Aslund: “The oil market has been stalemated”

The Council on Foreign Relations has published an updated backgrounder of the global oil market, which makes mention of Mikhail Khodorkovsky in Russia.

Russia. The world’s second-largest producer and exporter of oil, Russia employs less than 1 percent of its workforce in the oil and gas sector, despite the fact its energy industry comprises roughly a quarter of the country’s gross domestic product (GDP). (The official figure of 9 percent is distorted by questionable accounting practices, economists say.) Oil and gas make up roughly two-fifths of all Russian exports, leaving some investors wary of investing in such a resource-dependent market: A $1 per barrel change in the price of oil, for instance, results in a $1.4 billion change in Russian revenues. In its favor, Russia created a cushion for such changes by developing an oil-stabilization fund, worth some $44 billion, which can only be tapped to reduce its deficit or finance pension funds. The bulk of Russia’s 60 billion barrels of proven oil reserves lie in Western Siberia. A good portion, roughly 14 billion barrels, is also found on Sakhalin Island, a body of land north of Japan that is frozen seven months of the year and formerly housed Soviet prisoners. There are two joint, start-up production projects underway there: Sakhalin-1 and Sakhalin-2, the former led by ExxonMobil, the latter by Royal Dutch/Shell. Both projects are part of what is known as “production-sharing agreements,” where foreign oil firms front the investment capital while the Russian government gets a share of the revenues and retains rights over the oil and gas reserves. In 2007, the Russian government updated the agreement by pressing Shell to give up majority control of Sakhalin-2 to state-owned Gazprom, which some critics said was the first effective attempt to nationalize a foreign oil or gas project in Russia. The trouble with these projects, including those in Western Siberia, is getting the product to market, experts say. Given Russia’s climate and geography, it is short on deep-sea water ports. Also, Russia’s capacity to transport its oil has not caught up to production. Russia produces roughly seven million barrels of oil per day, but can only ship around four million via major pipelines. The rest must be transported by rail or river. Another hindrance is politics. The so-called Yukos affair, the government’s October 2003 arrest of Mikhail Khodorkovsky, formerly Russia’s richest man and head of the oil goliath Yukos, shook investor confidence in Russia’s economy. In the year after Khodorkovsky’s arrest, capital flight—only $2.9 billion in 2003—soared to $9 billion. Further, the sight of Khodorkovsky being hauled off to a Siberian penal colony for an eight-year prison term on what most say were politically motivated fraud and tax evasion charges, did not soothe investors’ nerves. “The oil market has been stalemated because of the Yukos affair,” says Anders Aslund, a senior associate with the Carnegie Endowment for International Peace and expert on the Russian economy. “When you’re fighting over property rights, you don’t do big projects.”