#12
Financial Post (Canada)
November 19, 2001
Russia likely to come around to production cuts, oilman
says: Eventually likely to accept OPEC position
BY CLAUDIA CATTANEO
CALGARY - Some members of Russia's new oil elite drink a lot of vodka; some know that vodka drinkers have a bad reputation and drink no vodka at all. But for the most part, it's made up of sharp businessmen who will eventually come around to OPEC's view they need to cut oil production to lift the price, said Bob Lamond, chairman of Calgary-based CanBaikal Resources Inc., one of the few Western companies with operations in Russia.
"My bet is that they do find some reason to restrict production," Mr. Lamond said. "It's in their best interest to have oil at US$22 rather than at US$17 a barrel."
Mr. Lamond said Russia's reaction to OPEC's demands was probably related to having been asked to cut production so late in the game. Negotiating with Russians can take time, he said.
Mr. Lamond is a senior oilman who is involved in talks with Russians to either sell CanBaikal or find a Russian joint-venture partner. He said many Russian oilmen have been trained in special schools and speak perfect English, but others are professionals or scientists who speak poor English. That can make negotiations long and tedious.
Mr. Lamond also runs Diaz Resources Ltd., a public oil and gas producer, and built Orbit Oil and Gas Ltd. and Czar Resources Ltd.
The world got its first major exposure to Russia's new oil capitalist class last week, when it blew off the Organization of Petroleum Exporting Countries and its demands for a deep cut to Russian production. Mikhail Khodorskovsky, for example, the chief executive of Yukos, Russia's second-largest oil company, said: "Prices will collapse, but our Arab colleagues won't be able to keep low prices more than two years."
The faceoff sent crude prices off a cliff, as market participants bet Russia's oil companies are more likely to play Russian roulette with OPEC than cave in.
Market reaction was not surprising. Russia's oil industry is seen in the West as a tough place to do business, particularly because many Western companies that attempted to set up operations there after the collapse of the Soviet Union pulled out and took big losses.
The casualties included Canadian Fracmaster Ltd., a Calgary-based oilfield services company that became insolvent, and Black Sea Energy Ltd., a Calgary-based junior co-founded by international financier Robert Friedland that floundered after a messy legal battle with its Russian partner in a lower Siberian court.
"Suffice it to say that it's not clear what it takes to buy a judge in remote areas of Siberia," Mr. Friedland said at the time. "In Russia they are new to a market economy and they are new to the concept of a win-win transaction. What they understand is win-lose, which means that if I cause you to lose I win."
But Mr. Lamond said things are changing. "I haven't found any Mafia, any extortion, any leaking pipelines, any theft," he said. "In fact, you have to put all these negative rumours on Russia into context. If things are so bad, how the heck are they producing 6.9 million barrels a day?"
Russia is the world's second-largest oil producer after Saudi Arabia. It used to be the first. Endowed with huge reserves, Russia's production peaked at 13 million barrels a day in 1989, but volumes dropped because of lack of capital and modern technology.
CanBaikal has 100% ownership of a block in Western Siberia with two producing wells and 20 million barrels of proven and probable reserves.
Russia's oil business was privatized about six years ago. It was badly hurt by the 1998 oil price crash, but grew rapidly when crude prices soared in the last two years. That alarmed OPEC members concerned about maintaining market share.
Companies such as Yukos, which has worked closely with CanBaikal, are eager to grow further and even raise money in North America, Mr. Lamond said.
"They have sorted out a lot of the infrastructure problems, they are obviously recompleting wells very rapidly and they are drilling new ones, and they are learning quickly on the job. They have a great advantage because they have superb, under-exploited oil fields," he said.
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