The U.S. side is looking for ways to help. Abraham has agreed to fund a study of East Siberian oil reserves, which are largely untapped as Russian oil companies concentrate on the more accessible oil to the west. And the Bush administration is trying to encourage more direct investment by U.S. oil companies.
"There's a convergence of interests of U.S. companies, Russian companies and the Russian government -- and now the U.S. government has joined the fray," said a high-ranking U.S. official who has been meeting with the Russians. "There's an energy now on the subject that had been absent."
Leonid Fedun, vice president and part-owner of Lukoil, said U.S. interest has grown noticeably since Sept. 11. "For us, the U.S. market is very attractive and inviting," he said, noting that Lukoil already owns 1,300 gas stations in the United States that it bought from Getty Petroleum.
The renewed enthusiasm holds some irony for Russians who thought they might not see foreign investors return after the economic crisis four years ago cost many of them dearly. But Fedun said that fear has dissipated. "Not many still remember the default of 1998," he said.
© 2002 The Washington Post Company
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