VOL. XLVII

No 04

26-January-2004

Ex-Soviet Oil Exports: Are the Russians Really Coming?

By Eugene Khartukov and Ellen Starostina

The following is based on a presentation made by Professor Eugene Khartukov to the Joint OPEC/MGIMO Workshop, OPEC Secretariat, Vienna, Austria, 2 July  2003. Originally published in OPEC Bulletin, September/October 2003 and republished in Geopolitics of Energy, November 2003. Updated and supplemented exclusively for MEES in early January. Prof Khartukov is General Director of the Center for Petroleum Business Studies (CPBS) in Moscow, while Ms Ellen Starostina is Head of PetroFinance Consultancy (PFC) and Director for Finances at CPBS.

In the heyday of Soviet oil exports (that is in the late 1980s), the “unbreakable union of Soviet republics” ¹ exported up to 2.9mn b/d of crude, mostly of a special blend known as ‘Urals’ (as it was mixed in the Volga-Urals region) or as ‘Soviet export blend’ (with an API of around 32^o and 1.8% sulfur). Urals flowed through the Druzhba (which means ‘friendship’) pipeline to Eastern Europe, as well as via the Soviet oil ports on the Black Sea (Novorossiysk, Odessa and Tuapse) and on the Baltic Sea (Ventspils). Some other minor crude oil streams ran to foreign destinations by rail, mainly to China and via seaports in the Russian Far East.

After the breakup of the USSR in late 1990, Russia lost sovereign control over pipeline outlets to Poland, Slovakia and Hungary as well as over the Ukrainian port of Odessa and Latvia’s Ventspils. However, the Russian oil pipeline monopoly Transneft retained control of the crude oil flows through all those outlets, as the export pipelines were fed chiefly by Urals (now known as Rebco, which stands for ‘Russian export blend crude oil’).

After a while, other ex-Soviet republics (such as Kazakhstan, Azerbaijan and Belarus) started to use the Transneft-controlled pipelines to export their own crudes and to build new pipelines (eg, the Caspian Pipeline Consortium line from Kazakhstan to the Black Sea) and terminals (like Butinge on Lithuania’s Baltic Sea coast) to facilitate their own oil exports or to serve those from Russia. As a result, the formerly indivisible Soviet exports of crude oil (all going outside the ex-USSR) were broken into three main streams:

 (a)   Russian crude exports to outside the FSU;

 (b)   Russian crude supplies inside the FSU (mostly to Ukraine, Belarus and Kazakhstan);

 (c)   Non-Russian crude flows (chiefly from Central Asia, Azerbaijan and Belarus) through the Transneft-controlled network to non-FSU destinations, as well as to other ex-Soviet republics.

 Although Transneft distinguishes between its oil shipments within and outside the Commonwealth of Independent States (CIS), with the Baltic ex-Soviet republics being regarded as ‘outside’ or ‘far abroad’ destinations, Western observers are more accustomed to reckoning how much crude is exported by Russia (and other ex-Soviet countries) beyond the borders of the FSU.

Reflecting Overseas Demand

Initially, after the breakup of the USSR, Russia’s crude exports to non-FSU destinations were severely impeded by the market-related terms of the new sales contracts, which the former Soviet satellites in Eastern Europe now had to accept. However, the much weaker (in fact virtually insolvent) ex-Soviet economies were affected to a far greater extent, and could now afford only a modest fraction of their former imports of Russian crude. Consequently, total exports of Russian crude oil shrank from 3.5mn b/d in 1991 to less than 2.5mn b/d in 1995, while Russia’s supplies to other ex-Soviet republics nosedived from 2.4mn b/d to 600,000 b/d, falling even further later. This slump had nothing to do with the so-called ‘depletion’ of Russia’s oil reserves — it was simply that Russian oil (at market prices) had lost its formerly subsidized ex-Soviet buyers.

Demand for Russian crude from the better-off hard-currency buyers outside the FSU, which was initially somewhat depressed, has been steadily recovering and has now exceeded its previous record level of 2.9mn b/d (set in 1988). However, in the late 1980s it related to all Soviet exports, which now should be compared with non-FSU supplies from and via Russia – that is, with regard to crude oil transit by other ex-Soviet states, which is projected by the Moscow-based PetroMarket Research to reach 0.8-0.9mn b/d this year (see Table 1).

The Desire For Exports

It is noteworthy that nowadays Russia’s annual oil balance (including oil production) stems from the country’s unquenchable lust for oil export revenues. These oil exports constitute the only reliable source of cash that is badly needed by Russian oil companies to pay wages, taxes and bank loans.

Moreover, although oil related hard-currency revenues are not as important in Russia as they are in most OPEC countries, they still provide a shot in the arm for the unstable national economy. During the last few years, exports of crude oil, together with oil product sales, accounted for around one-third of the country’s export revenues. Even more important, the oil sector makes up about 15% of Russia’s GDP, while oil-related taxes account for as much as one-quarter of the federal budget receipts. In other words, Moscow cannot afford to sacrifice even a fraction of those revenues for the sake of supporting world oil prices.

Whatever the circumstances, therefore, Russia will export as much oil as it can. However, the country’s ability to export its crude oil is currently limited by the available export facilities. By 2002, the major export capacity (ie, pipelines and sea ports) potentially available for Russian crude had exceeded 4mn b/d. In that year, the Russians used only 2.5mn b/d of this potential, with some spare capacity conceded to Kazakhstan, Azerbaijan and Belarus under intergovernmental agreements. Still, with more and more export facilities being gradually commissioned in the years to come, Russia will have more capacity available to export its crude.

Nowadays, there are hardly any major infrastructure projects in the Russian oil sector which are not directly aimed at increasing oil exports. Despite officially-declared export cuts, the country keeps on boosting its crude supplies by rapidly de-bottlenecking existing export outlets and building new ones — in the West, Far North and Far East. The most important oil export projects are associated with the further development of the Druzhba and Baltic pipeline systems, as well as with new construction schemes for the Murmansk oil hub and the Angarsk pipeline(s).

Druzhba’s Second Wind

The Druzhba pipeline remains the main export artery for Russian crude, capable of handling up to 1.3mn b/d. Its northern branch, with a capacity of about 900,000 b/d, feeds Poland and Germany, while the southern branch, with a capacity of 400,000 b/d, facilitates exports to Hungary, Slovakia, the Czech Republic and the former Yugoslavia. However, due to the fall in oil demand in Eastern Europe, the pipeline is now substantially underused. In 2002, the Druzhba’s average capacity utilization rate was around 80%, with its southern leg carrying only 75% of its nameplate throughput. The use of the Druzhba’s southern capacity should be enhanced when the 35-inch Adria pipeline, starting from the port of Omisalj in Croatia, is reversed to ship Russian crude to the Adriatic.

This scheme, which was proposed by Yukos and backed by Tyumen Oil (TNK), aims at a capacity of 100,000 b/d in 2004 and up to 300,000 b/d by 2010. The first phase of the project (reversal) looks quite cheap (between $20-30mn), while the planned expansion to 300,000 b/d is more expensive, requiring up to $320mn of estimated capital investment. Originally, the Croatian pipeline operator Janaf was supposed to complete reversing its section of the Adria pipeline by the end of 2003. However, the company cannot start work before it has received approval from Croatia’s environment ministry, which is worried about the effect of ballast water disposal on marine life in the Adriatic. As a result, the 100,000 b/d phase of the Druzhba–Adria scheme is not now expected to become operational before the end of 2004. In addition to this, the implementation of various safety and environmental requirements is likely to add around $60mn to the project’s estimated cost. Furthermore, the project may be also delayed by the recently emerged disagreement between Transneft and its Ukrainian counterpart UkrTransNafta, which insists on concluding direct contracts with Russian oil producers for shipping their crude along the Druzhba–Adria route.

In August 2001, the Druzhba’s Ukrainian section was linked by the Odessa-Brody pipeline to a new oil terminal at Pivdenny (or ‘Yuzhny’ in Russian and ‘Southern’ in English), some 25 miles northeast of Odessa. The 420-mile 40-inch line, with its current capacity of 180,000 b/d, can be expanded up to 500,000 b/d (and further to 900,000 b/d) and extended by 190 miles to the Polish refinery at Plock. The Brody-Plock extension would require 2-3 years to build and cost around $300-500mn — in addition to the $160mn-plus already invested in Odessa-Brody. The plan is vigorously supported by Kiev, as well as by Warsaw, Berlin and the European Union — none of which, however, are keen to provide the necessary funds. In any case, the extension can materialize only when (and if) UkrTransNafta, which runs the still idle Odessa-Brody line, finds the desperately sought-after oil supplies from the Caspian, to ship crude from the Black Sea to Plock and further via the Pomeranian pipeline to the Baltic port of Gdansk. This July, two years after the ill-fated Odessa-Brody link was built, the first signs of actual interest in using it were shown by Kazakhstan’s state oil and gas holding company KazMunaiGaz (KMG), which has pledged to conduct a feasibility study on the possibility of extending the line to Plock with the aim of shipping up to 160,000 b/d of Kazakh crude via Pivdenny to the north.

In the meantime, several Russian oil majors (including Lukoil, Yukos, and recently TNK) are seeking to persuade the Ukrainian government to save the unfortunate project by reversing the Odessa-Brody line in order to pump Russian crude through the Pivdenny terminal for sea-borne exports. The Russian oil companies, actively backed by Moscow officials, would like to use a part of the current 240,000 b/d excess capacity in the Druzhba pipeline system to ship their crude southward across Ukrainian territory. Their desire for additional oil exports seems to justify a relatively high tariff for the line fixed at $4.30/ton (60¢/B) plus an additional fee from the Belarus border to Brody of $2.30/ton (30¢/B).

Since the start of 2003, a short (32-mile) southern fragment of the pipeline between Michurinsk and the 840,000 b/d Pivdenny terminal has been used in reverse by TNK and recently by Gazprom-linked trader TransNafta and Bashneft (a large oil producer from the Russian republic of Bashkortostan). In late August, under incessant pressure from Moscow, which has curtailed its crude exports via Odessa, Kiev agreed to allow Russian companies to use the Pivdenny outlet for up to 80,000 b/d of their crude, starting from the fourth quarter of 2003. Most analysts believe this could signify the looming end of Kiev’s desperate resistance against the reversal of the Odessa–Brody pipeline. Still, the Ukrainian cabinet has delayed any decision until mid-January, when an independent feasibility study on the notorious reversal is to be completed.

This export route via Pivdenny has also attracted Kazakh exporters who, however, have laid a smokescreen around their vital interests by talking about the Plock extension. In late July, KMG succeeded in convincing UkrTransNafta of the need to lay a parallel 32-mile Michurinsk-Pivdenny line for shipping Kazakh and Russian crudes. Kazakhstan has also offered to build a new berth at the terminal to handle its crudes. According to KMG, this would keep the Odessa–Brody line free for its original mission — to pump oil northward. But the question still is, whose oil would it pump?

Meanwhile, the Polish pipeline operator PERN plans to invest around $200mn to increase the flow of Russian crude to the Naftoport oil export terminal in Gdansk. Currently, the terminal is running at only a fraction of its capacity because of constraints imposed by the Druzhba pipeline. Most of the money will be spent on construction of a new line along the northern branch of the Druzhba pipeline from the Belarus border to Plock, which is connected with Gdansk by the Pomeranian pipeline. The 145-mile Adamowo-Plock line, which would boost the capacity of the Druzhba’s northern leg from the current 900,000 b/d to nearly 1.3mn b/d, could be completed by 2006, with 1.0mn b/d available by end-2004.

Baltic Expansion

On the Baltic front, the Latvian port of Ventspils remained the main outlet for Russian (and Soviet) crude destined for North European markets until recently, when it was embargoed by Transneft, seeking to buy a controlling stake in the port cheaply. If Transneft succeeds in its efforts (with a sell-or-die ultimatum expiring by next May), the current 320,000 b/d capacity of the now idle outlet could be expanded to 360,000 b/d.

As an alternative to the independent Ventspils, in late 2001, Transneft built its own Baltic oil terminal at Primorsk, on the Gulf of Finland, north-west of St Petersburg. Its original capacity of 240,000 b/d was increased to 360,000 b/d in early July and to 600,000 b/d at the end of October (two months ahead of a plan). This now fully used facility is slated to expand further to 840,000 b/d by next April, at the latest. Ultimately, Primorsk’s capacity could reach 1.2mn b/d, although this depends on market conditions, especially as regards future oil exports from Iraq. The first phase of this Baltic Pipeline System (BPS), including a new 40-inch, 240,000 b/d pipeline from the Kirishi refinery to Primorsk, cost Transneft some $600mn ($140mn more than initially planned). The ongoing second phase, which will boost the capacity of the BPS to 840,000 b/d, envisages the construction of a longer 40-inch, 600,000 b/d line from Palkino (near Yaroslavl), and is estimated to cost $1.2-1.4bn.

If the fairly heavy ice conditions at Primorsk undermine the economics of using this capacious export outlet, Transneft also has a standby plan to build a 160,000 b/d pipeline from Primorsk to the more easily accessible Finnish port of Porvoo. With the recent takeover of Lithuania’s Mazeikiu Nafta by Russia’s Yukos, the Lithuanian port of Butinge, which was built in mid-1999 – not least in order to feed the crude-starved Mazeikiu refinery – has also become available for Russian oil exports. Moreover, the Lithuanian government has recently proposed expanding the port’s nameplate capacity from the current 160,000 b/d to around 250,000 b/d, and Yukos has responded with a plan to finance its expansion to 280,000 b/d.

Finally, Russia’s oil export capacities in the Baltic will be boosted by developing Lukoil’s new terminal at Vysotsk. The first 50,000 b/d phase of the projected 220,000 b/d export terminal, which is being built 18 miles north of Primorsk, was to be completed by the end of 2003, with about 140,000 b/d expected on stream by 2005. Although the $300mn project is mostly designed to handle petroleum products, some 50,000 b/d of its template capacity is reserved for crude oil, with the initial 20,000 b/d of its crude export facilities must be in place by the start of 2004. Crude and products produced by Lukoil will be delivered to the terminal by rail and river.

Black Sea Developments

At the Black Sea, Transneft is pushing ahead with plans to increase trans-shipment capacities at Novorossiysk – Russia’s largest oil port capable to handle over 900,000 b/d. Although no time schedule was disclosed, the projected boost to 1.2mn b/d is likely to materialize by around 2005. Capital requirements of this project, involving expansion of feeding pipelines, are estimated between $400mn and $1.2bn.

Unlike Novorossiysk, a nearby oil terminal at South Ozereyevka suffers from a lack of Russian crude supplies. The offshore loading facility was built some 15 miles northwest of Novorossiysk in mid-2001 by Caspian Pipeline Consortium (CPC) to facilitate sea-borne exports through its world-known pipeline coming from Kazakhstan’s Tengiz oil field. The 40-inch, 940-mile line, which has already consumed over $2.6bn of initial investment, was originally projected to ship up to 1.4mn b/d, with about 350,000 b/d reserved for Russian crude that would be available through a planned inter-connection with Transneft’s pipeline feeding Novorossiysk.

The expected injection of Russian crude was essential for making the $4bn project feasible even at today’s shipping tariff of $26.30/ton (or about $3.50/B). The connection line could be quite short (30-60 miles) and quickly built (within a month) for no more than $50m. However, potential suppliers of Russian crude found the interlink option too expensive to use (with over $1/B of additional tariff) and, in September 2002, CPC had to scale down the originally planned capacity to 1.13mn b/d. Still, the option is open for the future. Meanwhile, the CPC capacities are to be increased from the current 480,000 b/d to 1.06mn b/d in 2006 and 1.42mn b/d by 2014. This will require additional investment of $1-1.3bn, including $250-300mn due to be provided by Russia. And the Russian government, which has a 24% stake in CPC, is insisting on raising the line’s tariff to $38/ton (or $5/B) to make the ill-fated pipeline profitable (though hardly competitive).

Meanwhile, boosted by new deliveries from Karachaganak condensate field in north-western Kazakhstan, CPC planned to ship 445,000 b/d in 2003, rising to 590,000 b/d this year.

Until recently, the port of Tuapse, located southeast of Novorossiysk, was reserved for exporting Siberian Light crude. Partly for this reason, in 2002 its capacity of 180,000 b/d was used at only 55%. Last year, Transneft planned to cease separate exports of this prime blend, which would have substantially boosted the port’s utilization and uncork Russia’s oil pipelines for additional exports of at least 120,000 b/d of the traditional Urals blend.

To make the Black Sea picture complete, Moscow’s recent interest in joining the projected Baku–Tbilisi–Ceyhan (BTC) should be brought in. In late July, the Kremlin administration has asked the energy ministry to advise on a plan prepared by Rosneftegazstroy, which proposed to build a connection line between the port of Novorossiysk with BTC’s section in Georgia. Despite the strong resentment towards the rival BTC in some Moscow circles, the plan is worth consideration, given the growing concern about the already restricted traffic through Turkey’s Bosporus waterway.

Murmansk Plans

In the Far North, all the proposed oil-export projects gravitate towards a passage to the Atlantic, kept ice-free thanks to the warming effect of the Gulf Stream. In particular, Russian gas giant Gazprom envisages a 300,000 b/d oil terminal at Pechenga, northwest of Murmansk, to serve the Prirazlomnoye oil field in the Barents Sea. Another scheme, Northern Gateway, with a proposed capacity of up to 500,000 b/d, is designed to facilitate oil exports from the Kharyaga, Northern Territories and other upstream projects in the Nenets Autonomous District. Separately, Lukoil’s oil terminal at Varandey (the first private oil-export facility in Russia), also aimed at reloading crude from the major’s most northern fields onto larger, ocean-class tankers at Murmansk, is to be expanded from its current 30,000 b/d to 48,000 b/d next year and 200,000-300,000 b/d in 2005.

However, these plans have lately been overshadowed by the ambitious Murmansk project, proposed in November 2002 by Lukoil, Yukos, TNK and Sibneft. The project, which was joined by Surgutneftegaz (SNG) and may be also backed by foreign firms including ConocoPhillips, Marathon Oil and Total, envisages constructing a major pipeline which would transport West Siberian oil to Murmansk, where it would be loaded onto VLCCs at a new oil port. The pipeline would follow one of two proposed routes (either 1,600 or 2,200 miles), and would run from the Tyumen oil fields to the ice-free port.

Originally, the projected capacity of this system was slated to reach 1.2–1.6mn b/d by 2008 (with estimated capital costs varying between $5.1–5.7bn), with a possible expansion of up to 2.4mn b/d later. However, in late June, the Russian oil majors involved in the project signed a memorandum of understanding (MoU) with Transneft and the Ministry of Energy, boosting the 48-inch line’s ultimate capacity to a projected 3.0mn b/d. With only 200,000 b/d reserved for third parties, the line’s remaining maximum throughput was allocated in the MoU as follows: 1.0mn b/d to be filled by Yukos, 660,000 b/d by Lukoil, 500,000 b/d by TNK, 400,000 b/d by Sibneft, and 240,000 b/d by SNG. Provided that the conclusions of a feasibility study are positive, the line will be built and operated by Transneft. Assuming that the study, which has been delegated to the energy ministry, is completed by the end of 2004, the new pipeline, which would be Russia’s biggest, is expected to be operational in 2007.

Although the project is widely advertised (for known political and commercial reasons) to facilitate oil shipments to the US, due to evident marketing logics it is likely to serve the closer European market (see Table 2).

Angarsk And Southern Alternatives

Future oil exports from Eastern Siberia are planned in two different (and in fact conflicting) ways. Both the options are based on a pipeline starting from Angarsk (near the city of Irkutsk) but would end up either in north-east China (Yukos’ proposal) or near the Russian Pacific port of Nakhodka, at Perevoznaya Bay (Transneft’s suggestion). The Yukos-backed scheme takes the risky approach of locking in oil from eastern Russia inside the Chinese market, but could be amply supplied by the region’s projected oil production (which is estimated to hit some 600,000 b/d by 2010). Transneft’s plan, which the Japanese are actively lobbying in support of (offering Moscow some $5bn in low-interest loans), enjoys the geopolitical advantage of diversifying exports, but also has a serious weak point – the lack of available supplies in the region to support a larger oil pipeline, with a minimum required capacity of 1.0mn b/d. Another consideration is money: Yukos’ 1,420-mile, 40-inch pipeline would cost the Russian major $2.2bn (with China’s CNPC paying another $700mn), while the required investment in Transneft’s 2,410-mile, 48-inch alternative (wholly funded by the Russians) is officially estimated at $5.8bn.

Separately (and alternatively), Transneft talks with Kazakh pipeline operator KazTransOil (KTO) on shipping West Siberian crude through a recently proposed pipeline to China. The 640-mile line, with projected capacity between 600,000 b/d and 1m b/d, would go eastward from Atasu (located halfway between Pavlodar and Shymkent on the Omsk-Chardzhou pipeline) to Druzhba (Alashan’kou) on the Kazakh border with China’s Xinjiang province, targeting the Karamay refinery at the western end of the Chinese pipeline system. The proposed connection is a part of the ongoing project aiming at bringing crude oil from western and central Kazakhstan (including the northern Caspian) to the country’s under-utilized eastern refineries (at Pavlodar and Shymkent) and further on to western China. The already started construction of the 1,740-mile Atyrau-Kenkiyak-Kumkol-Atasu-Druzhba pipeline is estimated to cost $2.7bn, while its Atasu-Druzhba section, which can be built within two years, is expected to require around $850mn.

Export-Driven Output

While some of the above projects are still on the drawing board, others (like the Adria pipeline reversal and the Primorsk expansion) are set to bear fruit within a year. All in all, the ongoing and envisaged projects will boost the existing export capacity of major outlets (wholly or partly available for Russian crude) from some 4.0mn b/d in 2002 to over 6.3mn b/d by 2007 and 9.2mn b/d by 2010 (see Table 3).

Understandably, not all the incremental capacity will be used by Russia, which will refrain from using foreign facilities and share its own with Kazakhstan and other Central Asian exporters. Hence, we project that Russia will be able to increase its crude oil exports via major outlets from 2.5mn b/d in 2002 to 4.4mn b/d by 2007 and nearly 6.4mn b/d by 2010.

By adding minor export facilities (rail, river and small sea terminals), which are estimated to provide another 600,000–800,000 b/d, one can get a fairly reliable rule-of-thumb forecast of Russia’s total crude oil exports outside the FSU of 5.0-5.2mn b/d by 2007 and 7.0-7.2mn b/d by 2010. Adding inland demand for crude oil (ie, refinery intake, direct use and losses) at a projected (and fairly stable) rate of 4.0mn b/d, plus net exports inside the FSU (including transit via Ukraine) at a probable rate of 800,000-900,000 b/d, leads us to the conclusion that Russia’s crude oil output (including field condensate) is likely to reach 9.8-10.0mn b/d in 2007 and 11.8-12.1mn b/d in 2010.

This almost incredible conclusion has been implicitly supported by recent output projections from several Russian oil majors (including Yukos, Lukoil and TNK). In particular, speaking at the 2^nd International Pipeline Forum in Moscow in late May, TNK’s then President Simon Kukes (now Chairman of the Board at Yukos) outlined a comprehensive overview of Russian companies’ production plans, targeting a total of about 10.1mn b/d in 2007 and nearly 11.6mn b/d in 2012, even without taking into account Russia’s offshore production, which is estimated to contribute 600,000-800,000 b/d in the medium term.

Admittedly, the above projections look reliable only if world oil prices are fairly stable in real terms, with the OPEC Reference Basket price staying above $20/B. If the oil price nosedives to $15–18/B, we believe that the less attractive upstream and midstream economics will probably lower both Russia’s oil output and its non-FSU exports by around 0.5mn b/d in 2007 and by some 1.0mn b/d in 2010. Still, Kukes gave assurances that all the reviewed plans were based on a price of $16-18/B for Brent and at least 15% internal rate of return (IRR) for related oil projects.

At any rate, until the country’s oil resources are really depleted², it seems certain that Russia’s oil production growth will be determined by the available export capacity. Russian oil companies will export (and, hence, produce) as much crude as they can profitably sell. In turn, Moscow’s political elite — whether lobbied, corrupted or objectively interested in promoting the nation’s oil business – will do whatever is needed to keep the big oil show on the road… provided, of course, that the Kremlin and the Russian White House³ – prompted by the growing competition among the Russian ‘big boys’ – do not go as far as to victimize some of the major export projects in order to placate their political favorites4.

Global Market Impact

In the meantime, the global oil market will experience ever-growing pressure from Russia’s oil supplies, coupled with increasing exports from the Caspian. Although the level of oil supplies from Kazakhstan, Azerbaijan, Turkmenistan and Uzbekistan has been highly exaggerated by Central Asia’s totalitarian leaders, they are nevertheless typically estimated by Western experts to rise from 1.1mn b/d in 2002 to 1.7mn b/d in 2005, and further to 2.9mn b/d by 2010, before leveling off at some 3.0mn b/d by 2015⁵. Our most likely scenario is based on more conservative projections of Caspian (Central Asia and Trans-Caucasus) non-FSU net oil exports of 1.4mn b/d in 2005, 2.4mn b/d in 2010, and 2.3mn b/d in 2015. These fairly moderate numbers are intended to reflect the inevitably growing resistance of OPEC-10 producers, the rising exports of Iraqi oil and the ever-increasing competition from Russia’s booming oil supplies.

Besides, when assessing potential FSU supplies (and especially Russia’s oil exports to non-FSU destinations), we should disengage ourselves from the country’s crude oil balance and instead – in order to make it compatible with the global oil balance – take into account all the liquid hydrocarbons exported from Russia outside the FSU. These oil exports include not only crude oil, but also refined oil products, as well as stable condensate and other saleable NGLs. Taking into account these non-crude supplies, Russia’s net exports of liquid hydrocarbons to non-FSU destinations exceeded 4.5mn b/d in 2002, reached almost 5.2mn b/d last year and are projected by the Moscow-based PetroMarket consultancy to rise to around 6.0mn b/d in 2004.⁶

Bearing these considerations in mind, we predict that aggregate FSU net oil exports will most likely rise from 5.6mn b/d in 2002 to 7.6mn b/d in 2005 and 9.4mn b/d in 2010, before settling at 9.3mn b/d by 2015. In other words, incremental oil supplies from the FSU are projected to amount to 2.0mn b/d in 2005, 3.8mn b/d in 2010 and 3.7mn b/d in 2015. Using the above projections as alternative scenario assumptions for our multi-regression simulation model of the world oil market gives us a fairly clear estimate of the global impact of those incremental oil supplies. According to the model’s simulations, the impact of the new FSU oil supplies will start to be felt after 2005, with every incremental 1.0mn b/d of ex-Soviet exports shaving nearly $1.50/B off the OPEC Reference Basket price in real terms (in 2000 dollars). Alternatively, running the model in a fixed-price mode leads us to another uncomfortable finding: in order to maintain its Basket price at around the targeted $25/B (in real terms), OPEC would have to curtail its crude oil output from 25.1mn b/d in 2002 to 21.4mn b/d by 2010 and 20mn b/d by 2015. This is hardly an acceptable solution and a rather improbable outlook. It does mean, though, that either the sought-after $25/B target price is unsustainable (at least, in real terms) or our assumptions and projections are completely wrong.

Mismatched Dialog

Although, for obvious reasons, some OPEC officials tend to equate the Organization’s targeted price range of $22-28/B with Russia’s official price preference of $20-25/B for Urals⁷, it is no secret that most of Russian oil majors feel sufficiently comfortable with prices in the range of $15-18/B, and have repeatedly claimed that they can withstand a possible drop of world oil prices to as low as $10/B.

Admittedly, the interests of Russian state-budget watchers and major producers of Russian crude often differ (if not to say contradict each other). After all, who produces and exports Russian oil, and who fills the budget with the sorely-needed tax receipts? The question is, of course, rhetorical, since the answer is self-evident. Can one therefore assume that the Russian government controls the country’s oil production and/or exports? Unfortunately, this is hardly the case.

As a result of the hasty and all-out oil privatization of 1996-97, Moscow has lost the complete control that it formerly exercised over the oil sector, which is now virtually privatized. The only remaining state-controlled oil company, Rosneft, is producing a mere 420,000 b/d, or less than a paltry 5% of the country’s current (December) output of over 8.8mn b/d.

To make things worse, owing to vigorous resistance by the privatized oil majors, the federal government has failed to create a national oil company, which could de facto fulfill the oil-related international obligations of the Russian state. Not surprisingly, despite the officially-declared export cuts that were pledged by Moscow in late 2001, some Russian oil majors (like Yukos and Sibneft) in fact announced substantial (20-30%) increases in their oil production for 2002 and stuck firmly to their plans.

Nevertheless, when cooperation is needed, OPEC officials continue to negotiate market stabilization measures with the Russian government, and have to rely upon its pledges, despite the obvious fact that Moscow cannot afford any loss in petrodollar revenues, nor does it have enough power to compel the country’s privatized oil industry to adhere to those official obligations. It is understandable that OPEC and the Russian energy ministry have not succeeded in finding a common language on the desirability of cuts in oil supplies. Sometimes it almost seems easier to persuade the US Department of Energy to raise that country’s oil consumption instead!

A National Oil Company?

Fortunately, Moscow still has quite an efficient leverage, which it uses every time the oil majors are urged to pay more taxes or to meet some other non-commercial goals (like over-supplying domestic refineries, fuelling sowing and harvest campaigns, providing the military and insolvent users in remote regions). The government has wisely kept control over inland and export crude oil flows through the oil pipeline monopoly Transneft — one of the few remaining strategic utilities that can be used to regulate the mostly privatized economy. It is no surprise that Moscow has firmly rejected any plans to further privatize Transneft, keeping 75% of its shares in state hands. Moreover, the government continues to resist conceding even a part of its all-embracing control over oil pipelines (especially export routes) to private oil companies, which are eager to build their own independent export infrastructure, as described above. This forces the Russian oil majors to bow to Transneft every time they need to increase their exports, and imparts to Transneft the much-needed but missing function of a powerful partner in the ongoing OPEC-Russia dialogue.

Seen in this light, upgrading Transneft’s status to that of a national oil company (which the country is presently lacking) would not only reinforce state control over the Russian oil sector, but would also provide a solid basis for further intergovernmental negotiations on stabilizing the world oil market.

1. A reference to the first line of the national anthem of the Soviet Union.
    

2. A recent official estimate of remaining oil reserves in Russia (published by the RF Accounts Chamber) puts the country’s explored (A+B+C₁) reserves of crude and condensate at 25.2bn tons (or about 185bn bbl), while unofficial estimates of current proved reserves vary from 60bn to 150bn bbl. Our own company-by-company review of estimated proved (and quasi-proved) reserves (mostly supported by Western audits) puts Russia’s remaining recoverable oil reserves at around 110bn bbl.
    

3. The residence of the Russian Government.
    

4. We are certainly confident that the recent crackdown on Yukos’ management, which – admittedly – perfectly fits in the current pre-election campaign, was in fact triggered off and blessed by the company’s competitors, whose business interests were jeopardized by the announced Yukos-Sibneft mega-merger and Khodorkovsky’s aggressive offensive on their former privileged positions. “Nothing political, it’s strictly business!” confirmed a Russian major oil company’s manager. “Khodorkovsky should know his proper place – on the market or… behind the bars!”
    

5. Woollen, I: ‘Challenges for Caspian Oil and Gas Exports’, published in ‘Proceedings of EF International Conference on CIS Oil & Gas Transport and Supply’, 23-24 April 2003, Moscow, Russia.
    

6. Russia’s Oil Balances, 10 November 2003, No 1, P21.
    

7. As a matter of fact, for the last five years (1998-2002) a yearly differential between the higher OPEC Basket price and the Urals average price (cif NWE/Med), used as a reference by the Russian government, averaged less than 40 ¢/b.

Table 1

Russia’s Oil Balance, 2000-04

(Mn B/D)

a.         Forecast.

b.         Including unaccounted-for items and statistical errors.

c.          Excluding re-exports and transit to FSU destinations.

Source: Russia’s Oil Balances, 10 November 2003, No 1, P19.

Table 2

Comparative Ex-Field Shipping Costs: Murmansk vs Other Outlets