Russia set to weaken Saudi hold on oil: Opec's control of output and prices is under threat from a new quarter, writes Helen Kay

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The Independent Online
AS THE Organisation of Petroleum Exporting Countries closed its second-quarter meeting in Geneva last week with little sign that it was about to agree a much-needed cut in production, the oil price slumped to just over dollars 13 a barrel. It was further evidence - if any were needed - that Opec's position as foremost power on the energy front has been substantially weakened.

With over-production in the seasonally weak summer period predicted to reach more than 1 million barrels a day, cuts of the same order are essential to strengthen oil prices. But Saudi Arabia - which, with one-third of Opec's total daily output, is by far and away its single biggest oil producer - has so far proved adamant in its resistance to cutbacks.

The Saudis dominate Opec and thus oil prices among the remaining oil producers. However, the announcement last Friday that a new Russian law on oil and gas, which has taken three years to draft, may be enacted quite shortly, heralds a period of change. Although the Former Soviet Union (FSU) is a long way yet from realising its potential, it 'is the best hope the world has in terms of breaking Saudi Arabia's stranglehold', said David Roberts at Kraken Consultants.

Like most industry experts, however, Mr Roberts believes it will be quite some time before the FSU states get their oil on the road. 'I think it will take until 1997 at the earliest to get back to previous production levels,' he said. Apart from the political and economic turbulence in the region, he points to the lack of investment that has led to the closure of numerous wells.

In February 1993, the vice- president of Rosneftegaz, a Russian energy company, indicated the full extent of the problem: 'In 1988, there were 7,000 abandoned oil wells. There are now 32,000,' he reported. Experts vary in their opinion of the ease with which these wells can be re-opened but Mr Roberts remains pessimistic. 'If you shut a well, the reservoir deteriorates. Iraq, for example, probably won't produce more than 2mbd (million barrels a day) - as opposed to the 3mbd plus it was producing before the war,' he said.

Hard data is very difficult to obtain, but between 1988 and 1992 it is estimated that production in the FSU plunged from about 624 million tons to 449 million tons. Siberia, the single largest oil-producing region, saw production fall from 421 million tons to 341 million tons - a drop of some 20 per cent. Only Belarus, Uzbekistan and Kazakhstan have seen small increases in production.

However, the imperative to secure hard currency has seen many of the oil-producing states put exports before domestic demand. Although exports have nearly halved in absolute terms - from 205 million tons in 1988 to 107 million tons in 1992 - they have remained broadly constant as a proportion of overall production. Moreover, the brunt of the decline has been borne by Eastern Europe and the developing countries, according to Jonathan Stern, energy consultant at EconoMatters and author of Oil and Gas in the Former Soviet Union.

Fear of defaults on payment has contributed to this fall in domestic demand, although it has also proved a serious obstacle to foreign investment. Last February, for example, BP pulled out of a well-repair project in Siberia, reputedly because it had not received payment for its work. Other companies have also been understandably slow about sinking large sums of money in schemes with an uncertain payback.

'By May 1993, foreign companies had become involved in more than 90 oil and gas ventures in CIS countries, of which around one third had progressed as far as agreement. However, only a handful have seen actual expenditures in excess of dollars 100m,' said Mr Stern.

In fact, the Western oil companies have both the technology and the cash to help the FSU develop, but advances have been impeded by mutual distrust. 'The Russians feel that the oil is their birthright; they think they are being exploited. Meanwhile, the oil majors are afraid of swingeing and arbitrary export taxes, and of not getting paid,' said John Toalster, oil analyst at Societe Generale Strauss Turnbull. 'The end result may be that exports remain the same, with domestic demand increasing alongside production. The FSU may not get itself out of the tangle it's in,' he said.

Even so, Opec has already got itself into something of a fluster. Its worries about competing exports seem, at the very least, premature. But it is also - and more realistically - fearful of competition to attract foreign money. 'The big concern is that if the oil companies go into Russia they won't go into the Arab states,' said Mr Toalster.

Indeed, the legislation now being considered by the Russian parliament is clearly designed to woo foreign money. It has been drafted to resolve such key issues as jurisdiction over resources, property rights and export taxes, as well as to allay fears that a change of political regime may result in the repossession of assets. Such reassurances are regarded by many oil companies as a crucial condition for investments worth many millions of pounds.

Nevertheless, a number of issues remain unsettled, including the terms governing pipeline transport. This is a vital issue. The FSU has 'the potential . . . to increase gas exports significantly,' according to Mr Stern. 'However, realisation of that potential is highly dependent upon a satisfactory solution to transit problems,' he added.

For a variety of reasons, it seems likely that Opec is over- reacting. Yet because an increase of 500,000 barrels a day could materially affect oil prices, the importance of the FSU may prove out of all proportion to its output.

----------------------------------------------------------------- Oil activity in former USSR (millions of tons) ----------------------------------------------------------------- 1985 1986 1987 1988 1989 1990 1991 1992 Production 595 615 624 624 607 570 515 449 Exports 167 186 196 205 184 159 104 107 Imports 14 17 16 22 15 111 10* 10* Apparent consumption 442 446 444 441 438 422 401 332 ----------------------------------------------------------------- *Estimate ----------------------------------------------------------------- Source: J P Stern, Oil and Gas in the Former Soviet Union, RIIA 1993 -----------------------------------------------------------------

(Photograph omitted)

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