Russia's oil boom may be running on empty

Reply Sat 23 Aug, 2008 11:18 am
Russia's oil boom may be running on empty
By Tom Lasseter | McClatchy Newspapers

Graphic | How long Russia's oil will last:

MOSCOW " The Russian oil boom, which has produced a gusher of cash, political power and an opulent elite " and has helped fuel the country's renewed assertiveness in Georgia and elsewhere " is on shakier ground than officials in Moscow would like to admit.

Most of the oil produced after the country's 1998 financial collapse has come from drilling and re-drilling old Soviet oil fields with more advanced equipment " squeezing more black gold out of the same ground " and efforts to develop new fields have been slow or non-existent.

That strategy is potentially disastrous, said Valery Kryukov, who researches oil companies in western Siberia for a government-funded think tank.

"If the situation which exists now stays the same, oil production will start to decline seriously in two years," Kryukov said in a phone interview from his offices in the city of Novosibirsk.

The implications extend far beyond Russia's borders. Last year, Russia was the world's second-largest oil producer. If its output begins to decline or is hampered by inept or corrupt business practices, the price of oil could begin climbing again.

The concerns about Russia's oil industry also raise questions about the health of the nation's economy, which has enjoyed stratospheric growth thanks to high oil prices since the economic crisis a decade ago, according to interviews with a dozen economists and analysts.

Higher oil and gas prices could further enrich and embolden resurgent Russia, but if production declines sharply, a hungry bear could prove to be even more troublesome than a prosperous one is.

That's a serious matter for a country where, by some estimates, the oil sector funded about a third of the national budget last year, and where by all accounts industrial, technological and agricultural businesses lag far behind. Russia's other major revenue source is natural gas, in which Russia leads the world; oil and gas sales are mainly responsible for the country's $592 billion in gold and foreign exchange reserves.

The practice of reaping quick profits and ignoring long-term interests is reminiscent of the former Soviet Union's development policies, and it was embraced by post-Soviet billionaires, known as oligarchs, who propped up flimsy companies to strip Russia's natural resources for as many fast rubles as possible. It continued as the government took over many of those private companies, often by brutish means.

Under Vladimir Putin, Russia's president from 2000 to 2008 and now the prime minister, the Russian government dismantled the nation's largest oil firm, Yukos, and imprisoned its founder.

The government declared oil to be part of a "strategic sector" in which foreign investors need permission from the government before they can buy a significant stake in companies. Foreigners have been steadily shoved out, including a recent incident in which the head of the joint Russia-UK company TNK-BP, one of the country's leading oil concerns, and 148 specialists left the country after their visa status was called into question.

In the short-term, business has been lucrative: Russian oil output jumped from about 6.1 million barrels a day in 1998, when the price of a 42-gallon barrel was less than $20, to an average of some 9.7 million barrels a day in the first half of this year. Prices reached $145 a barrel in July before dropping back to the $120 range.

At its current rate of production, though, Russia will run out of oil relatively soon, in about two decades, according to BP statistics. Saudi Arabia " last year's biggest oil producer " can continue pumping at its current clip for about 70 years, according to the same BP statistics.

A chart provided by the U.S. Energy Information Administration lays out the stark details: Only two of Russia's 14 largest oil producing fields were opened after the Soviet Union collapsed in 1991, and half of the 14 were more than 60 percent depleted in 2006. As fields are depleted, pumping oil out of them generally becomes harder and more expensive.

After a decade of oil production increases, there's been a slight drop " 0.5 percent " in production during the first seven months of this year, according to state statistics. Troika Dialog, Russia's largest investment bank, is forecasting a 0.7 percent decline in oil production this year from 2007.

In response, Russian officials have rolled out a proposed tax break that could enable oil companies to save an estimated $4.2 billion or more in the hope that firms will use the cash to go find more oil.

Economists who are bullish about Russian oil point to upcoming projects on offshore sites " awarded to two state-controlled companies " that could substantially increase the country's oil reserves.

Officials in Russia's ministry of economic development didn't respond to repeated requests for comment.

However, Valery Tsvetkov, a deputy of the institute of market problems at the state-funded Academy of Sciences, laid out an array of statistics showing what's wrong with Russia's oil industry.

Among them: In 1990, some 17.3 million feet of new wells were drilled looking for new reserves in the former Soviet Union, almost all of them in what's now the Russian Federation. In 2007, about 3.9 million feet were drilled.

"Why? Because today those who work in the oil industry find it easier to take the cream off the existing fields than to find new fields," Tsvetkov said. When he and others send research papers to the government about potential economic problems, he said: "No one reads them."

"The Russian government has few people with the mentality of statesmen," Tsvetkov said. "Today, the aim of many people is to become rich at the expense of the state."

Indeed, there are few signs of concern in the nation's capital, a caviar wonderland for the Learjet crowd. Moscow has more billionaires than any other city in the world " 74 according to Forbes magazine. Lest the millionaires feel left out, there's an annual Millionaire Fair where a big spender can buy a $1 million set of diamond-encrusted rims for his Mercedes or BMW.

Even optimists, however, are worried about the economy's dependence on oil revenues during a time when reserves are ebbing.

Valery Nesterov, an analyst at Troika Dialog, showed a reporter a map of Russia's oil and gas infrastructure " a vast array of wells and pipelines " and gestured to blank expanses in the eastern provinces. The oil under the ground there and in the waters surrounding Russia could secure its position as a world leader, he said.

When asked about the current flattening of production numbers, and the extent to which Russia's economy is tied to oil, Nesterov's tone changed.

"Every Russian who thinks is worried about this. Unfortunately, there are no signs this will change," Nesterov said. "These days, the economy is dependent on natural-resource exports, which is just a temporary bonanza. These resources sooner or later will be depleted."

A Western diplomat in Moscow said drilling in old fields makes sense from the perspective of Russia's ruling elite, who control energy companies only as long as they remain in power.

"If you're running Gazprom (a Russian natural-gas producer) but you don't really own it, then your interest is maximizing short-term profits, not long-term development," said the Western diplomat, who spoke on the condition of anonymity because of the delicacy of the subject. "If you look at most of the Russian companies " the energy companies " that's precisely what's happened. They have focused on profits or dividends and less so on long term development and replacing reserves."

In a nation with a history of economic tumult and social unrest, the diplomat said, it doesn't bode well for the future.

"They're not Keynesians," the diplomat said, "they're Russians."
cicerone imposter
Reply Sat 23 Aug, 2008 11:39 am
I don't think it's a worry for me, because I drive about 5,000 miles/year, and gas prices don't impact our lifestyle very much - if at all.
Reply Sat 23 Aug, 2008 11:41 am
BBBHigher oil and gas prices could further enrich and embolden resurgent Russia, but if production declines sharply, a hungry bear could prove to be even more troublesome than a prosperous one is.[/quote wrote:

True, and only reinforces my impression that the trouble with Russia is Russians.

Serious decline in Russian oil & gas production could be very bad for northern Europe. Still, the Russian tendency to play politics with their hydrocarbons just may have been the spur needed to drive European development of wind & solar projects.
0 Replies
Reply Sat 23 Aug, 2008 11:44 am
@cicerone imposter,
I suggest you rethink your statement. The price of oil effects the cost of production and price of thousands of products, including the transporation of those products to the market. And you love to travel and the cost of flying is going through the roof. You could ride a bicycle all year and the price of oil would effect you and your lifestyle.

cicerone imposter
Reply Sat 23 Aug, 2008 12:15 pm
BBB, I understand all of "that." Fortunately for my wife and I, we have saved during our working years, and live quite comfortably without much worry about money. However, I do feel badly for those - especially for many middle class families and the poor - who are struggling to make ends meet. We are not rich by any means, but we do not have the worries of many families of today. We have just completed a major renovation of our home - both inside and outside - and have replaced some of our furniture. I'll need to cut back on some of my world travel to pay for this extravagance, but that's a small sacrifice compared to how many families are living today.
Reply Sat 23 Aug, 2008 06:00 pm
@cicerone imposter,
from what i understand , it's russia's NATURAL GAS RESERVES (CIA yearbook estimate 47 trillion cubic meters) and GAS EXPORTS (CIA yearbook estimate 180 million cubic meters) , particularly to europe that are the pillars of russia's strength .
if russia's oil exports to europe do not continue , it would be a VERY cold winter in europe ! and its industry would suffer mightily .
(and the european's surely appreciate having warm homes in the winter !) .

the toronto globe and mail had a 4 page feature a week ago giving great details of the supply of gas and europe's dependence on the continuing flow of the gas .

a look at the map will show how deeply the russian gas travels into europe - i doubt that the europeans are ready to give up the gas coming from russia .


just a small addition :
in 2006 russia paid off its debt to the CLUB OF PARIS - they practically have money to burn now !
cicerone imposter
Reply Sat 23 Aug, 2008 08:25 pm
With most of Europe consuming Russian energy, how many more years supply is there in Russia?
Reply Sun 24 Aug, 2008 04:04 pm
@cicerone imposter,
c.i. wrote :

"With most of Europe consuming Russian energy, how many more years supply is there in Russia? "

CIA yearbook - quoted earlier :

"russia's NATURAL GAS RESERVES (CIA yearbook estimate 47 trillion cubic meters) and GAS EXPORTS (CIA yearbook estimate 180 million cubic meters)"

i'm not going to calculate "how many years" - not even giving it a try - GRIN !

will future supply/reserves increase ?
will future demand increase or decrease ?
does any one have the answer for that ? i don't .

for the time being the europeans seem to feel quite satisfied , don't they ?
certainly doesn't look like the russian supply is going to run out shortly , does it ?

also , we might remember that the europeans seem quite serious in developing and applying much higher building/insulation standards than we do in north-america .

many of the buildings going up in north-america would likely not pass european building standards .
that , of course , smacks of red tape and regulation , but can that really be avoided ?

in ontario the building standards - particularly if one wants to take advantage of
subsidies/enticements ... - have increased considerably .
if we would be building a new house or re-furbishing an old one , we certainly would buid a much more energy efficient house .
when our house was build in 1963 an IMPERIAL gallon of heating oil was 19 cents - and we received a ONE cent "preferred customer" discount .
we still get a 1 cent discount , but now per LITER , so not complaining excessively .
Reply Sun 24 Aug, 2008 04:08 pm
c.i. :

"hamburgboy" is the old "hamburger " .
i was foolish enough to log out and in - GRRR !
what the .... - who cares ?
Reply Tue 26 Aug, 2008 05:40 pm
They're not Keynesians," the diplomat said, "they're Russians."

That makes the difference.
neither India nor China Nor Russia will go down in history because of the manipulated oil-prices.
Those who had hailed that cold war is over will feel the pinch and change their attitudes.
0 Replies
Reply Fri 29 Aug, 2008 03:24 pm
but it's back to HAMBURGER again - just so you all know - nothing to do with russia's oil .
0 Replies

Related Topics

WHAT'S IT LIKE LIVING IN RUSSIA TODAY? - Discussion by Mapleleaf
Russian appeal to the peoples of Europe - Discussion by gungasnake
Flavors of terrorists - Discussion by gungasnake
ISIS burning - Discussion by gungasnake
Putin's UN speech - Discussion by gungasnake
Putin Documentary - Discussion by gungasnake
  1. Forums
  2. » Russia's oil boom may be running on empty
Copyright © 2024 MadLab, LLC :: Terms of Service :: Privacy Policy :: Page generated in 0.03 seconds on 04/18/2024 at 11:44:13