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The Observer: West looks to Russia for a crisis solution

The Observer: West looks to Russia for a crisis solution

Sunday June 6, 2004

With vast reserves of untapped oil, and the right level of investment, President Putin may be the person who comes riding to the rescue, says Conal Walsh

Could Vladimir Putin bail us out? Russia’s president might take some grim satisfaction from the mounting oil crisis. High prices have underpinned the country’s booming economy in recent years: oil and gas represented 25 per cent of the Russian economy last year. The last thing the Kremlin wants is cheap fuel.

Well, not too cheap, anyway. If a genuine oil shortage took hold, few would suffer more than the tens of millions of Russians shivering in some of the coldest places on Earth. And there quickly comes a point where a crisis-struck, cash-strapped Western economy threatens Russia with a recession of its own.

Besides, Putin has always counted himself an enthusiastic ally of George Bush’s ‘war on terror’, and could be expected to show solidarity with the US against al-Qaida – particularly if it once again gave him the diplomatic cover he needed to pulverise Chechen separatists. The real question is not whether Russia would want to ride to the rescue of the West, but whether it is able to.

That entirely depends on the size of the problem in the Middle East, of course, and how apocalyptic we are being in our theorising. But the signs are that Russia has strong capacity. Most analysts now believe its oil reserves are probably much bigger than previously thought.

The BP Statistical Review says Russia has 60 billion barrels of proven oil reserves. But several companies have increased their estimates, and Brunswick UBS says the figure could rise to 180bn barrels. That would put the country second in the world rankings behind Saudi Arabia, which has an estimated 300bn barrels.

Russia and its Caspian neighbours are already the world’s leading gas produc ers. ‘I believe that by the end of the decade Russia will be proven to have 50 per cent more hydrocarbon reserves than Saudi Arabia has today,’ Brunswick’s Paul Collison said recently.

While Shell has been revising its reserves estimates downwards because of tight US accounting rules, the same rules will allow Russian companies to be more liberal in their esti mates, analysts say. But first there will have to be a lot more exploratory work.

The uncertainty surrounding Russia’s reserves is partly a reflection of the country’s inhospitable terrain, where extracting and transporting oil is four times more expensive than in the Middle East. ‘It’s the difference between drilling through frozen Siberian earth and sweeping away some sand,’ one industry expert said.

More foreign capital and investment in new technology is essential if the industry is to get to grips with Russia’s remote resources, but the country remains an uncertain place for outsiders.

At the moment, for example, Aim-listed Sibir Energy, the UK oil and exploration group, is trying to understand the apparently unexpected ‘disappearance’ of a £100m Russian oilfield stake it thought it held. And BP’s much-trumpeted $13.5bn TNK venture has been unsettled by news that its Russian partners want to exit the deal early.

Among Moscow’s political commentators, you will find many who say that Mikhail Khodorkovsky, the former Yukos boss dramatically jailed last autumn, was seized because of a desire on Putin’s part to crack down on alleged ‘robber capitalism’ and make Russia a more amenable place to do business.

Equally, however, the incident reminded nervous foreigners about the capriciousness of Russia’s legal system. As the Kremlin’s clampdown on Yukos continues, some even fear that Putin’s long-term aim is to re-sovietise the economy.

That may be far-fetched, but Putin would not differ from Saudi Arabia’s rulers if he were determined to keep the oil industry, at least, out of foreign companies’ hands. Khodorkovsky’s arrest took place just as ExxonMobil was rumoured to be preparing a $25bn investment in Yukos. Meanwhile, state-controlled Gazprom, the world’s biggest gas company, remains largely out of bounds for foreign investors, despite its large debts and patent inability to explore new fields.

There are, admittedly, some new, hi-tech projects. Gazprom is involved with western companies in plans to build a new pipeline to Europe across the Baltic Sea, while BP/TNK hope to develop a pipeline with Gazprom linking its Kovytka gas field to China.

Then there is the $10bn Sakhalin project, a huge private gas development off Russia’s Pacific coast, which is scheduled to start producing within a few years. Shell is leading the project, which aims to supply the Japanese market. Sakhalin-1, a nearby oil project headed by Exxon, is in its initial stages.

But Russia is going to need many more schemes like these if the world is to harness its vast reserves of oil and gas. To replace Saudi Arabia as number one supplier, it will need investment on a Saudi scale. And in 2002, it attracted just $4bn of foreign money – rather less than the Czech Republic.

http://observer.guardian.co.uk/business/story/0,6903,1232142,00.html

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