Lets Exploit Russian oil!
Posted in the Minneapolis Forum
#1 Jan 29, 2013
Global Insights: Oil Sector a Challenge for Russia, Opportunity for U.S.
Though Russian oil production continues to rise and is currently approaching Soviet-era levels, forecasts predict it will soon peak and then decline, causing potential problems both for global oil importers and the Russian government’s budget.
Averting this decline will require applying more-advanced production techniques to existing fields and exploiting new ones in the Arctic Ocean and elsewhere. Russia’s oil companies will be unable to accomplish this transformation on their own, however. To do so, they will need to secure greater foreign investment and partnerships offering more-advanced technologies and the exposure to better management skills. The benefits of increased foreign investment in the Russian oil sector would be felt by Russians, in terms of their everyday socio-economic conditions, as well as in U.S.-Russian relations, which would be widened and strengthened. Yet, foreign companies, especially those based in the United States, will continue to hold back from supporting the Russian oil sector until the Russian government creates a more benign environment for foreign investment.
Last year, Russian oil production increased by an average of 100,000 barrels per day (bpd), to 10.4 million bpd, the highest total since the collapse of the Soviet Union. As Russia exports about half its production, the increase has helped keep oil prices down, with follow-on benefits for a global economy struggling to return to strong growth.
These oil exports are also essential for the Russian economy, which derives more than half of its export income from oil, and the Russian government, which depends on oil and natural gas exports for about 40 percent of its budget revenue. In recent years, the government has used this hydrocarbon money to support investment, defense modernization, welfare and pension benefits, and other government programs.
The problem for Moscow is that almost all of Russia’s current oil production comes from the giant West Siberian fields developed during the Soviet period. Production there has been declining during the past few years. While Russia has brought a few other smaller fields online in recent years, their production potential is much less and the costs of developing them are much higher.
Russian oil production may continue to rise for a few more years, but without new fields entering operation, or the application of more-sophisticated production techniques to the existing fields, Russian oil production is expected to decline starting around 2015, with steady decreases after that. Production could fall to as low as 8 million bpd by 2020.
The drop-off in exports could be even greater, as Russian domestic oil consumption continues to rise, almost equaling recent production increases. Last year, for instance, though production increased by 100,000 bpd, domestic consumption rose by 80,000 bpd. With Russians making little progress in conserving energy or using it more efficiently, the trend toward increased domestic consumption is likely to continue.
#2 Jan 29, 2013
Russia can most logically expand its production through two means: exploiting unconventional sources like oil sands or shale oil, and developing the potentially enormous oil and gas deposits located beneath Russia's continental Arctic shelf. Although development of these sources is just beginning, experts believe that Russia could produce enormous quantities of oil, and natural gas, from them.
But Russia will be unable to exploit these “tight oil” and Arctic sources without outside help. Its companies lack the technologies and management skills to produce oil in such challenging locations, which combine remoteness with brutal climate conditions. Russia's limited experience with deepwater oil drilling further hampers its ability to exploit certain sources. As Thane Gustafson, the author of a new book on the Russian oil industry, has observed,“The next generation of Russian oil will have to come from places that are colder, deeper, more remote, geologically more complex and technologically far more demanding than anything Russian companies have tackled to date.”
U.S.-based multinationals have the capital and technologies to help Russia exploit its Arctic riches. Meanwhile, the small and medium-sized American companies that revolutionized and revitalized U.S. oil production could bring the same technologies and management skills to Russia.
To attract these companies, which could conceivably invest in other regions in Russia as well, the Russian government needs to create a more attractive investment climate. This would include legal, fiscal and regulatory reforms that establish a more competitive and transparent domestic market. In particular, the reforms must give tax breaks for energy companies that invest in new fields and technologies; encourage restructuring of the Russian oil industry to make it more innovative; reduce corruption and bureaucracy; and insure that property rights are better protected.
#3 Jan 29, 2013
The United States would also benefit from a newly cooperative energy arrangement. In a recent paper, Rawi Abdelal of Harvard Business School and Tatiana Mitrova of the Moscow School of Management highlighted the fact that, despite their comprehensive bilateral relationship and the large role Russia and the United States play in global energy issues, the two countries cooperate very little in the hydrocarbon sector.
In the view of Russians interviewed by the authors, this paucity of cooperation results from perceived impediments erected by the U.S. government. Similarly, Russian officials see the shale gas revolution as a conspiracy on the part of the United States to undermine Russia’s role in energy markets.
Absent forward momentum, the Russia-U.S. energy relationship might even deteriorate. The United States could soon become a major energy exporter again, which would lead to direct energy sales competition between Russia and the United States for the first time in history. One major opportunity for enhanced partnership, as opposed to competition, is the deal reached last August between Exxon Mobil and Rosneft. The project has only recently begun the preliminary seismic surveys, technical assessments and environmental studies that would allow any substantial drilling to start.
Bringing the project to fruition, and augmenting it with near-term cooperation on tight oil and other energy projects, is important for both sides. Concrete Russia-U.S. energy collaboration could help dispel mutual misconceptions and perhaps spur U.S. and Russian economic cooperation in other areas. That in turn could help to increase the number of stakeholders in both countries that share an interest in maintaining good relations. These kinds of private-sector ties, as much as political will in Washington and Moscow, will contribute to the health of bilateral ties moving forward.
#4 Jan 29, 2013
I'm obsessed with Ruskies. I live in the Cold War era. You might call it Alzheimer's, I call it reality today (well, if today is 1970, anyway).
And I forgot that Russia isn't even a communist country any more.
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