RUSSIA - Part 1 - The Prospects

Russia's oil output is averaging about 6 million b/d, compared to 6.1 million b/d in early 1998, with 100,000 b/d cut in solidarity with OPEC efforts to defend crude oil prices. But exports have risen by almost 80,000 b/d to 2.15 million b/d, due to a fall in local consumption. The country's production of natural gas is expected to rise by 55% to 929 BCM/year by 2015, according to VNIIGAZ, a research and scientific unit of Russia's gas producer Gazprom.

If its political 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 in the next decade or two, already being the biggest exporter of natural gas. But experts in Russian affairs are not optimistic about the prospects ahead.

Russian oil production is at a record low, compared with almost 11.5 million b/d in 1987. Total energy consumption in Russia fell to 580.5 million tons of oil equivalent in 1997, compared with 868.6 million tons oe in 1987. Total energy production in 1997 was 936.3 million tons oe, compared to 1,257.1 million tons oe in 1987 (see Downstream Trends).

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. Another field nearby, Karasavey, has 42 TCF, about 10 TCF more than Chevron's total gas holdings worldwide. Oilfields in the far north of Russia or in the far eastern island of Sakhalin offered to foreign companies have potentials more than twice the entire reserves in the Western Hemisphere.

Unfortunately, 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. Russia also has more than 40,000 idle oil wells, mostly in Siberia. A foreign company could go there with modern technology and a reasonable investment and help restore production in those wells. However, higher taxes and rising production costs have made Russia much less attractive than it was a few years ago. Costs of oil being produced in western Siberia, government taxes and pipeline fees have risen to almost $10.00/barrel, which is the market price of Urals, Russia's main export crude (see profiles of the producing companies and joint ventures Part 2).

Because they are borrowing much to finance their expansion and modernisation of their equipment, the Russian oil companies are compelled to maximise exports. The country's pipeline system has become congested as a result. The state-owned pipeline company Transneft is giving priority to Russian companies paying their taxes on time (see exports in Part 3).

The state's decision makers have been changing constantly since the collapse of the Soviet Union in late 1991. In March 1998, President Yeltsin sacked the entire government and appointed Sergei Kiriyenko, 35, as prime minister to replace Victor Chernomyrdin. Sergei Generalov, another 35-year-old who worked for the Menatep banking group, was later made minister of fuels and energy. But the ministry lost control over supervision of the production sharing agreements (PSAs). This role was given to the ministry of natural resources (see who's who in Part 4).