Foreign Correspondence

[Amaunet]

Are Russia's oil reserves bigger than believed?


One analyst believes the country's oil reserve estimates will double or triple over the next 10 to 15 years. But for now, Russia is struggling with export problems.

4:26 PM EST September 20, 2004

by Steve Liesman
Some 1,200 miles east of Moscow, across the tundra of western Siberia, lies the secret behind Russia's return to the ranks of oil superpowers. The Priobskoye field, a 400,000 barrel a day gusher, is the largest field tapped in Russia since the fall of the Soviet Union. It has helped the country push oil output above 9 million barrels a day, from just 7 million in 2001. Russia now rivals Saudi Arabia for the title of the world's No. 1 producer.

"Without the increase in output from Russia over the last three or four years, probably a couple of million barrels a day, we'd have had definitely a much tighter supply situation, leading to higher prices," says Stephen O'Sullivan, an oil expert at United Financial Group.

In Russia, prosperity is spelled O-I-L. It's oil from places like Priobskoye that's fueling the economic revolution back in Moscow. And it may only have just begun. Analysts think untapped Russian oil reserves may be much larger than current estimates.

"The reserve numbers are being revised upwards," says Paul Collison, an oil analyst at Brunswick UBS. "We believe that over the next 10 or 15 years a double or triple (in reserve estimates) is feasible."

Turning to Western technology
One reason for this optimism is that Russians are replacing Soviet-era practices with Western technology and oil-field management. Now when the Russians open new fields like Priobskoye, they often look a lot like fields operated by ExxonMobil (XOM, news, msgs) or Shell.

"There are Russian engineers that are very good, better then I will ever be," says Patrick Griffin at U.S. oilfield services company Baker Hughes (BHI, news, msgs).

The Priobskoye field is owned by Yukos, Russia's biggest oil company. Both its chief executive and chief financial officer are Americans.

"We've simply gone in with modern reservoir management techniques to all of our fields, and we've modeled all of our fields, they're all computer modeled," says CFO Bruce Misamore. "We know exactly how our reservoirs are performing, exactly how they should perform."

But while Yukos has succeeded in Siberia, it has failed in Moscow. The company has been besieged by a multi-billion dollar tax bill that threatens it with bankruptcy. Its founder, Mikhail Khodorkovsky, faces his own tax trials that put him in prison for years. Some say he's a victim of a political battle with Russian President Vladimir Putin.

Potential damage
"The whole Yukos affair has the potential to be very damaging to investment in Russia," O'Sullivan says. "The worry, of course, is that if affects the real economy, people making investments in oil and gas would be justified in postponing those investments."

That's why world oil prices have spiked with each headline from the Yukos trials. It's a sign of the importance of Yukos and the critical role of Russian supply in world markets.

But for all its attention, the Yukos affair isn't even Russian oil's biggest concern. With Western technology and Russian know how, the problem isn't finding oil but instead it's getting it to market. Fields like Priobskoye have had to cut back growth plans. If Russia can figure out its export problems, the world should look out for a gusher of Russian oil.

Russian pipelines to the west are filled to the brim, and the country is filling new export capacity as quickly as it can be built. The Primorsk terminal west of St. Petersburg has been upgraded to export 1 million barrels a day. It's a world-class oil terminal built to Western environmental standards.

Looking for more
But it's not enough to get more oil to market. Plans are under way to send a pipeline directly to China or Japan, and U.S. companies are pushing for a new port in the north that would make Russian oil exports closer to the United States than crude from Saudi Arabia.

Analysts say that with billions at stake the Russians will find the cash to overcome its export constraints, suggesting the United States will increasingly rely on Russian oil for decades to come.

"It is generally understood that there are two regions in the world that have the reserves for the world over the next 20 to 50 years and that is the Middle East and the former Soviet Union," Collison says.

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