#6
Washington Post
November 18, 2001
Russian Oil Firms Block Production Cut
OPEC Threatens Price War As Moscow Seeks to Widen Its Share of World Market
By Daniel Williams
MOSCOW, Nov. 17 -- When the Organization of Petroleum Exporting Countries appealed to nonmember Russia last week for help in boosting oil prices by cutting production, Prime Minister Mikhail Kasyanov canvassed Russia's leading exporters for their opinion.
Of the six top companies, five responded with a resounding no. They did not want to cut production, even though prices are falling because of a slowdown in world consumption.
Their resistance was a major factor in Russia's decision to reject OPEC's demands. On a visit to Madrid Friday, Kasyanov said no one should expect an "abrupt move" from Russia. As a result, OPEC's plans to curb production are on hold. The oil cartel has threatened to launch a price war to bring nonmember producers such as Russia to their knees.
Russia's position shows the complexities in the oil business that make OPEC a weak actor for the moment. The Russians want to increase the amount of oil they sell abroad. Where OPEC sees disastrous price declines, key Russian producers see an opportunity to increase their share of the world market. They want to pump more and more for export, without regard to the consequences for the cartel.
"Russia is spoiling the party," said Peter Boone, an analyst at the brokerage firm Brunswick UBS Warburg. "The Russians seemed more interested in keeping good relations with their customers in Europe and China than with OPEC."
It is unusual for Russia -- which controls only about 7 percent of the world market, compared with about 30 percent for OPEC -- to be so influential. But Russia's resistance was unexpectedly fierce, oil analysts here said. If this country, with traditional ties to Arab and developing countries, wouldn't go along, chances for non-OPEC holdouts such as Norway, Britain and Mexico seemed even more remote.
OPEC wants to drive prices up to between $25 and $28 a barrel. By Friday, prices had fallen to about $17. With the United States, Europe and Japan all suffering an economic slowdown, demand is unlikely to pick up anytime soon.
Russia has long depended on oil exports. In the late Soviet years, oil exports and the substantial hard currency earnings they brought in provided a valuable cushion against the country's other economic woes. Today, oil and gas accounts for more than 60 percent of Russia's export income.
The Soviet Union had about 10 percent of the world oil market, but Russia's share declined after the Soviet collapse. In the past four years, Russian producers have moved aggressively to rebuild their country's share, which grew from 6 percent to 7 percent while OPEC's remained steady.
The companies that resisted production cuts gave Kasyanov several reasons. They argued that petroleum is the economy's locomotive and reductions would hurt not only oil companies but also industries that supply drilling equipment. They also asserted that shutting down wells would cause the wells to freeze; it is more expensive to open and close wells in cold climates such as Siberia than in temperate regions elsewhere in the world.
At least one company, Yukos, argued the case in geopolitical terms. After Sept. 11, Yukos officials believe, the West will want to switch oil purchases to countries outside the volatile Middle East. In addition, Europe will try to further integrate Russia into the continental economy, and that will increase export opportunities if Russia shows itself to be reliable.
"We should make a gesture to not drive prices up at a time when the Western economies are suffering," said Hugo Ericssen, a spokesman for Yukos. "Prices will stabilize when the economies stabilize." Yukos increased production 18 percent over the past year, mostly for export, a source of lucrative foreign exchange.
The one company among Russia's top six oil exporters that sided with OPEC was Lukoil, Russia's largest exporter, which increased production marginally in the past year. Lukoil has long wooed Middle Eastern oil countries, including Iraq, to win drilling contracts.
Lukoil's vice president, Leonid Fedun, chided rivals for planning to increase production at a time of falling prices. "This makes no sense. Russia should coordinate with other producing countries," Fedun said.
The Russian government can control exports by limiting access to the pipelines that leave its territory. Nonetheless, private companies have become powerful lobbyists. Oil fell into private hands in the 1990s through virtual giveaways of the Soviet-era state-owned oil industry. Since then, nationalists and Communists have complained that the new owners wield undue and destructive influence.
For the moment, the government is siding with the five oil companies that oppose a production cut. Kasyanov said the current oil price downturn should be viewed "calmly" because it represented not a trend but a "market fluctuation."
But Russia might suffer if prices nose-dive. If oil drops below about $17 a barrel, the budget will begin to run into the red. Moreover, in the next two years, Russia is due to make foreign debt payments of $40 billion, and Moscowcould have difficulty meeting payments if oil prices hit rock-bottom levels.
That could also raise the possibility of another financial crisis. "Oil at below $15 a barrel would mean a disaster," said Sergei Vasiliev, a member of Russia's upper house of parliament.
Vasiliev also worried about Russia losing goodwill in OPEC, especially in the Middle East, where Moscow's influence declined markedly in the post-Cold War years. "We have common interests and a common economy. We don't need any hostility," he said.
Mikhail Zadornov, a member of the lower house's budget and tax committee, said that OPEC targets were too high. Under current conditions, he said, prices between $20 and $25 a barrel were all that could be expected. He said that Russia could withstand a price war because its currency reserves are high, and that it depends less on oil revenue than either Saudi Arabia or Venezuela, two big OPEC producers. "We don't want this war. Our interests are with the oil producers and the consumers," he said. "But, of course, it's hard these days to be with both."
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