Russia's oil exports likely to remain robust, despite official predictions

Eugene M. Khartukov
World Energy Analysis & Forecasting Group
Moscow

• Russia's crude oil balance [237,465 bytes]

It is widely known that the recent efforts of the Organization of Petroleum Exporting Countries to jack up world oil prices have been backed by some non-OPEC oil exporters.

Among the latter is Russia, whose government promised to curtail the country's second-quarter crude oil exports by 100,000 b/d.

Although the widely advertised self-imposed reduction is well within the typical seasonal swings of Russia's crude oil exports to markets outside the former Soviet Union, the move was well accepted by the market and has evidently added to the generally bullish sentiment.

At the same time, it could not help but raise inevitable questions (and natural doubts) about the reliability of the announced official restriction and the possibility of further real cuts-and not without grounds.

Freed from the strict and all-embracing state control, the mostly privatized national oil industry seems to ignore governmental orders and fails to follow official projections that are hammered out every winter by the Russian Ministry of Fuel and Energy (Mintopenergo). Consequently, Western analysts who used to rely on the official "truth" of the recent Soviet past are getting increasingly confused about how much Russian oil will pour onto world markets every year.

Decline exaggerated

Indeed, Mintopenergo, which does not believe in the liberated market forces and tries to rescue the "orphaned" oil industry, tends to exaggerate the inevitable decline in the national oil production that is no longer determined by government resolutions and state plans.

For example, in 1995, this "Russian DOE" worked out its forecast estimating the country's 1997 oil (crude and condensate) output at a level between 205.6 million metric tons (4.13 million b/d) and 287.5 million tons (5.78 million b/d). By late 1996, the range of the ministry's projections gradually narrowed to a single 295 million tons (5.95 million b/d), but actual 1997 production refused to slide much below 307 million tons (6.16 million b/d). In late 1997, Mintopenergo envisioned the next year's national oil output at around 290 million tons (5.8 million b/d), but the industry yielded almost 304 million tons (6.10 million b/d).

Still, this winter, the ministry officials gave their assurances that, in 1999, Russia's crude and condensate production will inevitably fall to 284-296 million tons (5.70-5.94 million b/d) and, consequently, the country's total oil exports will shrink to 108-120 million tons (2.16-2.40 million b/d) from 1998's 137 million tons (2.74 million b/d).

Russian oil balance

Without casting doubts on these alarmist predictions (after all, by accident, they may prove correct, and the proverbial wolf will finally come), let's just throw some light on the dark corners of Russia's oil balance and judge how much oil the nation can produce and export (see table, p. 43).

To begin with, every year, Russia actually produces and exports more liquid hydrocarbons than is officially reported as "crude oil (including condensate)" and thus more than is complacently compared with related world statistics. Unlike the Russian oil statistics, which factually deal with a mixture of crude oil and field condensate loaded into the same long-distance pipelines, international reports ordinarily embrace not only crude oil (with diluted field or lease condensate), but also the whole range of natural gas liquids (including stabilized condensate and liquefied petroleum gases, mainly butanes and propane).

To make Russian oil data internationally comparable, one should not neglect tangible amounts of stabilized condensate produced at Russia's gas-processing plants (GPPs) and exported separately to Ukraine, Finland, Lithuania, Poland, and many other countries. Annual production of this condensate amounts to over 6 million tons (140,000 b/d), while its exports exceed 500,000 tons/year (12,000 b/d). Also, every year, Russia produces around 5 million tons (160,000 b/d) of LPG and last year exported over 1.7 million tons (55,000 b/d) of LPG-mostly to East European and Baltic countries.

But even if we stick to Russia's traditional crude oil balance, one can discover that official annual statistics fail to cover more than 500,000 tons (12,000 b/d) of the so-called "recuperated raw materials," such as offsite condensate separated from associated gas and "secondary" crude oil extracted from oil spills and sludge. Although such statistics are eventually available on a monthly basis, they are fully collected with delays of up to 3-months and cannot meet deadlines for official annual reports. Understandably, such reports are not supposed to trace the unaccounted-for oil thievery, which in the case of the breakaway Chechnya republic alone was estimated recently to add up to 400,000-600,000 tons/year (8,000-12,000 b/d). Desirably, the stolen crude should be also recorded and added back to gross oil production as excessive (or normal?) field or transportation losses.

Foreign trade

As for foreign trade statistics, in some cases, the industry's official data fail to account, in a timely fashion, for crude oil exports that bypass the nationwide transportation system controlled by the Russian oil pipeline monopoly Transneft.

The "outsiders" export their crude by rail (mostly to Finland, Sweden, Poland, Belarus, and Estonia) and by sea-through the Russian Baltic port of Kaliningrad, from Sakhalin (via the ports of Moskalvo, Korsakov, and De Kastri) and from Kolguyev Island (in the Barents Sea). Such scattered exports of Russian crude tend to grow and last year exceeded 3.4 million tons (about 70,000 b/d).

In other cases-such as with the national customs statistics-crude oil deliveries to Belarus, which is no longer fenced off from Russia by customs-checking posts, are not reported as exports. As a result, about 10 million tons (or over 190,000 b/d) of crude destined for Belarus refineries falls out of Russia's reported exports.

Also, while not so massive and tending to decline, deliveries of Russian crude under processing deals with Lithuanian, Belarussian, and Ukrainian refiners (which slid to about 820,000 tons, or 16,500 b/d, last year) are treated by Russian customs only as temporary exports. To deserve their formal recognition as actual exports, such crude oil deliveries must avoid a related counter-flow of manufactured oil products.

Exports forecast

Consequently, the actual crude oil data tabulated by Gapmer (World Energy Analysis & Forecasting Group) differ from official statistics by what is evidently neglected or omitted by the latter. As for the 1999 forecast presented here, it is based on our traditional market-wise approach to a short-term assessment of Russia's crude oil balance. This year, such assessment proceeds, inter alia, from the following observations and considerations.

First and foremost, in recent years, the country's oil balances are evidently formed starting from the barest need of export revenues. These oil exports constitute the only reliable source of the cash that is badly needed to pay Russian oil companies' wages, taxes, and loans (OGJ, June 8, 1998, p. 25). Moreover, although not as important as in most OPEC countries, oil-related hard-currency revenues serve as revitalizing shots in the arm of the ailing Russian economy. Together with oil product sales, exports of crude oil and condensate accounted for about 17% of the country's export revenues last year and almost 24% of Russia's total exports in 1997, when world oil prices were considerably higher. Even more important, oil-related tax receipts ordinarily secure a fifth of Russia's budget income.

Unfortunately, these much-desired exports are capped by the shrunken oil demand in Eastern Europe, dead-ended by the insolvency of refineries in the "near abroad," and bottlenecked by the lack of export capacities to other, hard-currency destinations. It is noteworthy that the aggregate capacity of export pipelines and marine terminals serving crude oil flows from (or via) Russia to non-FSU markets is currently estimated at over 2.8 million b/d. However, despite some progress in managing existing facilities and ongoing expansion of the region's export infrastructure, no more than 2.6 million b/d will be actually available for Russia-controlled oil exports in 1999. Furthermore, a growing portion of the available export capacity is lately used to facilitate the increasing transit of Kazakh and Azeri crudes, which will leave no more than 2.4 million b/d for Russian oil exports to non-FSU destinations.

Regardless of world price levels and Mintopenergo's claims, neither the Russian oil industry nor the federal tax collectors will miss any available opportunities to earn vitally important petrodollars. This definitely secures about 2.3-2.4 million b/d of Russian oil exports to outside the FSU. Add the easily predictable 0.5 million b/d of the mostly quasi-government supplies and swap deliveries to Belarus, Ukraine, Lithuania, and Kazakhstan, subtract the fairly stable 0.1 million b/d of Kazakh crude imports, and we end up with probable net exports of Russian oil in 1999 at about 2.6-2.7 million b/d.

Domestic demand

It is logical to now examine the inland demand for crude oil. The very unstable financial position of Russian refineries and their questionable export competitiveness make this member of the future oil-balance equation the most difficult to define.

Since the start of market reforms in the early 1990s, the throughput of Russia's 28 refineries, which used to average near 6 million b/d, dropped to about 3.5 million b/d in the mid-1990s and to 3.3 million b/d last year. Although the Ministry of Economy foresees a 5% increase in refinery runs this year, it is still a "wild card," and oil product demand may remain depressed during 1999. Consequently, refinery throughput this year should rather be expected at 3.3-3.4 million b/d.

One should also allow for other, specific applications of Russian crude oil, such as field and transportation losses (which normally consume around 2.2% of gross oil output), as well as its direct use as non-refinery fuel and road material (which usually accounts for another 0.5%).

Oil stocks movements are fairly limited by available storage capabilities of Russian refineries and oil pipelines, which cannot stand any long build-up of crude stocks. Hence, the "other" domestic oil requirements in 1999 must be expected well within the traditional range of 0.1-0.2 million b/d.

Domestic production

Now that all the ancillary components of Russia's 1999 oil balance are reasonably quantified, the next step is to see how much oil should be domestically produced to meet the defined crude oil demand.

Adding up probable net exports (2.6-2.7 million b/d), refinery throughput (3.3-3.4 million b/d), and other oil requirements (0.1-0.2 million b/d) yields gross oil output at 6.0-6.3 million b/d and, most likely, 6.1-6.2 million b/d. That is not too wide a range to fit, indeed.

But would Russian oilmen be able to produce more than they can physically dispose of, or, alternatively, would they shut in more oil wells to allow their Kazakh and Azeri competitors to earn "their" petrodollars?

While this sounds rather rhetorical, it prompts another, real question: Is the official projection of the much lower production and exports another bureaucratic oversight or a thoughtful government intention? Perhaps the market-wise predictions of Russian oil supplies, which have proved to outclass the official "truth," are sentenced to lose their ground as the government tries to reintroduce the more "efficient" Gosplan-type methods of managing the national oil industry. Given the strong appeal of Russian oil "petropreneurship" and the unavoidable, powerful resistance of the new oil barons, the restoration of the centrally planned oil distribution system seems quite unlikely. Besides, no matter under what economic, political, and ideological regime, the Russians will have to dispose of their oil to help fuel the inefficient national economy and finance the enormous budget outlays. Therefore, if we exclude top-level sabotage or high treason, whatever any intentional reasons there may be for Mintopenergo's lower oil projections, they should be ruled out as completely irrelevant.

Then, in the near future, the world oil market will have to absorb the increasing volumes of Russian crude-of course, unless stormy weather in the Black Sea keeps oil tankers from loading berths too long; if new Russian export outlets in the Baltic, Southwest, and Far East open up as planned; or unless the repeatedly announced "wolf" of reserve depletion really comes to Russian oil fields. One can never rely on any projections about Russia's oil-all but everything may happen in this vast and incomprehensible country.

Is the official projection of the much lower Russian production and exports another bureaucratic oversight or a thoughtful government intention? Perhaps the market-wise predictions of Russian oil supplies, which have proved to outclass the official "truth," are sentenced to lose their ground as the government tries to reintroduce the more "efficient" Gosplan-type methods of managing the national oil industry.

The Author