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Washington Post
December 23, 2001
Russia Wins the War
By David Ignatius

As the dust begins to settle in Afghanistan, it's increasingly clear that the big winner in terms of post-Sept. 11 energy politics is Russia, which now rivals Saudi Arabia as the world's dominant energy producer.

Since oil and politics tend to flow in the same direction, the rise of Russia's oil industry will have major strategic impact. It will transform global business, too, as Russian oil companies such as Lukoil and Yukos join the likes of Exxon-Mobil and BP among the "super-majors."

The Afghanistan war will give Russia control over the oil flowing out of Central Asia, according to energy experts. That's the practical price Russian President Vladimir Putin can exact for supporting George W. Bush after Sept. 11. The output from the two big Central Asian producers, Azerbaijan and Kakazkhstan, could total roughly 3 million barrels per day by 2010.

Russian companies may also be the dominant players in Iraq, regardless of who's in power there. That would add another 6 million barrels per day of potential production under Moscow's loose control.

Then add Russia's own production, which now totals more than 7 million barrels per day, and it's obvious that Moscow is on its way to becoming the next Houston -- the global capital of energy. Russia would have a degree of control over about 16 million barrels per day, roughly double the current production of Saudi Arabia. And those totals don't include natural gas, where Russia is already the dominant producer, by far.

Russia's emerging dominance of the energy industry is a theme of a recent study by the Petroleum Finance Co., a Washington consulting firm. Their analysts note that when you combine Russia's proven oil and gas reserves, it is already the world's leading energy nation, with about 15 percent more proven reserves than Saudi Arabia.

"The U.S. need for Russian cooperation means Moscow will gain most in the new strategic environment," argues a Petroleum Finance analysis of "winners" and "losers" in the post-Sept. 11 world. Russia's political hegemony in Central Asia will be strengthened, according to the study, as will its control over regional pipelines and other export routes.

The big change will come as Russian oil companies change from sluggish state-owned giants (and their toxic successors, the privatized companies whose shares were looted by Russian "oligarchs") into dynamic modern companies.

These Russian companies today are chronically undervalued because of their robber-baron roots. Yukos, for example, has reserves roughly equal to those of TotalFinaElf. Yet its market capitalization is less than one-tenth that of the European company.

"The Russians have realized you can make more money by real capitalism than by stealing," notes J. Robinson West, chairman of Petroleum Finance. Already, Lukoil is planning to list its shares on the New York Stock Exchange -- which will force the company to meet tough U.S. accounting standards.

The Russian oil giants are beginning to invest aggressively outside their home market, in areas where the Russians have easy political access. Lukoil, for example, is investing heavily in Iraq's West Qurna field, which is expected to produce nearly 700,000 barrels per day. The company is also exploring for oil in Algeria, Sudan and Libya.

"The Russian companies are going to play a major role," agrees Walid Khadduri, the editor of Middle East Economic Survey, an authoritative newsletter on the industry. A big question, he says, is whether Russia will be open to foreign investment in its own energy reserves.

Another energy winner in the post-Sept. 11 world is Iran, according to both Petroleum Finance and Khadduri. Like the Russians, the Iranians were important -- if invisible -- allies in America's war in Afghanistan. And they're likely to be rewarded. "Washington has been forced to recognize Iran's strategic interests in the Middle East and Central Asia," explains the Petroleum Finance study, "but Russia's ascendance in Central Asia will limit Iran's political and economic gains."

Iran's biggest problem in capitalizing on its new status is its political dual personality. It has a moderate president and a young population so restless it's holding pro-American riots after soccer games. But Iran's mullahs and secret police are clinging to power, and they may hold the nation's oil industry hostage.

Saudi Arabia's immense oil reserves will make it a key player in the oil business, regardless of what happens with Russia and Iran. That's why some recent calls by American politicians to reduce dependence on Saudi oil miss the point. Americans can buy less Saudi oil if they want, but in a global marketplace that oil will simply be bought by someone else.

Oil is a proxy for power. And the rise of Russia's oil industry is a symbol of Putin's success. In just a few years, Russia has moved from being an economic basket case to Bush's key ally. The economic rewards for Russia's new status are beginning to trickle in.

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