RUSSIAN OIL PRODUCTION STILL SLIDING

Russian oil production continued its steep long term decline during first quarter 1993. However, complaints voiced by oil industry leaders during recent Moscow conferences spawned favorable government action. President Boris Yeltsin, who faces a nationwide vote of confidence in an Apr. 25 referendum, has freed oil and gas enterprises, exploration ventures, and refineries from mandatory sale of half of their hard currency earnings to the state. The concession followed a decree exempting

April 19, 1993

8 min read

Russian oil production continued its steep long term decline during first quarter 1993.

However, complaints voiced by oil industry leaders during recent Moscow conferences spawned favorable government action.

President Boris Yeltsin, who faces a nationwide vote of confidence in an Apr. 25 referendum, has freed oil and gas enterprises, exploration ventures, and refineries from mandatory sale of half of their hard currency earnings to the state. The concession followed a decree exempting petroleum producers from export duties, the Russian business weekly Commersant reported.

CRISIS TO CATASTROPHE

Before Yeltsin's action, Russian oilmen voiced grave doubts that existing government policies would solve soon their problems.

During their Moscow meetings, oil executives said conditions in their industry had "deteriorated from crisis to catastrophe." They warned that if the government did not provide quick relief, Russia's crude and condensate flow could plunge from about 7.85 million b/d in 1992 to 6.4 million b/d this year, 5.2 million b/d in 1994, and 4.3 million b/d in 1995.

A slide so severe would drop the nation's oil production to levels seen in the late 1960s. Because Russia's oil consumption, even with its economy in a steep decline, is more than 5 million b/d, exports to either customers outside the former Soviet Union or to other republics in the Commonwealth of Independent States could become impossible within 2 years if the gloomy forecasts prove correct.

Russian oil production first climbed to 4 million b/d in 1965 and leaped to 5.69 million b/d in 1970. Production peaked at 11.38 million b/d in 1987, then plummeted to 10.32 million b/d in 1990 and 9.25 million b/d in 1991.

In predicting that Russian oil flow could fall to 5.2 million b/d next year, Viadimir Medvedev, president of the Union of Oilman, declared, "This is not a threat or an ultimatum but a statement of fact."

A BRIGHT SPOT

One of the few bright spots reported at the oilmen's Moscow conferences was an apparent slowing of the crude and condensate production decline during much of first quarter 1993. Russian production averaged close to 7.2 million b/d through late March, but that was down about 15% from the same 1992 period.

Even so, the fuel and energy sector's performance was better than that of Russian industry as a whole. Preliminary data show overall national industrial output fell about 20% during first quarter 1993 vs. the first 3 months of last year.

Russian oil flow during the first 3 weeks of March 1993 averaged only 6.78 million b/d. That was 1.2% below production in the comparable weeks in February.

Refinery throughput also dropped sharply. Less than 4.14 million b/d of crude were processed during the first 3 weeks of March, a decline of 15% from the comparable 21 days in March 1992.

As Russia's plowing and planting season began, production of diesel fuel dipped 8% below last year's level, and gasoline output was off 12%. Prices for diesel fuel, gasoline, and lubricants jumped 4-7%/week during mid-March.

Refinery inefficiency remains extremely high. The percentage of light products obtained from a barrel of crude is only 65%, virtually unchanged since the 1970s.

First quarter natural gas flow was about level with the same 1992 period. But coal production was down nearly 12%.

With oil production continuing to decline, Russian petrochemical manufacture followed suit. March mineral fertilizer production fell 21% from the same 1992 period, while production of polystyrene, polypropylene, polyvinyl chloride, and other plastic materials dropped 8.37%.

Mid-March stocks of heavy fuel oil were down 20% from the same 1992 period. Some Russian oil fired electric power generating plants were out of fuel, and the civilian population in 50 areas of the republic suffered fuel shortages.

The Russian State Statistical Committee said western Siberia's Tyumen province, the nation's largest oil producer, showed no sign of recovering from its 5 year production slump. One in every four of the province's oil wells was idle last January-February vs. one in six for Russia as a whole.

Tyumen province's first quarter 1993 crude and condensate flow was about 4.559 million b/d vs. nearly 5.455 million b/d in the first 3 months of 1992.

UNWISE POLICIES

Yuri Shafranik, Russia's minister for fuel and energy, charged that the government's "unwise and shortsighted policies" of past years still prevail.

"No small part of the guilt for the sharp reduction in oil flow and geological exploration is attributable to the present government," Shafranik said. "The petroleum industry has been burdened with exorbitant taxes.

"Oil industry personnel themselves are also at fault. In their pursuit of bigger flows from higher yielding and easier to exploit deposits, they have practically ignored efficient development of other fields.

"According to various estimates, Russia today has shut in 12,000-30,000 wells with a production potential of 500,000 to 1 million bo/d."

The words "according to various estimates" are noteworthy, Shafranik declared. "Different oil congress speakers cited various estimates as if nobody has precise data.

"Such disagreement is eloquently characteristic of the present state of affairs in the Russian oil industry. Specific steps must be taken in the shortest possible time to prevent the industry's collapse."

Shafranik said blaming the proposed freeing of oil prices and the alleged greed of oil industry personnel for "all of the deadly sins" causing hyperinflation and Russia's other economic woes is "absolute nonsense." He pointed out that only 25% of the present price of oil products is attributable to production and refining.

While conceding that someone may be profiting from artificially high oil prices, it's not the petroleum industry, Shafranik declared. The government, he said, is allocating billions of rubles to the military/industrial complex and to agriculture on the pretext that such action is necessary because of high energy costs.

"But the government itself fixes oil prices from above. Crude price hikes were decreed in 1992 and early this year only after a number of petroleum producing associations fell into unprofitability."

TAXES, DEBTS

Anatoly Fomin, general director of western Siberia's Megionneftegaz production association, disclosed that late last year his enterprise forecast it would show a profit of at least 40 billion rubles in 1993. However, the government decreed new taxes in January, causing Megionneftegaz to revise its estimate to a loss of 5 billion rubles.

Fomin complained that early this year government taxes on oil exports amounted to many times the money that goes into the "consumption fund" designated for improvement of petroleum workers' living standards. He added that foreign financiers participating in a recent London conference agreed that they would make no further investments in the Russian oil producing industry until Moscow stopped making rapid changes in its tax policies.

The problems caused by taxes and nonpayment of bills by customers were mentioned in almost every speech at the oilmen's Moscow congress. The situation sometimes "bordered on the absurd, with everybody in debt to everybody else."

With payments from customers long overdue and the central government sharply cutting its oil industry investment, petroleum enterprises have been forced to borrow money from commercial banks at "enormous" interest rates. Official agencies frequently regarded those loans as income and confiscated them to settle the petroleum associations' debts to the government.

INDEPENDENT SALES

Until recently, Moscow ski=ed added revenue from the 10% of production oil producing associations were permitted to sell "independently" to foreign buyers for hard currency, said Union of Oilmen's Medvedev. He said such transactions were independent in name only.

"In actuality, the so-called independent sales abroad had to be made through the government's former Soyuznefteeksport agency, which charged a fee. Moreover, the production associations had to pay a customs duty and sell half of the foreign currency they earned to the government for increasingly worthless rubles."

Medvedev said about 75% of the revenues obtained by Russian oil production associations was eaten up by taxes, and only 16-17% was available to develop oil production.

"At best," he said, "the net profit on production associations' foreign oil sales was only 8-9% and much less for many enterprises.

"Thus the rumors of fabulous profits made by oilmen are, to say the least, somewhat exaggerated."

Russian oilmen hope Yeltsin's recent decrees reducing government control over petroleum exports will enable them to retain more of their hard currency earnings for badly needed investment in their enterprises.

Official statistics show oil, gas, and petroleum products exports accounted for 60% of Russia's hard currency revenue from foreign sales. In January and February, Russia exported 11.8 million tons of =de, 62% more than in the same 1992 period. Gas exports came to 15.5 billion cu m in January and February. That was 24% more than in the first 2 months of last year.