Smart Russia protects its oil resources

When the transformation of the Soviet Union began in the late '80s and early '90s, the Russian oil industry in terms of production was at its peak. However, the collapse of the Soviet Union and the chaos that followed later impacted the industry hard.

According to Daniel Yergin in his new book The Quest, the privatisation attempted in 1992 brought with it, "violence at every level, as Russian mafias ... ran protection rackets, stole crude oil and refined products and sought to steal assets from local distribution terminals."

Although the state eventually reasserted its authority. large portions of the industry ended up in the wrong hands.

Oil production fell from almost 11.5 million barrels a day (bpd) in 1988 to as low as 6.1 million in 1996 and stayed near that level until 2000. Even cooperation with western oil companies was not enough to salvage the industry.

In 1999, Vladimir Putin began the process of bringing the oil industry under the auspices of the state, if not direct control, thereby successfully beginning to wrest control from the oligarchs.

The recovery of the oil industry began with the rationalisation of the companies and agreements that were made with western oil companies that not only brought technical expertise, but management methods and ability to move quickly.

Production began to leapfrog from 7.1 million bpd in 2001 to 10.3 million in 2010. Exports rose just as fast, helped by the rationalisation and reduction of domestic demand from 5 million bpd in 1988 to 2.7 million in 2002 and then rising slowly to 3.2 million bpd in 2010.

Recently, Sergey Lukianov from the Business Development Department of TNK-BP. said that oil and condensate production rose by 56 per cent between 2000 and 2010.

Oil export capacity rose by 126 million tonnes per annum or 119 per cent and is expected to rise to 302 million tonnes by 2015 with surplus capacity to give the system flexibility in directing exports to various outlets.

Mega projects

In this period, some mega projects were completed, including the first pipeline to the Baltic (BPS-1) and the East Siberia pipeline (ESPO) of 1.5 million bpd, which is currently a combination of pipeline and rail tankers transportation system.

Eventually, the pipeline will stretch 4,500km to the port of Kozmino in the east with a 900km branch to Daqin in China.

The system even connected western Siberia. Major oil field developments were also undertaken not only in eastern Siberia, but also in the Caspian, Sakhalin and Timano-Pechora. Proven oil reserves increased from 55.2 billion barrels in 1998 to 77.4 billion barrels in 2010 and gas reserves increased from 43.5 trillion cubic metres (tcm) to 44.8 tcm.

Progress in the refining industry was slower. In the same period, refinery throughput rose from 174 to 250 million tonnes annually though the industry remained relatively simple with a large surplus of fuel oil that had to be exported.

In 2011, fuel oil production was 75.5 million tonnes annually and exports were 60.6 million tonnes. The sophistication of Russian refineries as measured by Nelson Complexity Index rose from 4.2 in 1991 to only 4.4 in 2011 while the world average is 6.7. However, this situation will change as many conversion units are projected to be added.

Up to 2020, fluid catalytic cracking units of a combined capacity of 11.5 million tonnes annually and 34.2 million tonnes of hydrocracking units will also be added in addition to some residue desulphurisation and coking.

The objective of equalising taxes on light and heavy products will force investment in the direction of reducing fuel oil. Refining quality changes are also reflected in domestic product specifications where they have been progressively improved and they are now close to ¤4 and are likely to reach ¤5 by 2015 with 10 parts per million sulphur.

This progress has vindicated the government's policy in the last 10 years where a resource so important for the wellbeing of the people should not be left entirely to the vagaries of privatisation. Some government control by legislation or structuring of companies or both must be exercised.

The writer is the former head of the Energy Studies Department at the Opec Secretariat, Vienna.