Russian Oil Majors Probing and Pressing Energy Deals with the U.S.A.

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Researched by Industrailinfo.com (Industrial Information Resources, Incorporated; Houston, Texas). Oil industry data released in the last week by the Russian government puts the country's crude oil production at 7.7 million barrels per day (bpd) in August. This puts Russia ahead of Saudi Arabia with 7.6 million bpd. Exports of Russian crude oil maintained a figure of 3.3 million bpd, which repeated the figure for July. This export volume is up 4% year on year.

These figures are given a particular significance with the news that Russia's largest oil company, Lukoil (LSE:LKOql; RTS:LKOH) (Moscow, Russia), transferred a shipment of crude oil onto a supertanker at Malta destined for the United States. The second largest oil major, Yukos (RTS:YUKO) (Moscow, Russia), made shipments to the U.S.A. in July. These shipments are seen as part of an ongoing campaign by the Russian majors to develop their U.S. market potential and fit with President Bush's policy of trades in support of the U.S. government's Iraqi policy and stated intention to secure oil sources and supply routes which are alternatives to the Middle East.

At the same time Lukoil and Yukos are reviewing planning documents for a new oil terminal in the Murmansk region, which would serve American clients with increasing volumes of oil from the Russian Arctic. This plan is being opposed by Transneft, the state controlled pipeline monopoly, which sees the new sea terminal as competition for the transportation of oil, which is now being carried by Transneft's new and expanding pipeline system from the Arctic to Primorsk, near St Petersburg. The company will open a second pipeline to Primorsk at the end of 2003, which will add 6 million tons of export capacity to the system.

Transneft is responsible for the transportation of 99.6% of all oil produced to refineries in Russia, neighboring countries, and more distant destinations. It also carries oil from Kazakhstan and Azerbaijan across Russian territory to terminals in other countries. Transneft's main pipelines run for 46,700 kilometers with 393 pumping stations and 867 oil tanks, with a total rated volume of 12.7 million cubic meters. In its criticism of the proposed Murmansk terminal, it targets the one destination focus in the interests of Lukoil and Yukos against its own policy of providing equal access to all companies and the promotion of diversification of exports.

In a similar vein, it criticizes Yukos's plans, now in negotiation with Beijing, to build a cross continental pipeline to serve China. Transneft says its own Pacific project, although carrying a higher price tag than the Yukos project, will enable Russian exporters to access both Asian and American markets. It is hardly surprising that a state monopoly accuses its rivals of 'self promotion of the companies on the U.S. market.' It says that even if the two companies export several million tons annually to the U.S. market, this is insignificant in terms of the U.S. consumption of 880 million tons per annum.

Transneft is looking for an international exchange listing next year. The company's corporate finance said that issuing level 1 ADRs would lower future financing costs that will be incurred as Russia's pipeline system expands. In July Transneft's preferred shares obtained a full listing on the Moscow Interbank Currency Exchange and a similar listing is expected in late September on the Russian Trading System.

Meanwhile, in another Arctic fastness, mating calls of caribou across the Bering Strait are now accompanied by a general increase in communication and business contact between the Russian region of Chukotka and the U.S. state of Alaska. The Alaskans see Chukotka, with its diamonds, gold, oil, and gas, as well as its potential for fishing and 'extreme' tourism, as being in need of a staging area for economic development projects. The region is also part of the strategy to find markets for Alaskan produced goods and services in Russia's Far North and Far East. In turn Chukotka is fishing for foreign investment and foreign markets for Russian oil and gas. The U.S. Secretary of Energy recently visited with his Russian counterpart (who is pro Chukotka) in Moscow and promised to help fund geological research in East Siberia and on the Arctic Shelf and offered technical assistance to create strategic oil reserves in Russia. This follows President Bush's promise to President Putin in May to seek American investment for Russia's fuel and energy complex. Chukotka is believed to hold hydrocarbon reserves within a geological structure similar to that of Alaska's North Slope.

The ability to exploit the potential of Chukotka's oil and gas fields is critically hampered by Russia's lack of appropriate modern technology. Alaskan experience in natural resource extraction under extreme conditions could provide the technological and capital boost needed by Chukotka.

In view of economic and strategic advantages that could develop, the narrow Bering Strait is an invitation to jump rather than an obstacle to stand in the way of cooperation. There is a congruency between the strategic aims of the Russians and the Americans as a network of gas and mineral deals begins to take shape. The powerful group of Russian oligarchs and old comrades have interlocking interests in energy and resource products and some of them are young enough to keep an eye on major political ambitions. The Americans also have their band of young turks and good old boys who know a thing or two about blending politics and energy. Events in Iraq in the next few weeks will govern whether the real deals are struck in the shorter or longer term.