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Preparing for the age of peak oil

Financial Times: Preparing for the age of peak oil

Published: April 16 2008 19:16 | Last updated: April 16 2008 19:16

Russia’s vast oil and gas reserves were seen not so long ago as the best hope of meeting growing world energy demand. No more. This week a top Russian oil executive echoed earlier official warnings that oil production could fall for the first time in a decade.

An output slump would hit consuming nations hard by sending international oil prices even higher. Russia would lose out too by forgoing tax revenues. But Moscow can prevent this – and create the conditions for a recovery in production.

In Russia, the problem is not so much a lack of oil but an investment drought. This has been caused by high taxes and hostile treatment of foreign and some domestic companies by a government reasserting control over its energy sector.

Russia will have to act quickly if it is to avoid a long-term decline in oil output. Bringing on stream untapped reserves in the Arctic and eastern Siberia will take years.

The government should therefore cut production taxes steeply. Only a large tax reduction will stimulate spending on domestic supply infrastructure. As long as there is little incentive to develop hard-to-access oil deposits at home, Russian energy firms will continue to make acquisitions abroad. The estimated $4bn extra a year that would be available to the industry under current proposals is a tiny fraction of what companies will need if they are to mitigate the output loss from declining fields in western Siberia.

The uncertainty over ownership rights to fields has to be resolved as well. This is as much a deterrent to domestic as to foreign investment. Western companies are rightly suspicious of the state’s motives. The official explanation for last month’s police raid on TNK-BP, the oil venture 50 per cent owned by BP, was alleged industrial espionage. But the suspicion remains that it was a ruse for Gazprom to be given a stake in the company.

Russia has much to gain by exploiting western expertise and technology. Foreign firms will compete fiercely for opportunities. But if it drives them out, Russia will be unable to revitalise its decayed supply network. There are signs the government understands this. US-based ExxonMobil, which has led the Sakhalin-1 development, is optimistic that stand-offs can be resolved.

Much can be done in the short term to stabilise falling output and ensure that a managed decline does not become a precipitous one. Moscow should swiftly pass delayed laws that define sectors where foreign involvement will be limited. It should press on with privatisation of state-controlled assets. Anything less would be a mistake.

Copyright The Financial Times Limited 2008

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