Wed, Feb 23, 2005 page12

• Oil looms large on Bush-Putin summit agenda

  ENERGY SECURITY Amid the breakup of Yukos, the US is concerned that oil production in Russia -- the world's main non-OPEC supplier -- could decline

  • AP
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  Although Russia is a comparatively minor feeder of the US' giant hunger for petroleum, concern over Russia's oil industry is one of the main items on the agenda for this week's summit between presidents Vladimir Putin and George W. Bush.

  Turmoil over the breakup of Russia's largest oil company Yukos has raised worries that the nation's production could decline -- driving up already-high world oil prices -- and sparked questions about the rule of law, property rights and taxation policies. New restrictions on foreign bidding for the nation's biggest oil and gas deposits deepened the unease for US oil companies looking to invest in projects to extract Russia's massive reserves.

  Russia provided only about 1.9 percent of the US' crude oil imports as of December, according to the US Department of Energy, but its vast untapped reserves and its contribution to the world oil supply make upheaval in Russia's energy sector a significant issue for Washington.

  Yukos Chief Executive Steven Theede told a US Senate committee last week that the destruction of Yukos and the jailing of its founder Mikhail Khodorkovsky directly endanger America's energy security. The strength of the US economy depends largely on the stability and reliability of global oil supplies to maintain it, he said.

  Bush, in an interview with the ITAR-Tass news agency, said of the oil issue: "The dialogue is `You've got a lot of it and we don't have much' ... But Russia has to make up her mind as to whether or not she wants to attract outside capital, which is really what the energy dialogue is about."

  Under Khodorkovsky, Yukos brought in Western-style production and management know-how that helped turn it into a major engine of Russia's soaring oil production. His jailing and the dismantling of Yukos because of massive tax bills -- widely seen as Kremlin punishment for Khodorkovsky's political activities -- led to worries over production.

  Yukos' output quadrupled from 2000 to 2003, while total Russian output increased by only 30 percent over the same period, Theede said.

  "If Russia had not massively surprised with this very strong resurgence of oil production growth, imagine where world oil prices would be today," said Paul Collison, oil and gas analyst at the Brunswick UBS brokerage in Moscow.

  "They completely dominated the non-OPEC supply increases in the world and if there is any sense of that factor diminishing, then I think that worries Western policy-makers a lot," he said.

  Fourteen months after his arrest, Khodorkovsky's trial drags on. Meanwhile Yukos' 1-million-barrel-per-day subsidiary Yuganskneftegaz was auctioned off by the state in December against the parent company's US$28 billion bill for back taxes.

  Yuganskneftegaz was eventually bought by the state-owned oil company Rosneft, and market watchers fear its new owners will be unable to run it as efficiently as Yukos had.

  Yukos' value has plummeted from about US$40 billion at its peak to just US$2 billion since the sale. Yukos estimates that US investors lost nearly US$6 billion in the collapse.

  Though oil production itself is still increasing, output growth has been dwindling. By next year, it will have fallen from 10.9 percent in 2003 to 4.7 percent, according to Brunswick UBS estimates. Though still impressive, the figures mark a worrying trend.

  Fears generated by the Yukos bills as well as overall tax increases in the sector have made major oil companies cut back their investments. Capacity restrictions at the state pipeline monopoly Transneft have also had an impact.

  Now, as the world's oil importers look for sources away from the turbulent Middle East, there is a feeling that Western investors in Russia's oil sector are not as welcome as they once were.

  Last week, Natural Resources Minister Yuri Trutnev announced that Russia's biggest oil and gas deposits were no longer for sale to foreign-controlled companies. That could make foreign companies less willing to pump big money into projects they do not control, possibly delaying the exploration of giant new fields in the Russian Arctic, Far East and around the Far Eastern island of Sakhalin.

  Sergei Karaganov of the Foreign and Defense Policy Council think tank said the developments severely eroded any prospect of progress on energy issues at this week's Bush-Putin summit in Bratislava, Slovakia.
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