Russian Oil Goes West

On Tuesday, the US Ambassador to Russia, Alexander Vershbow announced that the US was very satisfied with the recent energy summit in St. Petersburg. Russia has a great potential to supply the United States with oil and gas, which can help diversifying its energy supplies. In recent years, there has been great progress in the development of Russian-American energy projects. However, the main challenge lies still ahead. Russia is faced with the problem of tight pipeline capacities and has to find ways to increase its oil export volume. Not only the oil but also the US gas market is interesting for Russia as there are tight supplies which have increased prices considerably. This might encourage Russia to export liquefied natural gas (LNG) to the US west coast. Last year, the US imported only 6.5 billion cubic meters of LNG, but it is expected that this volume may rise to up to 100 bcm by 2020. US companies are already negotiating with Gazprom, the Russian gas monopoly, in the hope that such projects could be realized in 3-5 years.

For the United States, which is the world?s biggest oil consumer, Russia is the best opportunity to diversify its oil supplies away from the volatile Middle East. This will become more important as relations with long-term ally, Saudi Arabia, have considerable cooled down over allegations of terror financing. The US is also struggling with Iran over the development of nuclear technology and the development of war-ravaged Iraq can hardly be predicted today. Moreover, if investments in the Russian oil sector will continue growing, a steady expansion of crude output can be expected in the next 10 years and the additional exports are likely to be directed to new markets in North America and Asia.

For Russian crude producers, the US market offers great opportunities as the country will be able to absorb huge amount of Russian oil. Europe, Russia?s traditional market is not expected to expand heavily in the coming years and will refuse to buy too much crude from one single country, due to political considerations.

Except in a part of the Russian government, it is widely acknowledged that Transneft, the Russian state-controlled pipeline monopoly, will not be able to cope with the increased exports in the future. Therefore, a $4 billion private pipeline project was suggested by several Russian oil mayors. It would link eastern Siberian oil fields with the deepwater port of Murmansk and allow to ship crude to the US within 9 days compared to 32 days from the Mideast Gulf and 16 days from Africa. President Putin showed some approval for the project but no decision has been taken yet. Last week, US Commerce Secretary Don Evans even suggested that US companies should become partners in the project. The pipeline could become operational in 2007 or 2008.

However, Transneft and a part of the Russian authorities are not very eager to give the state pipeline monopoly away and allow private companies to operate their own transportation infrastructure within the country. A Russian energy official argued that first, the country should use the full potential of the existing pipelines before new ones are built. According to him, Transneft has been efficient in its role and it is doubtful that privatization of infrastructure would improve the situation.

On the energy summit, there was also a broad discussion if Russia has done enough to created confidence in the predictability of its investment climate. American oil executives complained that the issue of Production Sharing Agreements, to which many Russian oil companies are opposed, is still not resolved. It was also asked for greater transparency in the whole license issuing process and for better access for foreign investments. Another issue is also still very prominent, the affair surrounding Yukos and its head Mikhail Khodorkovsky. Yukos have been locked in a row with the Kremlin about property rights and privatization results after Platon Lebedev, a key shareholder of Yukos, was arrested and charged with the theft of state property back in the 90?s. The affair has shown that the whole investment climate in Russia might not be as stable as it has been suggested recently. It is not expected that this struggle will be settled before the Russian Presidential election in March 2004.

However, with all the shown committed to a new and strong partnership in St. Petersburg, one should not forget that there is a considerable divergence between the two countries on certain geopolitical energy problems. There is no political agreement about issues in the Caspian Sea region. The US is supporting a pipeline project which should allow Azerbaijan to transport its oil and gas to Turkey and sell it directly to European markets. Russia is a stated opponent of the project and would prefer transporting the crude through its own territory and creating an integrated transport system.

There is another energy partnership which is likely to interfere or even operate counter the US-Russian energy cooperation. As US relations with Saudi Arabia are deteriorating, Prince Abdullah from the kingdom visited Moscow at the beginning of September and the two old rivals seemed to have found a common agenda, including oil, terrorism and arms sales. The two biggest oil producers agreed that action should be taken to keep oil prices at a ?fair? level. Although Russia has fewer possibilities than Saudi Arabia to steer the countries oil output as most of the companies are private, the announcement should definitely be worrying for the US. Russian companies might also receive preferential treatment when it comes to investments in the Saudi oil and gas sector and thereby competing against US companies. Furthermore, Moscow can hope that the kingdom will divert part of its US investments to the Russian economy in order to support its aggressive growth target. Some sources speak of up to $200 billion. Saudi investors own assets in the US which are expected to reach up to $600 billion. It is rumoured that a good amount of these funds have already left the US due to a legal case in which relatives of the victims of the attack on the World Trade Center in New York ask for compensation which could rise to billions of dollars.


Author: Andreas Wild