Russia has entered the new millennium as the world’s second-largest exporter of crude oil, having left behind all other major exporters, except Saudi Arabia. The grave events of Sept. 11 have emphasized Russia’s potential role as a new alternative source of massive oil supplies that are politically more acceptable than those from the terrorism-prone Middle East. Does this widespread Western perception reflect reality? Can Russia really push Mideast oil exporters out of the market or it is just the wishful thinking of irresponsible politicians?

Stretching to the limit

It is noteworthy that, nowadays, Russia’s annual oil balances, including oil production, are evidently formed starting from the barest need of oil-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 bank loans.

The country’s ability to export crude oil is limited by available export facilities. In particular, by the end of last year, major export capacities (pipelines and sea terminals) potentially available for Russian crude reached some 3.8 million barrels per day (b/d). But this technical potential was used in 2001 for only 2.4 million b/d, with some spare capacity conceded to Kazakstan, Azerbaijan and Belarus under intergovernmental agreements. Still, with more and more export facilities being gradually commissioned in the years to come, Russia will enjoy more spacious outlets to export its crude.

Based on the latest projections of the Russian Energy Ministry, the major oil-export facilities used or shared by the country will be expanded to handle more than 4.9 million b/d by 2005 and up to 5.8 million b/d by 2010. Presumably, Russia would use about 3.2 million b/d of those facilities by 2005 and nearly 3.9 million b/d by 2010. If one adds to those numbers some 400 thousand to 500 thousand b/d and 500 thousand to 700 thousand b/d of "decentralized" oil exports (by railroads, rivers and minor sea terminals), respectively, we will have a fairly good rule-of-thumb projection of what Russia will export outside the FSU in the foreseeable future: some 3.6 million to 3.7 million b/d by 2005 and 4.4 million to 4.6 million b/d by 2010 compared to less than 2.7 million b/d last year. Quite dramatic growth.

Would this clash with current projections of Russia’s oil output, which is reportedly restrained by depleted oil reserves? Hardly. Some government-backed projects (like Transneft’s 1 million b/d oil pipeline from Angarsk to the Pacific) proceed from the assumption that Russia would be producing about 8.3 million b/d in 2005 and more than 9 million b/d in 2020. And, at present, nobody dares to foresee any considerable increase in domestic demand for crude oil (which currently stands at 3.8 million b/d) and in the import needs of other post-Soviet economies (which actually imported a mere 0.5 million b/d of Russian crude last year). However, these output projections are very hypothetical and rather "departmentally" biased, as is everything forecast (or rather planned) by Russian energy bureaucrats. Until the country’s oil resources are really exhausted, Russia’s oil production will surely be determined by export capabilities, not vice-verse.

Empty promises

While oil production in ex-Soviet Russia has come back from the all-time low of 6.1 million b/d in 1998 to 7 million b/d last year, the country’s crude-oil exports to outside the FSU have risen by 440 thousand b/d (from 2.24 million to 2.68 million b/d). The observed gain is quite comparable with 370 thousand b/d increase in oil output achieved by other FSU producers (mainly by Kazakstan). Those ex-Soviet republics have quietly raised their total crude exports to non-FSU destinations by more than 400 thousand b/d over the same period and are likely to add another 300 thousand b/d this year.

Last December, yielding to OPEC’s admonitions, the Russian government pledged to curtail the country’s Transneft-controlled crude exports to outside the C.I.S. in the first quarter of 2002 by 150 thousand b/d against its actual compatible exports of 2.61 million b/d in the third quarter of last year.

However, it should have been clear from the very beginning that the officially declared cut was quite formal and/or hard to achieve.

First of all, Russian officialdom has no real control over "its" oil sector, which was virtually entirely privatized during the hasty, all-out oil privatization of 1996-1997. Although self-confident officials argue that "slightly more than 30 percent" of the country’s oil-producing assets are still under the state control, as a matter of fact, just two major oil companies – Rosneft and the Russian-Belarusian Slavneft, with 100 percent and 85.8 percent of state participation, respectively – are the only crown assets remaining under government supervision. Last year, each of those companies provided a paltry 4 percent of Russia’s oil output.

Moreover, thanks to the vigorous resistance of privatized oil majors, the federal administration has failed to create a national oil company that could fulfill oil-related international obligations on the part of the Russian state. It comes as no surprise that, despite the officially declared cuts, some Russian oil majors (like Yukos and Sibneft) have announced substantial (by 20-30 percent) increases in oil production for 2002 and are sticking firmly to their plans.

Second, the promised minor cuts in Transneft-controlled exports outside the C.I.S. can be easily made up for by increases in "uncontrolled" supplies (by rail and rivers) and "centralized" deliveries to the C.I.S. destinations (Ukraine, Belarus and Kazakstan). Incidentally, these "near-abroad" exports have been immediately increased two-fold against their ordinary total volume of 500 thousand b/d.

Third, Russia can refine more crude to increase its usual 400 thousand b/d exports of straight-run fuel oil (mazut), which is normally used by Western refineries as valuable feedstock alongside heavy crudes. Indicatively, this year, the traditional heating-season restrictions on mazut exports were lifted in January – without waiting for the warm April.

Without going into boring technical details about Russia’s pseudo-cuts in its oil exports, it should be made extremely clear that the present Russian government can neither afford any loss in petrodollar revenues nor has it any real leverage to make the country’s privatized oil industry commit itself to official obligations. Until the country’s oil resources are really depleted, Russia’s oil companies will export (and, hence, produce) as much crude as can be profitably sold.

(The author is general director of the Moscow-based International Center for Petroleum Business Studies and professor at the Moscow State University of International Relations.)