Will Russia Bungle Its Oil Bonanza?

For five years, the managers of Russia's richest oil fields in western Siberia increased output by 14 percent annually, overcoming decades of Soviet neglect by fixing leaks, replacing pumps and charting better geological maps. Then it stopped. In the year after the Yuganskneftegaz production unit's effective renationalization, it will ship the same 52 million tons, or 385 million barrels, of crude that it did in 2004, according to the new owner's projections even as supply remains extremely tight around the world. The fields straddle five of the best-producing reserves in Russia. The state- owned Rosneft won them in January after the state took control as partial payment for a $28 billion back tax claim against Yukos, then Russia's largest private oil company. Their takeover came as a defining moment in President Vladimir Putin's policy of imposing Kremlin control over Russia's oil and natural gas that led to a partial renationalization of the industry, one of the world's largest energy suppliers. The subsequent drop in growth at Yuganskneftegaz from 14 percent to zero comes as an ominous sign that Russia may bungle its recent nationalization of companies, analysts say. And the production unit's troubles come as the state- controlled company Gazprom is poised to buy the privately held Sibneft Russia's fifth-largest producer, with more than 900,000 barrels a day from Roman Abramovich, a Russian tycoon now based in London. The deal could raise the Kremlin's control to one-quarter of all Russian oil production, according to 2004 production figures. The drop in production after years of surging growth partly stems from pipeline bottlenecks and high taxes across the industry. Still, whatever the causes, it threatens to undermine Russia's efforts to reinvent its energy companies as international oil majors. That transformation would depend on their ability to deliver energy as promised. Russia's emerging energy plan, articulated by Putin in speeches over the summer, would give it the ability to raise output during times of crisis and the reliability to supply even the world's largest consumer, the United States, in the years ahead. Yet, industry-wide, production growth is forecast to drop from a five-year average of 7.8 percent to 3 percent this year and remain at this level until Russia builds additional pipelines, said Christopher Weafer, chief strategist at Alfa Bank. "Russia has to show that it's not just a big energy partner, but a potentially much bigger energy partner, particularly to the United States," Weafer said. The stakes are high. Russia is already the world's second- largest oil exporter after Saudi Arabia. Russian Energy Ministry projections cited by the U.S. Energy Department show crude exports rising to a possible 5.5 million barrels a day this year, from 5.14 million barrels in 2004, and reaching 6.2 million barrels a day by 2015. Most of Russia's oil is now exported to Europe. But by 2010 Russia is expected to be exporting energy directly to the United States across both the Pacific and Atlantic Oceans, sending oil from offshore wells near Sakhalin Island to the West Coast, and liquefied natural gas and oil from the Arctic to the East Coast. "Without additional investment, the U.S.A. could be importing up to 50 million tons of Russian oil annually," Putin told a gathering of U.S. business leaders earlier this summer. Russian oil "would increase and improve the security of the world economy, including America." Russia's energy clout has become central to its foreign policy, with business and government leaders from China to Germany gleefully greeting Putin's promises of new energy. Earlier this month, Russia and Germany agreed to lay a gas pipeline under the Baltic Sea. Gazprom and American and European companies are in talks about developing the Shtokmanovskoye gas and gas condensate field in the Barents Sea, rated one the world's five largest, for export to the United States. But the respect Russia gains from energy depends on its ability to deliver.

"When a thief steals your car he doesn't immediately know how to drive it," said Alexander Shadrin, a spokesman for Yukos, after Rosneft's acquisition of Yuganskneftegaz. "Until they figure out how to use it, it will be a mess." Sergei Kupriyanov, a spokesman for Gazprom, brushed aside criticism of inefficiency, and a spokesman for Rosneft, who declined to be identified by name, attributed the leveling of production growth at Yuganskneftegaz to mismanagement under Yukos. Carl Granger, a Houston-based oil engineer who worked on the fields in 2002 under contract with Yukos, presented a different picture. Yukos engineers ramped up production by replacing Soviet pumps, tweaking controls and clearing out older wells, spending money and buying foreign equipment as needed, he said. The production unit also developed a new field.

"The potential was incredibly high compared to what was done before," Granger said. "And there are still thousands of wells like that out there."

International Herald Tribune via RedNova, 9.20.2005