RUSSIAN PETROLEUM SLUMP TO EASE SLIGHTLY IN 1994

Russia's oil production will decline again this year, but the long slide win continue to slow.

Russian gas production is expected to show a rebound in 1994 after posting a slight decline in 1993.

Domestic oil demand has yet to hit bottom, keeping refineries mired in a slump. The resulting decline in crude runs is increasing the surplus of crude available for export, thus keeping crude exports at high levels. Crude exports to countries outside the former Soviet Union those in a better position to pay in hard currency than Russia's FSU neighbors are expected to remain at high levels.

Production by joint venture companies in Russia could continue to show gains if critically needed reforms are forthcoming. Problems in tax and export policies are troubling more than foreign joint venture companies. They also are spurring Russia's giant new integrated companies to look abroad for upstream ventures. And they are impeding investment in privatized Russian petroleum companies, even as the government continues to press privatization efforts.

PRODUCTION OUTLOOK

Russia's Fuel and Energy Ministry forecasts crude oil and condensate production will average 6.54 million b/d in 1994, down from an estimated 7.08 million b/d in 1993.

That 7.6% drop compares with year to year declines of 11.3% in 1993 and 14% in 1992. In first quarter 1994, Russian oil production is expected to average 6.78 million b/d, down from 7.38 million b/d in first quarter 1993.

Russian joint ventures and join stock companies doubled their output of oil in 1993 from 1992 levels, producing 240,000 b/d. Those companies are expected to produce 280,000 b/d in 1994.

Russian oil exports jumped 13% in 1993 to 1.56 million b/d.

The natural gas industry is one of the few relative bright spots in Russia's energy sector, although it showed a small decline in 1993. Gas production is expected to rebound to 59.4 bcfd this year, averaging 64.2 bcfd in the first quarter, after dropping 3.6% to 59.2 bcfd in 1993.

However, the 2.124 trillion ruble debt customers owe the gas industry has slowed operations to a crawl. Workovers have dropped sharply in Urengoi and Yamburg supergiant gas fields as well as in the Nadym Pur-Tazovksy gas producing area of Tyumen region.

Similarly affected are field development and installation and upgrading of pipelines on the Yamal Peninsula, where most of Russia's new gas supplies are to be developed. For the first 10 months of 1993, only 441 km of pipeline and four compressor stations were installed there, compared with a target of 6,758 km of pipeline and 27 compressor stations.

Much of the current gas pipeline work is focused on a $10 billion Yamal western Europe system.

Russia's downstream outlook for 1994 continues to look bleak, although slightly better than in 1993. Refineries' crude throughput is forecast this year at 4.5 million b/d 4.79 million b/d in the first quarter, flat with the 1993 period up from 4.28 million b/d in 1993 but down from 4.96 million b/d in 1992.

Refinery utilization rates are only 55% at Saratov, 57% at Bashkortostan, 61% at Orsk, and 62% at Kuybyshev. The government plans to revamp 17 of Russia's 28 refineries because the continuing slide in crude oil production means a matching slump in plant efficiency, as well as higher costs and reduced quality of refined products.

BUDGET CONCERNS

The cash starved upstream sector in Russia is changing exploration spending priorities, says Edward Enghel, first deputy chairman of the State Committee on Underground Resources.

Exploration spending in 1994 wt be tied to 1993 outlays, which were 30% less than budgeted.

Emphasis on budget items will be to fund only general exploration work of national importance, notably for key onshore seismic surveys, geological mapping, and offshore surveys. Detailed surveys will be left to local exploration companies.

Plans call for cutting the federal geological service during first half 1994. Other federal programs win be curtailed as well.

Funds will be earmarked for a geological laboratory to support a super-deep research well on the Colsky Peninsula in northern European Russia, but other deep research drilling is ruled out. Offshore exploration will be more results oriented with less of an emphasis on research and technology development.

Federal funds will be eliminated for oil exploration on the Chukotka Peninsula and Irkutsk region but retained for exploration in the Kransnoyarsk administrative territory. Because exploration companies typically are key employers in such remote regions, sharp jumps in unemployment and shortages of goods are expected because of the budget cuts.

Enghel noted foreign investment in Russian exploration is still hindered by a weak ruble and poor economics as well as an absence of laws covering loans, production sharing terms, and proprietary licensing apart from subcontractors. Foreign capital comes into play for exploration only when tax breaks are provided by the government in special circumstances.

Cash strapped Russian exploration companies may find respite in securing oil production for themselves. One such exploration firm in Yamal currently produces more than Daghestan republic, northern Caucasus.

Another opportunity for Russian exploration companies lies in working in other countries, but without state subsidies as had been the case in the Soviet era. Although the State Geological Committee recently signed an agreement covering a large seismic survey in Venezuela, lack of seed capital, equipment, and experience with competition offer limited prospects for expansion abroad.

RUSSIANS ABROAD

Russian oil producing associations, on the other hand, are aggressively pursuing oil development opportunities abroad.

Oil producers in Russia complain that mounting bad debts and high taxes make it unprofitable to operate in their country, Fuel and Energy Minister Yuri Shafranik told a press conference in Moscow. Russian producers echo the complaints of western companies whose investments are being stymied by high export duties and taxes and export restrictions.

Russia's oil producing associations are grappling with bad debts totaling 10 trillion rubles ($6.7 billion), representing more than half the country's bad debt, owed by domestic and other former Soviet customers. Russia's biggest oil producer, Lukoil, alone is owed 1 trillion rubles. Shafranik called the situation "catastrophic" and urged the government to take action.

The situation is causing Russian oil companies to target E&D in other countries, notably Azerbaijan, Kazakhstan, and Viet Nam.

Lukoil recently acquired a 10% interest in the Azerbaijani government's share in a group developing Chirag and Azeri oil fields in the Caspian Sea (OGJ, Jan. 31, Newsletter). That group, led by British Petroleum Co. plc and Norway's Den norske stats oljeselskap AS, hopes to, sign a final agreement soon.

Lukoil, which accounts for almost 15% of Russia's oil production, also may be seeking a similar deal involving Karachaganak gas field in Kazakhstan, currently under development by a group led by Agip SpA and British Gas plc.

In addition, Lukoil is involved in exploration in Egypt and Tunis in partnership with Agip, a pipeline construction project in Lithuania, and a gas exploration project in said Andrey Kochetkov, a Lukoil consultant.

Kochtekov noted growing competition among the biggest Russian oil producers for work abroad, citing efforts by giant producer Yukos in several projects outside Russia.

Russia also expects to expand operations in Viet Nam, with near term plans to boost its share of production there to 40,000 b/d of oil from the current 14,000 b/d.

Meantime, giant gas concern Gazprom is increasing its ownership of fixed assets in other countries' gas sectors. That can be seen in its latest gas supply deal and other arrangements with Finland. Under the deal, Gazprom will supply Finland as much as an additional 269.5 bcf of gas during 1993 2000, netting it increased revenues of $300 million/year. During the past 20 years Gazprom has supplied Finland 1 tcf of gas 112 bcf in 1992 alone.

Gazprom is taking advantage of Finland's current privatization of its gas distribution network by buying interests in state owned Neste Oy to secure an equity stake in Neste's pipelines. This entitles Gazprom to downstream revenues from pipeline tariffs from deliveries of its gas to Finland.

Gazprom also has taken equity positions in gas grids in Estonia and Germany and is eyeing similar moves in Slovakia, the former Yugoslavia, Hungary, Austria, and Lithuania. In addition, the Russian gas giant owns a fertilizer factory at Kokhtla Yarve, Estonia, and plans to build a gas fired power plant in Greece.

Ukraine has offered to sell Gazprom part of its gas distribution network, but the company is balking at Ukraine's debt crisis and economic chaos. Some leveraged deal might be possible through sale of Ukrainian debt to commercial banks.

PRIVATIZATION PROGRESS

In another major step toward privatization of Russia's oil sector, the government will merge oil production and refining enterprises in southern and eastern Siberia into a new integrated oil company, Interfax news agency reported.

A draft resolution says Eastern Oil Co. (EOC) will be formed from the merger of Tomskneft joint stock company and Achinsk refinery, both of which previously were units of state owned Rosneft. Tomskneft produced 216,00 b/d of oil in 1993, and Achinsk processed 106,000 b/d of oil.

The Tomsk petrochemical plant and five other oil producing and seismic surveying enterprises also will transfer shares to EOC.

The State Property Committee plans to hold a tender for 40% of EOC shares, of which foreign entities may buy 15%. The committee is focusing on creating integrated companies to make Russia's debt laden oil companies more attractive for investment.