Drop in Soviet Oil Output Results in Worldwide Bind

THE international oil industry is concerned that labor strikes, indecision, chain-of-command breakdowns, or distribution problems in the Soviet Union will accelerate the decline of that nation's oil sector at a time when the world has no output to spare. "One of the great guessing games is, what will happen to Soviet oil exports this winter?" notes Daniel Yergin, president of Cambridge Energy Research Associates."Everybody's trying to produce all-out," says Robert Anderson, president of Hondo Oil & Gas Company. He pegs world production at 99 percent of capacity, excluding Kuwait and Iraq. "We could be in the unenviable and humiliating position of going to Iraq and saying, 'We need your oil. Any disruptive events in the Soviet oil sector - the world's most productive could produce significant price shocks and economic hardship" in Eastern Europe and Western countries, says James Pate, president of Pennzoil Company. Soviet oil workers have threatened to strike but never actually done so. Robert Ebel, an expert on the Soviet oil industry with Enserch Corporation, doubts the workers will. But he says he expects some chaos and indecision in field operations. "These people are used to taking orders from above," Mr. Ebel says. "You can forget about union laws vs. republic laws. Republic laws will govern." Mr. Pate lists several "wild cards" in balancing world supply and demand this winter: the relative coldness of the weather; the timing of the recovery of the United States economy and accompanying oil demand; and the ability of the Soviets to sustain oil production and exports. But Mr. Ebel says there was no hope of sustaining activity even before the failed coup. Soviet output peaked in 1988 at 12.4 million barrels per day (b.p.d.). Mismanagement and lack of investment have reduced output by close to 10 percent a year since then. This year's output will average 10.2 million b.p.d., Ebel says, but by December the rate will be "well under 10 million." The decline has come primarily at the expense of exports of oil and refined products. Those totaled 2.3 million b.p.d. in the first half, compared with 3.2 million b.p.d. last year. "That hits them hard in the pocketbook when they need every nickel," Ebel says. Oil is one of the few commodities the Soviets can sell to earn hard currency. Suspension of coal shipments would almost certainly increase internal consumption of oil, reducing volumes for export, Pate says. Ebel also notes that the Soviet people also rely heavily on natural gas. But great increases in natural gas supply are a thing of the past. Meanwhile, Soviet demand for oil is not declining, even though economic activity is. "More and more oil has to stay at home," Ebel says. But because events are transpiring so rapidly in the Soviet Union, he hasn't even attempted a forecast for 1992. "Our knowledge of the future of the Soviet Union is diminishing on a daily basis," Ebel says. Pate notes that 90 percent of Soviet oil production comes from the Russian republic. The "prospects for oil being used as a political tool cannot be ignored," he says. That may already be happening, says Hans Jochum Horn, managing partner in the Moscow office of Arthur Andersen & Co. Mr. Horn recently returned from Latvia, which was not getting its usual supply of oil from within the Soviet Union. Horn speculates that the breakaway republics won't get any more Soviet oil. Despite initial chaos, post-coup reforms will speed critically needed investment from abroad. In fact, the government is expected to insulate oil companies from the chaos because of the immediate need for a lot of money. Foreign oil companies consider the country to be a tremendous opportunity at a time when the global pickings are slim. Dr. Yergin notes that, from a geological point of view, the Soviet Union is "most exciting" to foreign oil companies, possibly equaling the potential of Saudi Arabia. "People's juices are really flowing." But the companies had been held back by Soviet bureaucratic disfunction, union-republic struggles over jurisdiction, and the absence of a legal framework under which to operate. The collapsed coup opened the door to rapid action, says Horn. The University of Houston's law school has just been retained to write petroleum laws for the Russian republic. And the Soviet Union's Ministry of Oil and Gas "no longer exists." It is to be replaced by a "Russia's Oil and Gas Company." A "state committee for geology" is authorized to look for oil or give exploration licenses to others. A new "ministry for fuel and energy" will supervise all petroleum operations, Horn says. These agencies are so new they don't yet have offices. But the question of whom companies should talk to has been resolved. "The power today is with the republics," Horn says. The Soviet Union's oil and natural gas sector stands to be impaired now but benefit later as post-coup political changes run their course.