The Kremlin Defends Its Energy Interests

Russia moved to support the 2 million barrel a day cut in oil production by OPEC by reducing its own oil exports. The country’s oil companies and energy projects appear, however, to be facing an uncertain future amid continued volatility in global energy prices.

Russia dispatched a powerful delegation, led by Deputy Prime Minister Igor Sechin, Energy Minister Sergei Shmatko, and top executives from oil companies, to the OPEC meeting on December 17. Sechin told the meeting that Russia would seek the status of permanent observer in OPEC. He urged that a dialogue be initiated between oil and gas producing nations and invited OPEC representatives to attend a gathering of gas producers in Moscow on December 23. In a reference to the global financial crisis, he also maintained that energy producers had become “hostages of decisions made by others."

Sechin supported Russia’s earlier pledges to support OPEC oil cuts, revealing that Russia had already limited its crude exports by some 1.5 million tons (350,000 barrels) a day in November. He reportedly pledged to cut Russia’s 2009 oil exports by a total of 16 million tons, or 320,000 barrels a day (Interfax, RIA-Novosti, December 17).

Moscow had been expected to give greater priority to the OPEC meeting, sparking rumors that the Kremlin might dispatch a higher-level mission for direct talks with the oil cartel. On December 15 the government press service was forced to dismiss media speculation that the Russian delegation to the OPEC meeting would be headed by Prime-Minister Vladimir Putin himself (Interfax, December 15).

Russia’s top officials have made it no secret that the country was prepared to cut oil production. On December 11 President Dmitry Medvedev said that Russia could limit its crude output in an effort to prop up prices. “We must defend them,” he said, referring to Russia’s diminishing oil and gas revenues (Interfax, December 11).

Russian oil companies said they were prepared to deal with the worst-case scenario too. On December 9 LUKoil CEO Vagit Alekperov said that the company anticipated oil prices at $45 a barrel in 2009 (Interfax, December 9). Last October LUKoil vice-president Leonid Fedun argued that Russian entry into OPEC would be beneficial for the country and its oil sector.

In the meantime, Russian oil companies are facing increasingly adverse economic conditions, as low international crude prices have coincided with increased domestic costs. On December 7 Russia’s pipeline monopoly Transneft suggested that the government raise oil transit tariffs by 21 percent in 2009, arguing that more funding was needed to build the ESPO pipeline. Transneft has already raised its tariffs twice this year, by 19.4 percent in January and 10.7 percent in August. At the same time, Rosneft reportedly urged the government to cut oil transit tariffs due to falling oil prices (Interfax, December 7).

The ESPO has emerged as Russia’s highest profile energy project in years. Last October Transneft inaugurated the 660-mile (1,100-kilometer) completed section of the ESPO in a reverse, westward direction to pump oil from Talakan to Taishet. ESPO’s first stage would have a capacity of 30 million tons per year, while the second stage would transport 80 millions tons of crude per annum.

There have, however, been concerns that eastern Siberia may not have enough oil for the ESPO’s full capacity. In order to fill the ESPO, eastern Siberian would have to produce more than million tons of crude a year by 2020 and sustain production at that level.

Russia’s state-run Rosneft has promised to supply 25 million tons of crude for the ESPO from the Vankor oilfield, while 2 million tons are expected from Rosneft/TNK-BP’s Verkhnechonsk field, 2 million tons from the Talakan field of Surgutneftegaz, and around one million tons from the Urals Energy’s Dulismin deposit.

Some oil executives in Russia argue that eastern Siberian oil projects could become too costly under the current economic circumstances. On December 8 Jonathan Kollek, TNK-BP vice-president for supply, trading, and logistics, said that the Verkhnechonsk field would become unprofitable at current transit and oil prices, despite some tax breaks (Interfax, December 8). As the economic viability of eastern Siberian oil projects have become a matter of debate, so has the relevance of the ESPO project itself.

The prolonged negotiations on the ESPO pipeline spur to China have apparently remained inconclusive, as Rosneft and the China National Petroleum Corporation (CNPC) have struggled to agree on oil export volumes and prices. Russian and Chinese companies tentatively agreed on the ESPO branch when then-President Putin visited China in March 2006. In May 2008 President Medvedev announced ahead of his trip to Beijing that Russia and China had agreed to build the spur from ESPO to China.

Rosneft has been seeking a loan from China to be repaid with future oil supplies. On December 15 Russian newswires cited Rosneft sources as saying that the company and CNPC had agreed on oil prices and the terms of a $15 billion loan (Interfax, December 15). Both companies have yet to confirm the deal officially. However, this development indicates that Russia’s state-run oil giant Rosneft needs more financial support amid adverse market conditions.