Energy Exports Could Spur Russia

Oil and gas production are slipping now, but World Bank expects a major turnaround

June 3, 1992

RUSSIAN reformers are telling their international supporters that when the republic reaches full energy export potential, it will contribute to, not detract from, world economic growth.

"The energy sector is a disaster today, but in four to five years, it could help finance the restructuring of the Russian economy," agrees Jonathan Brown, the World Bank's division chief for infrastructure, energy, and environment. Russia's oil and gas production has slipped 10 percent a year during the past two years; it will decline another 20 percent this year - and more if an oil worker strike is not avoided.

Chevron Corporation's May 18 oil production deal with Kazakhstan may be a catalyst. Russians expect soon to lure the financing for the costly expansion of their own energy production. Though the Kazakhstan contract is the largest in Chevron's history, Russia's new ambassador to Washington, Vladimir Lukin, boasts that "more, many more, and much bigger" oil deals will be struck with the larger Russian energy sector. "The stakes are very high. Those who come first will have advantages," he says.

The World Bank is bullish on drawing foreign private capital and expertise to Russian oil and gas fields. By the next decade, the energy- and mineral-rich Russian republic will change from an aid recipient to a donor, says World Bank Vice President Wilfried Thalwitz. Russia and other energy-rich republics, including Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan, all possess "enormous potential for energy earnings," he says. $27 billion needed

While the bank plans to put some $2.5 billion into a variety of Russian projects (including energy production) from July 1992 through June 1993, Russia needs up to $27 billion through the year 2000 "just to stabilize the oil sector," says Mr. Brown. Mr. Thalwitz laments that in the former republics, "there is no investment to speak of at the moment." Joint ventures, he says, are the only means of "regenerating the growth mode." He's relying largely on foreign private capital for this.

US Export-Import Bank vice chairman Eugene Lawson was recently in Moscow to work for US private sector oil and gas equipment sales to Russia. He met with the Ministry of Fuel and Energy and with Russian Central Bank officials to assess the possibility for repayment of a possible $1 billion in Exim Bank credit for US energy industry exports.

"One should avoid overdramatization of our problems," says Ambassador Lukin. He acknowledges that "we will not dramatically increase our oil exports overnight," but he does put Russia in the oil producer big leagues, even in line with Saudi Arabia. He says with the proper investment in energy, Russia can fund its reforms and provide exports to help stabilize the world oil market.

Such bullishness is not without its detractors. "Those who see Russian energy exports as a way to finance hard-currency imports, pay off foreign debts, and finance development are ignoring domestic-consumption needs in the former republics," says a skeptical US Treasury official now examining the area's energy production and consumption capacity.

Two years ago, the former Soviet Union absorbed domestically more than 80 percent of its oil and gas production. There have been sharp reductions in production since then. By contrast, Saudi Arabia exports most of its output. Even if adequate foreign investment were ensured, says the Treasury official, "No one knows how much more oil will come on stream for export, because future domestic needs have yet to be calculated." An improved economy, with greater industrial growth, means that local oil and gas c onsumption will increase, he says.

World Bank's Mr. Thalwitz puts top priority on developing industries that earn foreign exchange. Hard currency is needed for consumer goods and other imports essential to modernize agricultural and industrial production. The World Bank plans to finance energy projects ranging from more efficient oil transport from Western Siberia to redressing waste problems caused by leakage in pipes.

Brown says that Russia and other energy-rich republics must enact laws to boost their export potential. Tax systems should promote, not punish, the foreign investor; petroleum legislation must codify deals; the state must commercialize oil and gas enterprises; and cash-rich investors must have access to promising fields. Laws could change

While delicately avoiding the sensitive issue of international investments in Russia's so-called national treasures - oil, gas, gold, and other raw materials - Ambassador Lukin says: "I'm sure that within five years, there will be a provision that allows foreigners to buy Russian property."

Michael Johnson, vice president of international affairs at the Chicago-based FMC Corporation, says his firm will provide and service basic equipment for international oil firms if they enter into production-sharing arrangements in the former Soviet republics. "But they won't come in unless there are terms they can live with," says Mr. Johnson. Huge potential

Operating in 120 countries and with 40 subsidiaries, the diversified FMC has long eyed, and sometimes supplied, the marketplace of the former Soviet Union. "For the last decade, it hasn't been very promising, and it isn't today. But its future potential is huge," Mr. Johnson says. FMC has been looking for facilities to manufacture petroleum equipment in Russia and Azerbaijan in anticipation of working with a number of US oil firms there.

Exim Bank "already has oil projects in house," according to a senior US Treasury official, "but we're nowhere near $1 billion, and we certainly wouldn't want to go beyond that point."

Mr. Brown is confident that the deals will come and that an upgraded Russian energy sector will draw enough financing to build new infrastructure, such as a quality transportation network sorely needed to bring goods and services to domestic and cross- border markets. Since the whole transportation system was railroads, there are now huge gaps in today's network that must accommodate short-haul traffic.

Paved roads in the entire former Soviet Union amount to only one third the paved-road network in France.