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Corruption, Incompetence and Bureaucracy Holding Back Russian Oil Production

By Al Fin | Mon, 24 January 2011 14:14 | 6

While Russia is rich in oil and gas resources, the Russian government in 2008 had to introduce a US$4.2 billion tax cut at mid-year to reverse declining production after a period of growth from 1998 through 2004. "From the oil company's perspective, the government was taking all the revenue from high oil prices, leaving them will little to invest in new production, so there was nothing to offset declining production from aging fields in Western Siberia," Neff said.

"It's amazing how quickly the industry turned things around," said Neff, noting that Russian oil production passed the 10 million b/d mark in 2010. However, "there's still a sense that Russian production could come to a cliff if they don't make changes." _Rigzone

Russia has barely begun to tap its vast energy and mineral resources. Corruption, incompetence, and bureaucratic wrangling at all levels have combined to hold Russian production far below what it could be. In the past, many international partners and investors have been burned by the arbitrary nationalisation of assets by a corrupt Russian government. But now, Russia says it wants to change all that. Are they truly serious this time?

Russia is seeking to develop its oil and natural gas resources, particularly in untapped areas like its offshore Arctic region, as well as diversify the number of oil and gas export markets available to Russia, and needs companies with deep financial pockets and a willingness to share risk. However, laws restricting exploration and production (E&P) activity by foreign companies and a sector structured to favor domestic firms must be addressed to encourage E&P activity and maintain production growth.

While the Russian government has welcomed foreign investment, it has limited companies to partnering in projects with Russian companies as operator. "It's hard for companies not to want to be in Russia because it has such vast resources, but the investment climate has not been favorable to foreign companies. The most they can hope for is an equal stake in a project with a state company, and that it ambitious," Andrew Neff, senior energy analyst at IHS.

BP's recent share swap with Rosneft, which will allow BP access to explore for oil and gas in Russia's Arctic, was made possible by BP's exceptional circumstances and its unique position in Russia via its TNK-BP venture, Neff said. However, it could set off a new frenzy of international oil companies (IOCs) looking to partner with national oil companies, if not in Russia, perhaps elsewhere.

...The Russian government is expected to push towards private companies investing in exploring for and producing oil and gas in eastern Siberia as part of a plan to diversify its supply market to include China and other Asian countries, where crude oil demand has surged. "The thinking is that if Europe can diversify its gas suppliers, the Russia should be able to find alternative markets for its supply," said Neff.

These efforts include the first pipeline linking Russia and China, the 3,018-mile Eastern Siberia Pacific Pipeline, which is now operational and will transport 300,000 b/d of oil over a 20-year period. The project's second phase will see pipeline laid that will allow for oil shipments to Japan and Korea.... _Rigzone

Prospective partners and investors must think long and hard about getting involved with the corrupt Putin dictatorship. The recent re-conviction of former Yukos head Khodorkovsky provides abundant evidence that the laws in Russia are simply whatever Putin says they are.

And yet, Siberia is stuffed full of mineral and energy wealth. Everyone wants a piece of it. Of course, if Russia does not do something about its incredible shrinking population, Siberia will belong to China before anyone expects it.

By. Al Fin

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  • Anonymous on January 24 2011 said:
    The Chinese stopped our advance in Korea, but when they go after Siberia they should remember what happened when Hitler went after Moscow and Stalingrad.Let me simplify that. The Chinese are not going to go after Siberia, so please dont try to raise the spirits of the morons in certain think tanks who are trying to sell that nutty idea.
  • Anonymous on January 24 2011 said:
    Fred may very well be right about that. On the other hand, the demographic changes that are occurring in far eastern Siberia are difficult to argue with.I doubt that China will ever need to invade Russian Siberia. Demographics is likely to take care of the transition from "Russian Siberia" to "Chinese Siberia" all by itself.There is no telling what that ongoing transition will do to the global balance of power.
  • Anonymous on January 25 2011 said:
    I'd love to say that you were wrong Alfonso, but you certainly could be right. And Siberia isn't the only place where....
  • Anonymous on January 25 2011 said:
    This time I have to disagree with Fred. Why do some people always think of invasions simply in military terms? It would much more likely for China to 'spill into' Siberia and RFE demographically. Once Beijing gets Taiwan back(...?) they are quite likey to 'encourage' northward movement,possibl over generations. Siberia's Russian population is static at about 20 million, posibly even declining; Siberia and the RFE are about 2-3 times theUSA in size. Plenty of opportunity for the Chinese, esp. as the permafrost melts which is happening. Climate change may well make more of Southn and Western Siberia and the RFE habitable - a bit like the old American frntier. Chinese are very adaptble.A recent Russian military exercise was aimed specifically at countering Chinese 'designs' in the area. The Russians know the Chinese are coming, just a question of when and how it begins.
  • Anonymous on January 25 2011 said:
    I find Al Fin's comment about the Putin dictatorship pretty pointless and unintelligent. Russia is a land of 'tsars', always has been always will be. Just as the US is a land of corrupt big business with a facade of democracy and a failing judicil system. Lets leave generalisations out and try to focus on the interesting information.
  • Anonymous on January 26 2011 said:
    Philip, I know a lot about military exercises, and most of them are completely senseless. But you might be correct when you use the expression "...just a question of when and how it begins". Might!

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