Untapped Potential: The Future of Russia's Oil Industry. (Perspectives)

Article excerpt

For a number of years, US energy policy has encouraged the search for oil outside the country, but away from the Persian Gulf. This approach recognizes first that access to those areas of the United States considered geologically attractive, but out-of-bounds for environmental reasons, will continue to be denied. Second it accepts that the politically unstable Persian Gulf where the bulk of the worlds' oil reserves are located, cannot assure a secure oil supply. Because security of supply is valued above all other considerations in today's market, national and international policies must be adjusted to provide that security through diverse sources. As a result of this policy, the United States presently imports oil from some 60 counties, a policy that would appear to offer the desired protection. But because the United States is not isolated from the volatilities of the world oil market, even this diversity of importers is insufficient to guarantee the desired security.

It has been argued, for example, that the United States should reduce its dependence on Saudi Arabian oil as a way of reducing its import vulnerability. After all, Russia is now the second leading oil producer and exporter, has proven itself to be a reliable supplier to the world market for a number of years, and has indicated that it is prepared to respond to US needs. That approach simply ignores the reality of how the oil market functions. However, the argument is appealing because Saudi oil imports could be halted by government edict, if it were concluded that such actions would serve US interests. What then? Saudi oil would find other markets and the United States would have to turn to other, possibly less reliable, suppliers.

Given the status of oil as an international commodity, and given that no state is immune to the workings of the world oil market, what can be done to maximize the reliability of the market? There seems to be only one answer, and that is to continue the search for and development of oil supplies outside the Persian Gulf. Today, emphasis is placed on Africa, particularly West Africa, and deepwater resources in the Gulf of Mexico and offshore Brazil.

In recent years, media coverage has focused on the oil and gas production and export potential of the Caspian Sea and Central Asia, which some initially believed would become a substitute for the Persian Gulf. After further research, however, most analysts now place it on par with that of the North Sea. This reassessment nonetheless does not detract from the importance of the Caspian Sea and Central Asia as important marginal suppliers. Developing these regions will give importers another choice among suppliers, which then translates into greater security of supply.

This latter consideration motivated the very vocal US support for the development of Caspian oil and gas production and the construction of export pipelines, intentionally bypassing both Russia and Iran.

Looking to Russia

As late as 1938, Russia was the world's leading oil producer, at 11.4 million barrels per day (bpd). Then, in mid-1980, production began to collapse, a result brought about not by developments in the marketplace or war but by oil field mismanagement and a lack of fresh investment capital. The decline continued through the mid-1990s, when output hit a low of barely six million bpd.

The question then arose, how much further might production drop? The answer came in a somewhat unexpected way. First, the sharp ruble devaluation in the late 1990s reduced costs and stimulated production. Domestic demand was holding relatively constant, meaning most of the production increments became available for export. Then the Organization of Petroleum Exporting Countries (OPEC) began to raise oil prices by reducing supply. Prices did respond, providing an additional incentive to the now privatized Russian oil companies.

Russian oil producers quickly responded to these incentives and output is expected to average 7. …