Russia to Expand Pipeline Network As Plateau Looms

The Russian government is poised to move ahead in the next few weeks on long-awaited additions to its overburdened oil-export network. But the expansion will come as the huge growth in Russian oil output of the past few years gradually levels off, according to government and industry officials.
A slowdown in Russian oil output could be bad news for energy consumers. Russia's increased production has been a major factor keeping global oil supply ahead of demand in recent years. With consumption soaring in China and elsewhere in Asia, a slowing of Russian growth could leave the world with an even tighter margin of spare capacity than now, when prices have soared because producers are already pumping flat out.
"We could produce 500 million tons [10 million barrels a day] within a year or two," said Sergei Oganesyan, chairman of Russia's Federal Energy Agency. "But I think that's the maximum possible" for a decade or more, he added.
After plunging by about half over the early 1990s, Russian oil output has jumped about 50% since 1999, bringing it just short of the world's largest producer, Saudi Arabia. Russian output set a post-Soviet record of 9.4 million barrels a day in September, with the full-year result expected at about 9.2 million barrels a day.
The additional Russian crude over the past few years has provided a crucial offset in the global market to increasing demand for oil from China. Russia also has eaten away at the market share of the Organization of Petroleum Exporting Countries.
"It's early to say that OPEC is back in the driver's seat, but Russia's growth to prominence is coming to an end," said Stephen O'Sullivan, head of research at United Financial Group, a Moscow investment house.
The government's latest forecast calls for Russian oil production to rise about 3% annually over the next three years, less than half of the 8% rate expected this year.
Russian oil production over the past few years has continually defied predictions of a slowdown, routinely outpacing the government's conservative forecasts, which often lag behind those of Russian oil companies.
But a study to be released today by the Baker Institute at Rice University in Houston warns Russian growth will continue at a slower pace, and "this growth is unlikely to be sufficient to undercut current high world prices in the near to medium term."
Keenly aware of the geopolitical heft that oil confers, President Vladimir Putin has pledged to Western leaders that Russia will continue to expand output and exports.
Russian oil companies have warned in the past few years the lack of new export pipelines could limit growth. After months of political and bureaucratic haggling over plans for new lines, the government seems to be getting ready to move, officials say.
Early this month, Mr. Putin ordered his cabinet and the state pipeline company to pick up the pace. This week, the government will formally discuss the plans. "I expect the decisions will be made by the end of the year," said Semyon Vainshtok, head of OAO Transneft, the state pipeline company.
Officials say the government's top priority will be expansion of a network of pipes bringing oil from western Siberia to the Baltic Sea near St. Petersburg.
Also likely to be approved is a 2,600-mile line across Siberia to the Pacific Ocean that the government hopes will stimulate development of new fields in eastern Siberia, an oil-rich region that is underexplored.
Officials say a combination of rail and pipeline shipments could mean the first oil would flow in this direction as early as mid-2006, while the full line wouldn't be operational until 2007 or 2008. The project could include a spur into China, which has sought a pipeline link to Russian supplies.
Russian officials say a proposed pipeline linking fields in western Siberia with the Barents Sea, from which tankers could take oil to the U.S.'s East Coast, remains on the back burner, with no decision expected until late next year.
Russian oil companies, along with the U.S. government, had lobbied hard for a link to the ice-free port of Murmansk. But Russian authorities have been cool to that idea and currently favor a shorter pipeline to a port further east.
In addition to new pipeline routes, the government also seems to be moving on legal changes needed to ease private financing of new lines, according to officials and analysts.
While the Kremlin is adamant that all pipelines remain state-controlled, proposals are in the works that would allow private investors to help pay for them in return for concessions, such as priority access or lower rates. If approved, these changes might help speed construction of the line to the Barents Sea, which Russian oil companies say they are ready to finance if the terms are right.
Major Russian oil companies are more optimistic than the government about future production growth. Robert Dudley, president of BP PLC's joint venture here, earlier this month said he expects growth of about 6% a year to continue for at least several years. His company, TNK-BP, is forecasting a 13% gain this year, falling to about 6% to 7% annually through 2007.
Scottish oil-industry consultant Wood Mackenzie expects Russian oil-production growth to slow sharply in coming years, with the peak of 10.5 million barrels a day coming around 2010. "We see an increase in the call on OPEC crude over the next five years" because of slowing Russian growth and continued rising demand elsewhere, said Ann-Louise Hittle, a Wood Mackenzie analyst.
After several years of big gains in production, many of the Russian companies that have seen the largest increases are reporting slowing growth, while those that have lagged behind aren't picking up the slack. OAO Lukoil said Friday its production will rise 4% next year, down from the 7% to 8% expected this year.
OAO Yukos was the largest contributor to the increases over the past few years, but the company appears likely to be broken up and sold off in the next few weeks amid a conflict between the Kremlin and Yukos's former chief executive and main shareholder, billionaire Mikhail Khodorkovsky, who is on trial on tax-evasion and fraud charges.
Russian officials insist overall output won't be affected, but analysts say the Kremlin-connected companies expected to take over Yukos's assets haven't shown the same aggressiveness in boosting production that Yukos did.
Government officials and analysts also say Russian companies haven't invested enough in bringing new fields into production, raising questions about whether improvements at existing fields will be enough to sustain growth.
The Baker Institute study found "future production growth will require substantially higher levels of capital spending . . . than has been typical in the past," largely because Russian oil companies have been focusing on existing fields rather than new exploration.

(From The Wall Street Journal, and Putin.ru 25.10.2004)