Commentary: The Other Saudi Arabia?

Russia is fast reemerging as the oil power to challenge OPEC

With BP PLC investing $8.1 billion and other companies circling, Russia is clearly the hottest stall in the energy bazaar right now. The question arises: Is the world witnessing the emergence of a new energy colossus to rival Saudi Arabia? The short answer is "yes."

With its mammoth gas reserves thrown in Russia's resources are even larger than those of Saudi Arabia. After falling sharply with the collapse of the Soviet Union, oil output is now rising by 9% a year -- faster than anyone expected a few years ago. The fields' private owners have spent heavily on new equipment and technology, often pulling in Western contractors such as Houston-based Halliburton. At 8 million bbl. per day, Russia's crude production now approaches that of Saudi Arabia's, which has been hovering around 8.8 million.

The reemergence of Russia as an oil power is a boon for consuming nations. A few years ago, it looked as if Saudi-dominated OPEC would tighten its grip on the markets in the early decades of the 21st century. Now Russia, which is boosting annual output by about 600,000 bbl. per day, and other non-OPEC producers in Africa and the former Soviet Union are crowding out OPEC crude. Non-OPEC countries are likely to absorb nearly all the 1.1 million bbl. in world demand growth this year.

Russia may succeed in exploiting concerns that Middle East supplies are insecure, to persuade Asian and European customers to shift to Russian fuels transported by massive new pipelines. "Importers would gladly opt for Russian supply over long-haul Middle Eastern crude," says Edward L. Morse, executive adviser at New York oil-trading firm HETCO.

Yet Russia's exports are now less than half those of the Saudis (table), and the country is still mainly a supplier to Europe. Russia has been slow to build up its export capacity, causing gluts in the domestic market and wasting a big revenue opportunity. With international oil prices in the $30-per-barrel range and Russian domestic prices just $5 to $9 per barrel, companies are using every barge and railcar they can lay their hands on to ship oil out, says Robert Dudley, CEO of TNK-BP. To penetrate new markets, Russia urgently needs to build up its export infrastructure. There are competing proposals for pipelines running to Japan and to China. Companies are also sizing up projects to supply the U.S. market. PFC Energy, a Washington consultancy, warns that unless Russia finds new outlets for its oil, it'll face a 2 million bbl.-per-day domestic glut by 2010.

The Saudis are wary of their new rivals and are trying to co-opt them: Crown Prince Abdullah visited Moscow in September to discuss gigantic investments in the gas sectors of both Saudi Arabia and Russia. To get the Russians to play along, the Saudis could offer to help curtail funding of Islamic militants in Chechnya by Saudi citizens.

But this entente may not last longer than the next oil crunch. OPEC has announced output cuts of 900,000 bbl. per day and may lean on major non-OPEC producers such as Norway, Mexico, and Russia to make reductions of their own in the next few months. Russia agreed to trim output by 150,000 bbl. per day in December, 2001, but winked as its oil companies evaded the restrictions. Intent on developing the oil sector, the government of Vladimir V. Putin will be loath to slash exports and damage the Russian oil companies that are now the country's corporate champions. "Russia is on a collision course with OPEC," says Adam Landes, oil analyst at Russian investment bank Renaissance Capital in London.

The Saudis are building cash reserves in case they find it necessary to open up the spigots and drive prices down, to teach not only Russia, but possibly also Iraq, a lesson. A price war would hurt the Saudis, but it would also be a big shock for the Russian economy, which is humming thanks to high oil prices.

Of course, this clash of the titans may never happen. As demand for oil accelerates in tandem with global growth, at the same time that production in North America and the North Sea tapers off, there could be ample room for peaceful coexistence between the Saudis and the Russians. Russia is clearly on the move, and that is good news for everyone -- except OPEC.

By Stanley Reed

With Jason Bush in Moscow

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