- The Washington Times - Monday, December 18, 2006

Second of two parts

Russia has emerged as an unrivaled energy superpower in a world thirsty for oil and gas, but the country’s recent moves to seize control of strategic parts of the energy industry have slowed growth in production and raised questions about the legal rights of investors and speed of future development.

The 10 percent annual growth in oil production that vaulted Russia into the top rank among suppliers in 2003 and 2004 slowed sharply to about 2.5 percent in the past two years in the wake of Russia’s breakup of its leading oil company, Yukos, and the jailing of its chief executive, Mikhail Khodorkovsky.

The slowdown in Russian production helped spur world oil prices to record highs by keeping a tight rein on global supplies.

Russia this year raised environmental and legal roadblocks to Royal Dutch Shell’s $22 billion project to develop huge oil and gas fields on Sakhalin Island in Russia’s Far East. Analysts believe it to be a bid to increase the state’s revenue and control in the largest foreign investment in Russia by insisting Shell include the state gas monopoly Gazprom as a partner. As a result, new investment by Western companies has dwindled.

Gazprom also shut Chevron, ConocoPhillips and other potential Western partners out of a major project to develop the gigantic Shtokman gas field in the Barents Sea, saying it will finance and manage the entire project on its own.

Yet despite Russia’s sitting on the world’s largest reserves of natural gas, a lack of timely investment in new drilling projects caused Gazprom to run short of fuel last winter to meet fast-growing demand for electricity in Russia.

Russian officials dismiss talk of energy shortages and say they are resolved to meeting their future commitments and are gearing up to do so. They point to the nation’s long history of being a reliable energy supplier to Europe, even during the Cold War, and note that other countries such as Venezuela also have been increasing control over their oil sectors.

Western investors showed little concern about their legal rights as they enthusiastically snapped up offerings of Russian energy stocks this year, Russian officials say. The first public stock offering of minority shares in the state oil company Rosneft in the summer was heartily received when it opened on the London Stock Exchange, despite questions about whether state control would impinge on earnings for investors. Russian electric utilities offerings last month also were oversubscribed by global investors.

But even as the world looks increasingly to Russia to satisfy its energy needs, the International Energy Agency is raising questions about whether growth in Russian oil and gas exports will be fast enough to keep up with rising demand in Europe and commitments Russia has made to deliver oil and gas to both Europe and Asia.

“Will the investments take place? Will they come on time?” asked William C. Ramsey, deputy executive director of the international agency. “These are costly projects. … We’re concerned that the investment climate now is not conducive to bringing those resources online.”

Russia in particular needs to start developing potentially immense deposits of oil in eastern Siberia that remain largely unexplored, he said. The country has just started work on a 2,500-mile pipeline from central Siberia to the Pacific coast that must be in place before the oil can be tapped.

“We need to devote money aggressively to the East Siberian fields,” Mr. Ramsey said. Because of the long time it takes to build transport and drilling structures, “we’re talking about 2017 before we see substantial resources coming out of East Siberia.”

Keeping prices high

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