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Keeping the Faith

Pat Davis Szymczak

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Last autumn, Fortune magazine quoted OPEC founder, Sheikh Ahmed Zaki Yamani as saying that the cartel 'could be headed for irrelevance.' The reasons 'why' are many. Among them: the cartel is composed of 'mostly undemocratic, mostly impoverished nations that can balance their budgets only if oil prices stay at about $25 a barrel,' Fortune wrote in its Oct. 12, 2002 issue.

Further, OPEC is dominated by national oil companies that don't invest enough in new technologies and exploration; the two OPEC countries that are opening new fields with outside investment experience a clash of interests between supporting quotas and keeping those investors happy. And the biggie these days: most OPEC countries are found in the Middle East.

This is all very good news for Russia. Though Fortune didn't exactly say this straightly in its article, the magazine did throw a big hint by printing a list of the world's 12 highest volume oil exporters in 2001. Together, Russia and Norway, ranking second and third on the list, exported more oil than No. 1 ranked Saudi Arabia.

In 2002, Russia in fact exported more oil on a monthly basis than the Saudis during several months. And Russian pipeline operator, Transneft, is forecasting a 16 percent growth in exports in 2003. That would be a better than 50 percent jump in the next 12 months over last year's export figures.

Russian Buying-Power

What this means is that Russian oil companies will continue to rake-in an avalanche of profits that many are using to shop the world for the latest in new technologies and equipment. Consider the following: a Soviet-era Russian rig in Siberia can cost as little as $500 a day to operate. Compare that to the average rig-operating costs found elsewhere in the world (calculated in the thousands of dollars), and you get my point: Siberian crude costs very little to produce.

The flip side, of course, is that this Soviet equipment, which costs so little to operate in Siberia, is equipment that went out of fashion years, if not decades ago. Western drilling experts are fond of swapping horror stories about working side by side with Russians in 40-below zero (Celsius) temperatures on rigs with no heated work areas; facilities so cold that gauges break or are so frosted over, they are unreadable.

You can take this one of two ways: Russia is hopeless, so why bother (ie) the glass is half empty; or Russia is the growth market of the decade for anyone with the foresight, savvy and tenacity to tackle it (ie) the glass is half full. Anyone who has succeeded in business anywhere in the world knows well, that the latter, positive-thinking, approach is the approach that gets results.

Those 'Inscrutable Russians'

In making this argument, I am reminded of the Russian poet Fyodor Tyutchev who, in the 19th Century, wrote the words (loosely translated here): 'You cannot understand Russia by applying Western linear logic. In Russia, you need only to believe.' Projected onto the Russian oil business of the 21st Century this means - to succeed in Russia, keep in mind that your partner or client may well be as oriental in outlook as he is western in outlook. (The fact that the double-headed eagle of the Russian national emblem looks east and west is not a matter of artistic aesthetics.) Learn to combine the approaches you might use separately in Europe and in Asia, and you'll have a good chance of emerging as a winner.

If you compare any OPEC state with Russia, you can see that it really is worth the effort to get to know Russia. Though he sometimes has to play a balancing act with tricky domestic politics that can give 'Russian Democracy' a unique flavor, Russian President Vladimir Putin, is a 'westernizer' who clearly wants a Russia that is recognized as a part of Europe. Moreover, though the Russian state balances its budget on petro-dollars, Russian oil companies are for the most part privately owned and very competitive. With world class reserves on a par with ExxonMobil and BP, many Russian majors are positioning themselves to become part of the same exclusive, international club.

New Persian Gulf of the Arctic

Getting back to Fortune and that chart I mentioned of the world's top three oil exporters: Saudi Arabia, Russia, Noway; the Russian-Norwegian connection bears watching. At a summit last autumn in Oslo, Russian President Vladimir Putin and Norwegian Prime Minister Kjell Magne Bondevik, both invited each other's oil and gas companies to undertake joint exploration and development projects in their respective sectors of the Barents Sea. The prize in this case is natural gas, not oil. But with European demand for gas on the rise, Gazprom's production in decline, and Russia keen to develop a new offshore industry, the potential is enormous. The Norwegians next year are expected to begin construction of an LNG facility, in fact, that has the potential of turning the Barents Sea into an Arctic version of Qatar or Australia in terms of LNG production and export.

On the oil side, Russian-Norwegian cooperation would go a long way towards developing the nascent Russian offshore industry. This would be good news too for US companies that are suffering from the downturn in the US oil industry right now. It would mean the opening of a new, high growth market for equipment, technologies and know-how. With all respects to the poet Tyutchev, all it will take to be a part of this growth is a little 'leap of faith.'

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