RUSSIA - Part 1 - Oil Production Keeps Rising; Gas Output Declines.

Russia's crude oil output in the first half of August jumped to 7.62m b/d, up 8% from an average of 7.056m in the first half of August 2001. With the production system having been stabilised since 1998, many of the large fields now enjoy modern equipment. As the system keeps improving steadily, the country's oil production capacity could exceed 8m b/d by 2005 and may overtake a 1987 peak of 11.48m b/d by 2015.

Russian oil production rose by 0.5% in 1999, almost 6% in 2000 and 7.7% in 2001 to reach 2.54 bn barrels. Russian oil consumption has not changed much since 1998. The production system has been improved by the private and integrated Russian oil companies, which have amassed a lot of cash since 1999, and joint ventures involving foreign firms. The Russian oil companies are now ranged in two categories: the aggressive groups which have raised output quickly and cut costs with the help of Western service firms, as in the case of Yukos and Sibneft; and conservative groups like LUKoil, which now lags behind Yukos in terms of market capitalisation (see profiles of the producers and their fields in Part 2).

Gas production has declined from a peak of 599.8 BCM in 1991 reported by BP's annual statistical review to 581.02 BCM in 2001 reported by Russia's state statistics committee Roskomstat, with BP's review putting last year's output at 542.4 BCM. The domestic energy base has been shrinking since 1989, when Russian consumption of primary energy amounted to more than 868 million t/y of oil equivalent to reach 643m t/yoe in 2001 (see Downstream Trends of this week).

Russian exports of crude oil and petroleum products during the first half of August rose to almost 5m b/d. Total exports from the former Soviet Union (FSU) then averaged 5.99m b/d. FSU exports could reach 14m b/d by 2015 and thus challenge the Persian Gulf. Already Russia's proven oil and gas reserves are the world's biggest and about 15% larger than those of Saudi Arabia. Russia and fellow CIS oil and gas producers have discussed a bloc that could become a rival to OPEC (see Part 3).

If its political and legal climate and the economy improve as foreign investors hope, Russia could regain its position as the biggest oil producer in the world. It could become the world's biggest exporter of oil before the end of this decade, already being the biggest exporter of gas (see oil & gas exports in Part 3).

Russia has more than 250 undeveloped fields. One field considered by US majors at Bovanenko, in northern Siberia, contains 155 TCF of gas - roughly the same as the entire USA. The west Siberian field Zapolyarnoye has 3.5 TCM (125 TCF), almost as much as the Norwegian and UK North Sea reserves combined. Oilfields in the far north or in the far eastern island region of Sakhalin offered to foreign companies have potentials more than twice the entire oil reserves in the Western Hemisphere.

Many of these monsters are so remote that moving the oil or gas is a far bigger challenge than getting it out of the ground. But there are other options, with foreign companies proposing huge ventures and the government improving E&P terms (see Gas Market Trends). Alliances with Western majors would also enable Russian companies to expand overseas (see Part 4).

Under President Vladimir Putin, the decision making process in Moscow has been improved (see who's who in Part 5). Some of the Western majors have had a bad experience in Russia. In 1997 BP sank $484m into a 10% equity in Russia's then No. 5 oil firm Sidanko only to discover that Sidanko's books concealed massive debts. The company was to collapse in 1998 and, in a rigged bankruptcy court, the politically attuned Tyumen Oil Co. picked off some of Sidanko's most valuable assets at an incredibly low price. In a compromise deal by late 1999, Tyumen agreed to return a prized Siberian oilfield to Sidanko's control but only after BP and the other shareholders gave it a stake in the field.

After the collapse of the Soviet Union in late 1991, the petroleum industry in Russia became legendary for its schemes to launder oil money, mislabelling products and manipulating sales prices to move profits into offshore banks and away from shareholders and the government. The primary interest was to get cash and run, oil being a good way one could build up funds outside Russia. A lot of private fortunes have been built on that.

All this was done during the regime of Boris Yeltsin, which ended in late December 1999. In an article published by The New York Times in early June 1998, the head of Russia's Chamber of Accounts said "the main culprit" of the 1998 economic crisis was "the alliance that the Russian government has formed with powerful business interests". He added: "This alliance has been raiding the public treasury and depriving the Russian people of a secure and democratic future... Tax revenues are collected only to be stolen. Losses on the federal and regional levels are huge". The Finance Ministry had no accounting system to keep track of revenues and spending.