Russian Roulette | Page 5

from March 11-13, 2002." The oil and gas fields in
Sakhalin attract 25% of all FDI in Russia and more than $35 billion in
additional investments is expected. Other regions of interest are the
Arctic and Eastern Siberia. Americans compete here with Japanese,
Korean, Royal Dutch/Shell, French, and Canadian firms, among others.
Even oil multinationals scorched in Russia's pre-Putin incarnation - like
British Petroleum which lost $200 million in Sidanco in 11 months in
1997-8 - are back.
Takeovers of major Russian players (with their proven reserves) by
foreign oil firms are in the pipeline. Russian firms are seriously
undervalued - their shares being priced at one third to one tenth their
Western counterparts'. Some Russian oil firms (like Yukos and Sibneft)
have growth rates among the highest and production costs among the
lowest in the industry. The boards of the likes of Lukoil are packed
with American fund managers and British investment bankers.
The forthcoming liberalization of the natural gas market (the outcome
of an oft-heralded and much needed Gazprom divestiture) is a major
opportunity for new - possibly foreign - players.

This gold rush is the result of Russia's prominence as an oil producer,
second only to Saudi Arabia. Russia dumps on the world markets c. 4.5
million barrels daily (about 10% of the global trade in oil). It is the
world's largest exporter of natural gas (and has the largest known
natural gas reserves). It is also the world's second largest energy
consumer. In 1992, it produced 8 million bpd and consumed half as
much. In 2001, it produced 7 million bpd and consumed 2 million bpd.
Russia has c. 50 billion oil barrels in proven reserves but decrepit
exploration and extraction equipment, and a crumbling oil transport
infrastructure is in need of total replacement. More than 5% of oil
produced in Russia is stolen by tapping the leaking pipelines. An
unknown quantity is lost in oil spills and leakage. Transneft, the state's
oil pipelines monopoly, is committed to an ambitious plan to construct
new export pipelines to the Baltic and to China. The market potential
for Western equipment manufacturers, building contractors, and oil
firms is evidently there.
But this serendipity may be a curse in disguise. Russia is chronically
suffering from an oil glut induced by over-production, excess refining
capacity, and subsidized domestic prices (oil sold inside Russia costs
one third to one half the world price). Russian oil companies are
planning to increase production even further.
Rosneft, the eighth largest, plans to double its crude output. Yukos
(Russia's second largest oil firm) intends to increase output by 20% this
year. Surgut will raise its production by 14%.
Last week, Russia halved export duties on fuel oil. Export duties on
lighter energy products, including gas, were cut in January. As opposed
to previous years, no new export quotas were set. Clearly, Russia is
worried about its surplus and wishes to amortize it through enhanced
exports.
Russia also squandered its oil windfall and used it to postpone the
much needed restructuring of other sectors in the economy - notably the
wasteful industrial sector and the corrupt and archaic financial system.
Even the much vaunted plans to break apart the venal and inefficient
natural gas and electricity monopolies and to come up with a new
production sharing regime have gone nowhere (though some pipeline
capacity has been made available to Gazprom's competitors).
Both Russia's tax revenues and its export proceeds (and hence its

foreign exchange reserves and its ability to service its monstrous and
oft-rescheduled $158 billion in foreign debt) are heavily dependent on
income from the sale of energy products in global markets. More than
40% of all its tax intake is energy-related (compared to double this
figure in Saudi Arabia). Gazprom alone accounts for 25% of all federal
tax revenues. Almost 40% of Russia's exports are energy products as
are 13% of its GDP. Domestically refined oil is also smuggled and
otherwise sold unofficially, "off the books".
But, as opposed to Saudi Arabia's or Venezuela's, Russia's budget is
based on a far more realistic price range of $14-18 per barrel. Hence
Russia's frequent clashes with OPEC (of which it is not a member) and
its decision to cut oil production by only 150,000 bpd in the first
quarter of 2002 (having increased it by more than 400,000 bpd in 2001).
It cannot afford a larger cut and it can increase its production to
compensate for almost any price drop.
Russia's energy minister told the Federation Council, Russia's upper
house of parliament, that Russia "should switch from cutting oil output
to boosting it considerably to dominate world markets and push out
Arab competitors". The Prime Minister told the US-Russia Business
Council that Russia should "increase oil production and its presence in
the international marketplace."
It may even be that