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Friday, 16 November, 2001, 13:46 GMT
Russia's threat to Opec deal
A Siberian oil worker
Shutting off the flow will not be easy
By BBC News Online's James Arnold

If the oil market at the moment has started to resemble a poker game, then Russia seems to have a handful of aces.

Biggest oil producers, million barrels per day, 2000
Saudi Arabia: 9.1
US: 6.7
Russia 6.6
Iran: 3.8
Mexico: 3.5
Norway: 3.3
China: 3.3
Venezuela: 3.1
UK: 2.7
Canada: 2.7
Source: EIA.
As the once-mighty cartel Opec scrambles to prop up the collapsing oil price, it is in the embarrassing position of relying for support on Russia, a maverick non-member.

Russia may be the second-biggest oil exporter in the world, but it has rarely tended to figure highly in Opec's deliberations.

Now, however, it is priority number one: Opec says it will only cut production if big non-members - foremost among them Russia - join in too.

But while all oil producers stand to benefit from higher prices, getting Russia to play ball could prove a challenge.

Big league

Russia is certainly a heavy-hitter in the oil market.

It produces about 6.5 million barrels of oil per day, some 9% of total world consumption and behind only Saudi Arabia and the US.


And it exports almost half of what it produces, mainly to the thirsty European and US markets.

But Russia has tended to stand aside from what might be termed the oil industry establishment.

During the Soviet period it was isolated by its politics, and during the 1990s it tended to be regarded as something of a loose cannon.

Edgy relations

Now, Russia has cleaned up its act, at least as far as the oil sector is concerned.

Production and exports are steady, its once-freewheeling oil firms are increasingly sober corporate citizens, and the Putin government has even made polite noises about rumours that it might join Opec.

Vladimir Putin and George W Bush
Russia does not always do others' bidding

But that all changed on 14 November, when Opec demanded that non-members provide 500,000 barrels per day of cuts to help support the market.

Mexico has volunteered a 100,000-barrels-per-day reduction, and Norway has not dismissed the idea.

But Russia, in the form of Prime Minister Mikhail Kasyanov, has dismissed the idea as "impossible".

Without Russia on board, the two other big non-Opec producers have no chance of collecting 500,000 barrels of cuts - and hence the Opec deal will fall apart.

Bluff?

Of course, Mr Kasyanov's rebuff could be interpreted as a bluff.

But there are compelling reasons for believing that Russia might prove unable - even if it proves willing - to cut exports substantially.

Main Russian oil firms, 2000 output, thousand barrels per day
Lukoil:1,510
Yukos: 890
Surgutneftegas: 752
Tatneft: 458
Sibneft: 326
Source: BKS.
First, Russia lacks the sort of discipline necessary to impose an output reduction that convinces the markets.

Unlike almost all big producing countries - the US and UK excepted - Russia has a highly fragmented oil industry.

Frantic, and at times chaotic, privatisation in the mid-1990s has resulted a dozens of mainly medium-sized, mainly privately owned oil producers.

Although the government retains some influence, most of these firms plough their own furrow.

Nor does Russia have much centralised control over the distribution system, which is based around a labyrinthine and ageing pipeline network.

Trade in oil is notoriously murky, with at least 20% of output believed to disappear into the black market.

Eager to export

At the same time, the economics of the Russian oil industry argue strongly for more exports, not less.

Russia's rouble lost about 75% of its value in late 1998, meaning that dollar-denominated oil exports are now worth four times as much in rouble terms as they were.

The government also recently relaxed the rules that forced exporters to switch their revenues back into roubles straight away, making it far more favourable for oil firms to sell abroad, rather than at home.

While the demand for oil within Russia is growing strongly, producers prefer to sell in markets where they have a decent chance of getting paid on time.

No hurry

Above all, Russia simply does not share Opec's sense of urgency about the current oil price.

Most Opec states rely on oil revenues for the bulk of their budget funds.

But Russia's oil, while important, does not account for more than one-quarter of state earnings.

And the Russian budget has enjoyed such a bonanza since the 1998 devaluation that it can survive low prices for far longer than its Opec rivals.

Most of its financial projections were drawn up on the realistic assumption that oil prices would fall - a strong contrast to the sunny optimism apparently enjoyed by many Opec countries.

No way out

For Opec, the conclusion is gloomy.

Even if it wins round the Russian government to the notion of output cuts, it will still have to convince the legion of oil-producing companies.

And even if it wins them over, it has to realise that any commitment has an almost overwhelming chance of being broken.

In this poker game, Russia could turn out to be a real wild card.

See also:

15 Nov 01 | Business
Russia defies Opec oil cartel
14 Nov 01 | Business
Opec piles pressure on Russia
13 Nov 01 | Business
Bush boosts oil stocks
12 Nov 01 | Business
Russia declines oil export cuts
08 Nov 01 | Business
Oil jumps amid Opec hopes
04 Oct 01 | Business
Opec faces up to low oil prices
10 Oct 01 | Business
Oil output cut 'imminent'
05 Oct 01 | Business
Oil prices bounce back
04 Oct 01 | Business
Premier faces Pakistan gas flare-up
27 Sep 01 | Business
Opec keeps oil production steady
25 Sep 01 | Business
BP cuts petrol prices
24 Sep 01 | Business
Oil prices sink to year low
17 Sep 01 | Business
Oil reverses post-attack surge
13 Sep 01 | Business
Attacks shake oil and gold prices
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