Has Russian oil output peaked?

Production dropped this year after reaching a post-Soviet high in October. On Monday, Putin's newly convened cabinet made the issue its first order of business.

from the May 28, 2008 edition

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Russian oil profits, taxed by the state, have been accumulating in a special 'stabilization fund' that now totals about $130 billion. Earlier this year the government put another $32 billion into a sovereign wealth fund that is expected to begin investing in Russian infrastructure and social welfare schemes. "Russia's economy so far can't absorb the oil cash that's coming in. That, not increasing oil output, is our biggest worry," says Sergei Glaziev, head of the National Institute for Development, a Moscow think tank. "We urgently need to diversify our economy away from this dependence on natural resources."

Others say Russia's gas-and-oil sector can continue to grow, but only if there are massive new investments and critical reforms to an industry that under Putin became dominated by two state-owned behemoths, Gazprom and Rosneft. Both companies have accumulated huge debt in an ongoing campaign to take over formerly private assets that have returned nearly half of Russian oil and gas reserves to state control in recent years.

"Ten years ago the bulk of our oil resources were held by private companies, and growth rates were very high," says Michalkova. "Growth rates have become sluggish for complex reasons lately, but political interference and battles over ownership have not been helpful."

Major investments will be needed to eke out further production from the largely exhausted Soviet-era oil fields of western Siberia, experts say. "Production costs have more than doubled in the past six years, and the current tax regime makes additional output at older fields unviable," says Valery Nesterov, an energy expert with Troika Dialog.

Even if new finds are made in Russia's uncharted east, they are likely to be much smaller, more remote, and difficult to access. "In the early '80s a typical new oil field held reserves of up to 50 million tons, but today a company celebrates if it finds a field with 3 million tons," says Mikhail Krutikhin, an analyst with Russian Energy, a Moscow-based consultancy. "Therefore we need more small oil companies, which are best for operating small fields. But Russia has a few giant companies, whose fixed costs and attitude are all wrong.

Russia's new president, Mr. Medvedev, has talked about a need to encourage small business, but Krutikhin is skeptical given Medvedev's background as former chairman of Gazprom. "To reinvigorate our oil and gas industry, Russia needs dramatic tax reform, antitrust measures, and strong support for small enterprises," says Mr. Krutikhin. "But Medvedev comes from Gazprom, which is the biggest enemy of small business in Russia, so I really don't have any high expectations."

 

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