Russia Leaning Toward Joining Oil Cutbacks

In an oil-price poker game with U.S. energy security and worldwide economic recovery at stake, Russian oil companies hinted Tuesday they may join Norway and Mexico in heeding calls for a global cut in production to boost prices.

The independent oil producers took small steps back from their earlier rejection of a 500,000-barrel daily cut. The comments were immediately rewarded with a 6% rise in prices on international markets, rallying from a 29-month low to top $19 per barrel.

“We are interested in the oil markets getting back to normal. This means a situation where prices are reasonably high and oil producers fully meet consumer demand for crude, which is diminishing now,” Deputy Prime Minister Viktor Khristenko told reporters here, calling the recent price nose dive “alarming.”

Oil prices have fallen 50% over the last year, and the accelerating downturn since the terrorist attacks of Sept. 11 has raised fears among both independent producers and the Organization of the Petroleum Exporting Countries that a barrel of Brent crude could fall below the $18-to-$21 floor on which most countries have calculated their budgets.

In Russia, the oil price dynamics also have presented politicians and oil executives with the challenge of finding a proper balance between maximizing revenue that bankrolls slowly improving living standards and forfeiting profit in the name of Western economic recovery to lure big oil consumers--first and foremost the United States--away from OPEC’s volatile Arabian suppliers.

The markets’ positive reaction followed Khristenko’s remarks and predictions at meetings in Oslo and Moscow over the last two days that the independents can come to some accommodation of OPEC demands for their cooperation in reducing a global oil glut.

In the Norwegian capital, Mexican Energy Minister Ernesto Martens predicted an accord within days after earning assurances during talks with Norwegian Oil Minister Einar Steensnaes that Oslo is prepared to make its share of cutbacks.

The evolving “I-will-if-you-will” position among the major independents has allowed analysts and oil traders to conclude that a global agreement now seems likely.

As the No. 2 oil exporter outside OPEC and the world’s third-largest producer, Russia’s participation would be crucial to the success of a coordinated campaign to dry up the oil oversupply that accumulated when prices were high and production geared up to take advantage of what proved to be a short-lived bonanza. OPEC has proposed cutting production among its member states by 1.5 million barrels daily, but on condition the independents reduce their output by 500,000 barrels, with about 200,000 of that expected to come from Russia.

Only a day earlier, Russian officials met with Martens here but gave no indication they were ready to comply with the OPEC reduction trade-off. Much back-room negotiating has ensued between government energy officials and the mostly private oil companies, however, resulting in a shift in strategy that will allow Russian growth to continue while working to stabilize prices.

“If the OPEC countries have to bear this burden, the independent producers such as Norway, Mexico and Russia must not profit from this situation. That would be wrong,” said Alexander Vasilenko, spokesman for oil company Lukoil, Russia’s biggest producer, predicting a compromise would soon be worked out.

One such compromise under consideration in the various huddles of politicians and oil executives trying to come up with a unified Russian position is an agreement to cut exports but divert that output for domestic consumption.

“We can live with [a 150,000-barrel-a-day] export cut, but demand in Russia is growing, so we can move that share to domestic refining,” Tyumen Oil Co. President and Chief Executive Simon Kukes said in a telephone interview from the Siberian city of Nizhnevartovsk.

He argued that for Russia to cut actual extraction would damage economic growth, which was a robust 8.3% last year and remains on target, despite the oil price slump, to post as much as a 4% expansion this year. To deprive the economy of oil in such a growth mode would slow development and cut into social spending by reducing tax revenue from oil sales.

Russia’s No. 2 producer, Yukos Oil Co., has so far rejected the export cutback proposal as “absolutely unacceptable,” predicting massive layoffs and loss of traditional markets to regional rivals in Kazakhstan and Azerbaijan.

Yukos chief Mikhail Khodorkovsky argued in an interview with Echo Moskvy radio Monday that any halt in production at wells in the frozen north also would inflict disproportionate risk on Russia.

Once idled in winter, Siberian wells would be inaccessible until the spring thaw, whereas OPEC wells in warmer climes are more flexible with starts and stops of production.

Still, Russian producers also are presenting themselves as a reliable long-term alternative to OPEC suppliers in these post-Sept. 11 times of strained relations between Western countries and the predominantly Arab populations that make up the oil cartel.

Although the oil companies tend to present the production cutback proposals as severe, 200,000 barrels a day represents less than 3% of the 7.2 million barrels Russia pumps daily. Their laments probably are intended to cast them as self-sacrificing in the common struggle against global terrorism and the economic burdens the Sept. 11 attacks inflicted on the West.

“If the United States wants to consider Russia as a long-term supplier, we have to prevent Russia from making too sharp of a cut” in production that would hurt domestic growth prospects, Kukes said.

Unlike OPEC producers that are state-owned companies for the most part, Russia’s oil industry has been privatized and has to be wooed by the government, not presented with a state edict.

However, Khodorkovsky addressed the commingling of interests between the Russian state and the oil business.

“If the Russian government decides to cut the export and production of oil, which is the same, then the oil companies will naturally comply with the request because we are vertically integrated entities,” he told Echo Moskvy.

Any pressure from the Kremlin is likely to be motivated more by geopolitical aims than economic maneuvering, as President Vladimir Putin has pronounced himself unconcerned about the outlook for his nation’s economy in the wake of tumbling oil prices.

“I do not think that the oil price drop on international markets will have any serious negative effect on Russia’s economy since the [2002] budget is calculated on the basis of a pessimistic scenario of the oil price dynamics,” Putin told Western journalists in an interview this month. Even if prices fall further, he added, a healthy budget surplus should provide a cushion for what analysts expect to be a short-lived slump and should spur further reforms of an economy still too dependent on oil.

Although oil accounts for 25% of Russian exports and 40% of its hard-currency earnings, some analysts argue that low oil prices are better for the Russian economy than a revenue influx that has nothing to do with improving labor productivity.

“The current prices for oil give us the chance of continuing economic growth and will maintain hundreds of thousands, if not millions of jobs and give the possibility of increasing real personal incomes,” Andrei Illarionov, a presidential economics advisor, told the Interfax news agency.

The national budget for next year was calculated on a minimum price of $18.50 per barrel of Urals crude in forecasting revenue of $68billion.

Even in a worst-case scenario of $13.50 per barrel of oil, revenue would fall by only $7 billion, leaving it comfortably ahead of this year’s $55 billion and only $25 billion two years ago, Illarionov said.

“By no criteria can this be called a tragedy or a catastrophe,” he said.