LONDON, Dec 5: When Opec meets next week to haggle over oil markets, members would do well to remember that their biggest competitor is not sitting at the table.
Russia, already the world’s second largest exporter but almost wholly limited to European customers, is aggressively pushing plans to break into the world’s biggest energy importer, the United States, and the top demand growth prospect, Asia.
Both of these consumers are anxious to develop new sources of supply that eliminate the political uncertainties of the Opec-dominated Middle East, which has for years relied on US and Asian refiners to absorb three-quarters of its exports.
Russia is only too ready to please.
“The Russian companies are aggressively trying to expand their markets internationally as they don’t see a lot of growth in Europe,” said Julian Lee of the Centre for Global Energy Studies in London. “This is obviously a concern (for Opec).”
Nearly a dozen projects, including an Arctic oil terminal and a big eastern pipeline, are being planned to help Russian crude make the long journey to US or Asian markets, which could usher a total five million barrels per day of crude out of Europe.
While some plans are unlikely to make it past the drawing board, analysts expect Russian oil production to surge by as much as a third by 2010, necessitating significant new export infrastructure — and new markets.
Russian crude production currently runs at eight million barrels per day (bpd), with exports at over three million bpd.
Russia’s sour crude has already flowed in unprecedented volumes to both the east and west this year, thanks in large part to Opec’s cumulative output cuts, which reduced the global pool of crude and raised prices abroad.
Oil traders say some shipments have been politically motivated — such as YUKOS’s ground-breaking shipments to ExxonMobil’s US refineries — but dealers have also been actively exploiting profitable price differences outside of Europe.
The quirks of the global oil market will always present such opportunities from time to time, but the strategy of looking abroad to support prices at home is well known to Opec.
“If it comes to a straight fight in the Mediterranean, the Russians would have to heavily discount versus the Iraqi barrels, which are almost identical,” said Paul Horsnell of investment bank JP Morgan. “It’s very logical for them to expand the reach of where they’ll sell.”
That search will bring the Russians into direct competition with Opec’s core Middle East members, who are counting on economic growth in Asia and the United States to allow them to ease strict oil output curbs now in place.
Horsnell says Opec has little to worry about if global demand recovers after five years of stagnation, but others believe the competition could heat up.
“There will be room in the US for Russian oil, but it means the growth potential for Opec is more limited than they’d like to believe,” said CGES’s Lee.
The fact that four Russian companies have joined forces to pursue a million-barrel-per-day oil terminal at the former naval base in Murmansk — with exports aimed almost entirely at the United States — may signal a new seriousness of purpose.
“This would be ground-breaking in several respects — the first Russian port with VLCC capacity and the first time Russian majors form a meaningful consortium,” said Paul Collison, senior Russian oil and gas analyst for UBS Warburg.
Topping the project list for developing eastern customers is a $1.7 billion YUKOS/PetroChina pipeline project from Angarsk to Daqing, China, which should pump 600,000 bpd of Russian crude into the Asian giant in about five years’ time.—Reuters