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#19 - JRL 7038
National Post (Canada)
January 28, 2003
Rising Russian output raises spectre of oil price collapse: Clash with OPEC possible
By Claudia Cattaneo, Calgary Bureau Chief

Russia's newly privatized oil industry is growing so aggressively it's headed for a clash with OPEC over market share unless it finds ways to co-operate on prices, one of Russia's top energy economists said here yesterday.

Eugene Khartukov, general director of the Moscow-based Centre for Petroleum Business Studies, said Russia, which replaced the Organization of Petroleum Exporting Countries' Saudi Arabia last year as the world's top oil producer, is investing heavily in new infrastructure to boost output to 10.8 million barrels a day by the end of the decade, from the current 8.2 million barrels a day.

If Middle East tensions that have been sustaining high crude prices settle down, the world is headed for an oil price collapse as Russia's rising output along with increased exports from Iraq glut the market, he said. "It's just a kind of a warning: Beware the Russians are coming," Mr. Khartukov said outside an oil conference organized by the Canadian Energy Research Institute. "There will be ample supplies and do not underestimate it. There will be great competition between Russian supplies and OPEC ones."

An oil price glut would have dire consequences for Canada's higher-cost producers.

Mr. Khartukov said it's a myth that Russian oil production, which peaked in the 1980s at 11.5 million barrels a day, is in decline because of reserve depletion.

He said the country's proven reserves are massive and will last well in excess of 40 years at current production rates.

The industry, which is now 97% private and well-capitalized thanks to the high crude prices of the past few years, is pouring up to US $7-billion a year into new infrastructure like pipelines to increase export capacity -- with full support from the Russian government, which is dependent on oil for half its income.

"Russian oil companies would export as much as possible," Mr. Khartukov said.

"They will stretch this up to the limit. They are making a lot of investments, obligations, commitments ... no matter how low the prices are, because Russian crude oil production costs are quite low now," at US$2 to US$3 a barrel.

One of the cornerstones of the industry's growth strategy is a major port terminal in Murmanks, Russia's only ice-free Arctic port, to ship Russian crude to the United States.

In November, four of Russia's major oil companies -- LUKOIL, YUKOS, Tyumen Oil Co. (TNK) and Sibneft, agreed to build a terminal in Murmansk in the Barents Sea that could handle one million barrels of oil a day, and a 2,500-3,600-km link between Murmansk and the country's existing pipeline network that should be completed by 2007. Mr. Khartukov said the project may also be backed by Western oil companies.

But he said Russia's seven private oil firms, flush with cash from high oil prices and not yet experienced in downturns, are not paying too much attention to the risks of flooding the world oil market.

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