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Economic Commentary:
Gulf oil producers fear new Russian threat

Published by Daily Star on 2003-11-03

BEIRUT: President Vladimir Putin's dramatic moves against Yukos, Russia's largest oil producer--freezing company shares and arresting its chief--are being watched with interest by much of the world because of what they say about the exercise of power in a supposedly democratic country, albeit one that was Communist until the erstwhile Soviet Union collapsed more than a decade ago. But the development is surely being monitored most closely in Saudi Arabia and Japan, each of whom has special reasons to fret about what happens in Russia, the world's second largest oil exporter after the kingdom.

While President Putin's motives remain the subject of intense speculation, the general facts of the Yukos story are pretty well known by now: In a predawn raid last week, the Kremlin arrested Mikhail Khodorkovsky, chief of Yukos--and the richest man in Russia. He was charged with tax evasion, fraud, forgery and embezzlement. At the time of the arrest, Yukos was widely believed to be run well along international accounting standards. Khodorkovsky was generally credited with rescuing the company from the brink of bankruptcy; by last year, Yukos pumped an average of 1.4 million barrels a day--some 18 percent of the 5 million barrels a day that Russia produces--and the company, benefiting by higher global oil prices, was able to pay dividends to its 60,000 shareholders.

What makes the Yukos story relevant to the Saudis and other producers in the Gulf is the threat posed to their market share and crude oil revenues from increased Russian exports, as analyst Alan Hegburg puts it. At one point in 1988, Russia produced as much as 12.5 million barrels a day--exporting no more than 2.5 million barrels a day, mainly to Europe--but production has since been handicapped by deteriorating infrastructure and the shortage of ports large enough to accommodate new pipelines and terminal facilities. The country's most important pipeline is owned by Transneft, a monopoly that is reported to be poorly managed. Yukos has long been known to want to get around the Transneft system with a new system to the deepwater port of Murmansk, according to Hegburg. The United States supports this alternative system, as indeed it does the building of a Russian liquefied natural gas (LNG) terminal in the Murmansk area to supply the American market. Such a pipeline would bring Russian oil and gas much closer to the US than supplies from the Gulf, something that surely worries Gulf producers.

Another source of concern for the Gulf is what Japan has been saying about Russian supplies. The Japanese are keen about a pipeline to the Far East. They have offered up to $10 billion to build a line from Angarsk to the port of Nokhodtka on Russia's Pacific Coast. Analyst Eric Watkins points out that the Japanese have explicitly said their aim for the pipeline is to reduce their dependence on Middle East crude oil: almost 90 percent of Japan's annual oil imports come from the region. Watkins also says that, "no less worrisome to Middle East suppliers," the Angarsk-Nokhodtka pipeline is being billed by the Japanese as a cost-effective way to sell to markets in the US and other areas of Asia-Pacific.

And still another worry for Gulf producers: when one takes into account Russia's natural gas production, it's the biggest exporter of hydrocarbons in the world. With the projected pipelines and new export facilities, Russia "is on track to rival Saudi Arabia in scale and global reach," says Edward L. Morse of Hess Energy Trading in New York. Russia, he adds, "is a new element that will have a seminal impact on the structure of the global oil market and the global oil industry."

Pranay Gupte,
Senior Writer and Global-Affairs Columnist

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