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Wednesday, May 14, 2008

Russia's oil treasure shows signs of decline

Special to The Japan Times

SINGAPORE — In the eight years of Vladimir Putin's presidency, Russia's energy riches were used as a lever to rebuild the country's influence and power. As his successor, Dimitry Medvedev, took over last week and Putin became prime minister, both leaders will worry about signs that this energy muscle is starting to shrink.

The world should worry too. The first fall in Russian oil output in a decade is adding impetus to the surge in the price of oil, which rose above $120 a barrel to a record high early last week. Russia is a key oil producer and exporter. In recent years it has ranked second, after Saudi Arabia, but has sometimes produced even more oil than the Middle East giant, by far the largest producer in the Organization of Oil Exporting Countries. The OPEC cartel supplies around 40 percent of the 86 million barrels of oil currently used each day around the world.

Japan, China and other leading Asian oil importers will also be concerned at the decline in Russia's oil output. With the eighth-largest proven oil reserves, Russia was considered the most promising oil area outside the Middle East. Rapid production growth for much of the time Putin was president helped to meet booming Chinese demand for oil and limited the rise in oil prices.

India, South Korea and other Asian economies, as well as Japan and China, were hoping Russia would emerge as a major energy supplier to the region, easing its dependence on the Middle East. According to U.S. government estimates, oil consumption in industrializing Asian countries is expected to rise by 2.7 percent annually, doubling between 2004 and 2030 to reach nearly 30 million barrels per day.

In 2007, non-OPEC countries produced about 60 percent of the world's oil, and Russia accounted for almost 25 percent of this amount. Last month, the International Energy Agency cut its 2008 non-OPEC supply projection to 50.5 million barrels a day, due to weaker-than-expected oil output from countries like Canada and Mexico. Now Russia must be factored into the equation.

Figures released by the Russian government earlier this month show that the country's oil production fell for a fourth straight month in April, confirming pessimistic forecasts for the year. Output was 9.72 million barrels per day, more than 2 percent lower than the post-Soviet high of 9.93 barrels per day in October.

As the main oil fields in West Siberia mature, heavy taxes on oil production, increasing state control and rapidly rising exploration and development costs are discouraging exploitation of new finds in more remote and expensive areas like East Siberia, the Russian Far East and the Arctic. Without massive new investment to expand production, and incentives to lower soaring domestic consumption of energy, oil exports seem certain to decline.

Leonid Fedun, vice president of Lukoil, Russia's biggest independent oil company and second-largest producer after state-owned Rosneft, told the Financial Times earlier this month that Russian oil output had peaked and was now on a downward trend. He added that Russia would be able to sustain levels of between 8.5 million and 9 million barrels of oil per day only if oil firms invested hundreds of millions of dollars in tapping new fields.

A report in January by the German Institute of Economic Research said that at current production levels, Russia's oil reserves would be consumed in about 22 years and oil output was expected to drop significantly, at least in the next few years. It noted that with sufficient reserves for another 75 years, the outlook for natural gas was more favorable although production might decline awhile before rising as new fields were developed.

In this situation, the competition between Asia and Europe for supplies of Russian oil and gas is likely to intensify, enabling Moscow to play one side off against the other to get higher prices. Europe has a big head start on Asia. The European Union imports nearly 30 percent of its crude oil and one-third of its gas from Russia, mainly through long established pipelines.

Meanwhile, China and Japan are vying to persuade Russia to build new pipelines along different routes to Asia so that each can become a priority export market. Their underlying fear is that there will not be enough Russian oil and gas to meet their demand.

Michael Richardson, a former Asia editor of the International Herald Tribune, is an energy and security specialist at the Institute of Southeast Asian Studies in Singapore.

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