Much Ado About Russian Oil

Since Russia stood down OPEC in winter 2001 on production and export cuts and then briefly overtook Saudi Arabia in February 2002 to become the world’s largest oil producer, there has been much ado about Russian oil.

Moscow has been touted as the new Houston, President Vladimir Putin crowned as the world’s new oil czar, and Russian oil barons have been feted in Western capitals.

But the word is now getting out: Russia cannot become a long-term replacement for Saudi Arabia or the members of the Organization of Petroleum Exporting Countries in global oil markets.

Despite its impressive performance in February, Russia simply does not have the reserves or the production capacity. While Russia falls into the category of top producing and exporting countries, it ranks much lower in proven oil reserves, with only 5 percent of world supply.

There are no expectations of major new reserve finds in Russia, and, with the collapse of the USSR, Russia has also lost the rich Caspian Basin offshore and on-shore oil fields in the Central Asian states and Azerbaijan. In contrast, OPEC collectively accounts for 77 percent of total world oil reserves, and Saudi Arabia still holds fully 25 percent of proven global oil reserves.

As far as production is concerned, although Russia increased its oil production by 1 million barrels per day between 1999-2001 (from 6 million to 7 million barrels per day), it will never regain the peak production in the 1980s of around 12 million barrels per day. This was Soviet production, not Russian production.

Despite substantial production increases by individual companies in the past two years, the Russian oil industry as a whole also does not seek to boost production in the immediate future. LUKoil, the company with the largest reserves, increased its output by only about 1 percent in 2001 over 2000, and its business strategy is concentrated on more lucrative oil refining and asset expansion overseas.

The oil boom Russia has experienced in the past few years is the result of high oil prices, not increases in production, as world oil prices soared from around $10 a barrel in December 1998 to a peak of around $33 a barrel in September 2000.

Although Russia’s oil prospects are limited rather than limitless, it does have enormous potential in gas. Russia is to gas what Saudi Arabia is to oil—a fact that was lost in the euphoria of Moscow’s standoff with OPEC.

As crises in the Middle East and concerns about pollution and global climate change increase, international attention will inevitably focus on Russia’s vast reserves of cheaper, cleaner natural gas.

With 32 percent of proven total world natural-gas reserves, Russia outranks Iran at 15 percent, Qatar at 7 percent, Saudi Arabia and the United Arab Emirates at 4 percent, and the U.S. and Algeria at 3 percent. Single-handedly, Gazprom, Russia’s giant gas company, holds 25 percent of world gas reserves (equivalent to Saudi Arabia’s percentage holdings in oil).

Russia is also a world-class gas producer, with gas fields stretching from Western to Eastern Siberia and particular strength and dominance in Central Asia. It is already the primary gas supplier to Europe, and in the next two decades Russia will likely capture important gas markets in Northeast Asia and South Asia.

Securing high-growth 21st-century markets for its gas is one of Russia’s top current economic and foreign-policy priorities. But success in international gas markets will not come easily despite Russia’s potential. It can be assured only through major increases in Gazprom’s current production, significant international as well as Russian investments in infrastructure, and the timely development of fully functioning gas markets in Asia.

The development of Russia’s own economy will also have an impact on its gas production. In the last decade, gas and Gazprom have subsidized and sustained a vast portion of Russia’s economy that it inherited from the Soviet Union, which has not been able to make the transition to a market-economy environment. In the absence of major structural changes in the economy, these demands on the gas industry will continue to increase, impinging on its ability to improve efficiency and boost exports.

But if these challenges can be met, while there was much ado about Russian oil in 2002, there may be more to do with Russian gas by 2020.