Land of Opportunity for US Energy Sector, Maybe
Russia is reaching out for foreign investment and expertise to help tap its huge and largely untouched oil reserves
WASHINGTON — IN Russia, money does not grow on trees, it grows in oil wells. Or at least it would if more of the oil wells worked.
The decline in the Russian oil industry has been staggering: Over the last five years, production has declined by one-third as almost 32,000 of the country's wells have fallen into disrepair, according to Vyacheslav Lopatkin, chairman of the Moscow Oil Exchange.
"Russia has so much oil and so little capacity to produce it," Lawrence Summers, undersecretary of the Treasury, told a Louisiana-Russia development conference here last week.
But help is on the way, as well as possibly handsome profits for United States firms that produce the materials to fix wells and perform the actual repairs. On July 6, the Export-Import Bank of the US (Eximbank) and the Russian government signed an Oil and Gas Framework Agreement that will provide financing to allow the Russian industry to buy $2 billion worth of US oil, gas, and petrochemical equipment and services.
Eximbank estimates that the business will support more than 38,000 man-years of employment in a US sector that has been hurt badly by the recession.
Some underlying documentation remains to be worked out with the Russians, and a US team will be in Moscow in the middle of next month to do that, says John Lynch, Eximbank's loan officer for Russia.
"So in one or two months, we'll be waiting for the business to come in," Mr. Lynch told the conference, which brought together Russian oil industry figures and American businesspeople.
The conference was part seminar, explaining how financing could be obtained through Eximbank and the World Bank's International Finance Corporation, and part networking opportunity for two groups eager to make one another's acquaintance.
Mr. Summers of the Treasury provided a lunch-time pep talk aimed particularly at the Russians. "Success will depend on the ability to attract private investment," Summers told them.
If the Russians respect property rights, impose reasonable tax rules, and institute reasonable pricing, Russia can be "a land of opportunity for America's energy industry," he said.
To the Americans, he laid out an attractive investment opportunity. One dollar invested this summer, he said, will produce an 80 cent increase next winter. He cited studies that suggest the return on an investment could be four times that amount. The World Bank has foreseen a $50 billion investment for the rest of this decade, he added, which "could earn a staggering return."
But big profits are easier envisioned than realized. Much of the Russian oil that remains to be extracted lies in a harsh physical climate. And, warns Vladimir Moryzhenkov of the private oil company Tyumen-Moscow Exchange Hermes, Russian government officials are not as informed as they could be on business and the energy industry. The average Russian government official has no experience with private property and business, and "doesn't know the nature of the energy markets," he says.
Mr. Moryzhenkov's firm, Hermes, is one of the success stories of post-communist Russia. When the company started 2 1/2 years ago, its capital totaled 10,000 rubles, then worth about $2,000. Today, he says, all assets total $100 million.
Other would-be Russian oil tycoons can only dream of such riches. At the conference, frustrations were expressed by both sides that Eximbank has not moved more speedily to finance US investment in Russian oil fields. But Russia's particular circumstances made it difficult to reach agreement, Lynch says. The negotiations took more than a year to complete.
Eximbank's problem was that Russian government guarantees were not considered viable, because of the Russian economy's problems. So Eximbank set up a new form of security, called "contract security" - essentially, using the oil and gas in the ground as security.
The borrower will not be a government agency, but rather a hands-on Russian company operating in the field. The borrower must be deemed credit-worthy by Eximbank and agree to make payments into an escrow bank outside of Russia.
"If you're thinking Russians will never agree to off-shore escrow, at the start of '93 I would have agreed," Lynch said. "But since that time, there's been more realism in Russian government thinking."
Eximbank's $2 billion designated for Russia is not a line of credit. Instead, the bank will consider transactions on a case-by-case basis.