I love how Russian newspapers get named. This one bears the clever title "Weekly Magazine."
Chris Doss The Russia Journal ---------------------------- Yezhenedelny Zhurnal May 14, 2002 SECOND FRONT Soon Russia will have to make a final decision on its friends and opponents Author: Maxim Blant [from WPS Monitoring Agency, www.wps.ru/e_index.html] IT SEEMS COMPLETE SUPPORT FOR US ACTIONS SINCE SEPTEMBER 11 WILL FINALLY START TO YIELD A PRACTICAL BENEFIT FOR RUSSIA. IN CASE OF SERIOUS CONFLICT IN THE MIDDLE EAST, RUSSIA'S OIL SUPPLIES TO THE US MAY BECOME A POWERFUL WEAPON FOR WASHINGTON. NOW THE PROBLEM IS TO WORK OUT HOW TO TRANSPORT THIS WEAPON.
A major topic on the agenda for next week's Russia-US presidential summit is how to transform Russia into the main oil supplier to the world market.
It seems complete and unconditional support of US actions since September 11 will finally start to yield a practical benefit for Russia. The West is rather well-disposed of Russia's claims on a special role on the world energy market. In early May, energy ministers of the Great Eight countries held a summit in Detroit, where Russian Energy Minster Igor Yusufov made several suggestions, realization of which could turn Russia into an oil source for industrially developed countries, alternative to the Persian Gulf countries. Beside meeting with his colleagues, Igor Yusufov also met with US Vice President Dick Chainy, the author of the US's energy strategy, which is the largest energy consumer in the world. As a result, the whole world heard Russia's loud declarations that it is ready to supply oil to the US, which in turn, considers a possibility of purchasing Russian raw materials for state reserve.
The political moment is extremely favorable for realization of Moscow's plans. The recent visit of Ariel Sahron to the United Stated also contributed to creation of the necessary "mood". Israeli prime minister brought a large file, collected y national special services, the aim of which was to convince the US that Israel is unable to hold peace negotiations with Arafat, as he personally supports terrorists. Besides, the file also contained documents which stated that Saudi Arabia renders "direct and systematical" financial aid to the families of Palestinian terrorists. However, even without the dossier, after the September 11 events, the US much more often expressed its discontent with its ally in the Persian Gulf and the main oil supplier. For instance, an article published in the Wall Street Journal earlier this year, says that Saudi Arabia "states that it is our best friend, although it has always supported our opponents. But we can survive without their oil." According to the paper, oil supplies from Russia can allow the United States to become less dependent on Arabian oil.
At first glance, Russia cannot dream of a greater situation. According to the US Oil Institute, average daily oil supply in the US totals about 15 million barrels. Two thirds of them are imported. US state reserve of raw oil is maintained at 300 million barrels level. The stock of petrol, diesel, and fuel oil are approximately the same. These reserves are constantly refilled.
Although Russia is ready to sell more oil, neither the US nor Europe will be able to entirely reject oil supplies from the Middle East. The matter is that almost two thirds of the world discovered oil deposits, 63%, are situated in the Persian Gulf area.
At present, 1.7 million barrels of approximately 10 million barrels a day which the US imports, originate from Saudi Arabia. However, if these oil supplies were regulated by market laws only, they would be half as little. According to influential US "Foreign Affairs" magazine, state Suadi Aramco company received a $1 less from each barrel exported to the US than while supplying oil in Europe. In other words, US consumers economize on the Saudi Arabia oil approximately $620 million a year. Saudi Arabia pays this price not only for its share on the US's market. According to the authors of the "Foreign Affairs" article, "in exchange the US maintain in the Persian Gulf area a powerful military grouping, which not only protects territorial integrity and oil deposits of Saudi Arabia and other allies in the region, but also aids the Sauditi Dynasty to stay at power." According to the US's new energy strategy, written by Chainy, measures for decreasing the US's dependence of Arabian oil should be taken, in particular, due to purchasing oil in the countries, which are not OPEC members.
According to the results of 2001, Russia took the first place in the world by oil extraction volumes, having overrun Saudi Arabia. However, even extracting only 7.5 million barrels a day, Riyadh also possesses frozen capacities, which, if necessary, will allow it to sharply increase oil extraction by 3 million barrels a day. Foreign Affairs compares these capacities with the power of nuclear weapons. Moreover, from time to time Saudi Arabia uses this weapon. Last time it happened in the second half of 1990s, when Venezuela started its ambitious policy, intending to triple oil extractions.
Despite readiness to crowd Saudi Arabia on the US's oil market, Russia is still concerned about a price war with OPEC countries. At the end of last year, responding to OPEC's requirement to decrease oil extraction, Russian Prime Minister Mikhail Kasyanov gave vent to rather sharp statements that no one has the right to dictate to Russia how much oil it should extract and to whom it should sell the oil. However, as soon as the threat of a trade war became obvious, Moscow immediately agreed to "voluntarily" decrease oil exports by required 150 million barrels a day. These restrictions were prolonged until the second quarter of this year, even although abundance of oil stock caused a considerable price fall on the domestic market.
If the Russian oil starts displacing Saudi Arabian oil on the US' market, this may cause responsive actions from Riyadh. It is unknown, who will win the opposition. On the one hand, Russia's advantage is that its oil industry is privatized and is open to foreign investment. Moreover, such companies as BP, Exxon Mobile, Total Fina Elf, and Shell have already actively worked in Russia: they not only participate in production sharing agreements, but also buy large stakes in Russian oil companies. In particular, during the May summit Vladimir Putin and George Bush will discuss a possibility of intensifying US investment in the Russian energy sector. The more investors come to the Russian energy sector, the more chances Russia has of breaking through to the markets of developed countries. Why would BP or Shell buy oil for their oil refinement plants in the Middle East, if they can use the oil extracted in Russia? Beside western investments, a reverse process is also active - Russian oil companies started buying up oil refinement enterprises and gas station networks in the west. In time, this will become another advantage in the fight for markets.
Meanwhile, at present oil extraction and experts in Suadi Arabia are entirely controlled by state monopolist Saudi Aramco. Despite statements of Saudi Oil Industry Minister Ali Al Naimi on plans for privatization of a number of the company's divisions, according to analysts, the divisions in question are most likely to be auxiliary enterprises and non-specialized assets. At least, at present there is no information that foreign companies are to be allowed to extract oil in Saudi Arabia.
Currently, the plans for selling Russian oil to the US have no economic grounds. The problem is that the lower profitability boundary for Russian oil is $25 a barrel, as transport expenses are too great.
In fact, the most likely solution is supplying Sakhalin oil to the US, as Shell and Exxon Mobil companies participate in development there. Overall, the companies are prepared to invest about $24 billion; however, even when Sakhalin oil-wells start working in accordance with the project capacity, which is scheduled for 2003-04, this will increase Russian oil exports by 200,000 barrels a day only - so it is too early to speak of competing with Saudi Arabia as yet.
Nonetheless, a trade war between Russia and OPEC is quite possible. It is to be a war for European and Asian markets. Over the past two years, oil extractions in Russia have grown by record tempo. As a result, by the beginning of 2002, the country extracted a million barrels of oil a day more than in the end of 1999. At the same time, OPEC reduce extractions by 3.5 million barrels a day in order to maintain higher prices. Earlier this year, the trend was continued: OPEC reduced its quotes by 1.5 billion barrels a day more, while in Russia oil extraction is still growing, as restrictions concern only exports. This has already caused a serious overproduction crisis, as Russian oil companies do not possess necessary capacities for storing oil.
YUKOS chief Mikhail Khodorkovsky, who has long supported rejecting cooperation with OPEC, believes the price war is inevitable.
In his opinion, "over the past two years, OPEC's share in Europe has decreased by 3%. I cannot say precisely for how long it will be putting up with reduction of its market. But as soon as OPEC says 'enough', which may happen at the end of this year or at the beginning of 2003, oil prices will sharply fall down."
If situations develops in accordance with this scenario, Arabian countries will have a serious advantage: it is simpler and cheaper to extract their oil. For instance, net price of a barrel of oil in Saudi Arabia and United Arab Emirates does not exceed $2 a barrel, while in Russia it is over $7 a barrel. If take into account investment expenses which are necessary for development of new wells to displace the exhausted wells, the gap increases ever more.
However, have it started, the outcome of a trade war is difficult to predict. If Russia is concerned about price fall, western countries are afraid of their sharp growth if a military operation in Iraq starts. In order to avoid sharp fluctuations on the raw oil market, Russian Energy Minster Igor Yusufov suggested to his colleagues of the Great Eight countries to establish a kind of a "Committee of Four" to balance OPEC on the world market. The Committee would involve large oil extracting countries: Russia, the USA, Canada, and England. Besides, in order to decrease price risks on the oil market, it is possible to create state reserves like the US has in other countries of the G8 as well. This idea was reflected in the final document the ministers passed in Detroit. If this idea is realized, Russian oil companies will have a chance to supply oil not only to the European market, but also conclude long-term state contracts. Realizing that Russian oil supplies to the US are most unlikely to be sharply increased in the near future, Russia suggests placing of some oil strategic reserves of Europe and the US on the territory of Russia. Simultaneously, Moscow stresses that realization of these plans requires increase of western investments to the Russian energy sector.
Projects discussed in Detroit do not mean that Russia is ready to launch a war to OPEC. Parallel to western countries, Russia negotiates with the punitive part - shortly before leaving for Detroit summit, Energy Minister Yusufov met in Moscow with General Secretary of the organization Ali Rodriguez. Besides, Russia actively works in Iraq. During negotiations in Detroit, the Middle east Economic Survey reported that Russia and Iraq concluded a $40 billion transaction for realization of 67 projects. Thus, so far, Russia manages to "work at two fronts simultaneously". However, the time when it will have to finally determine its friends and opponents may come very soon. (Translated by Arina Yevtikhova)