QUOTA AND EXPORT RULES CLOUD OUTLOOK FOR RUSSIAN INDUSTRY

The Russian republic's strong assertion of control over its oil and gas production and exports has further complicated the already muddied outlook for the world's No. 1 oil and gas producer.

Decrees unveiled Nov. 15-16 by Russian President Boris Yeltsin that stripped the Soviet central government of much of its authority and accelerated economic reform included a ban on some exports of oil and tightening of controls on export deals.

How the latest developments from the rapidly collapsing Soviet Union auger for the oil industry is unclear. Oil markets reacted to news of the decrees by increasing futures prices only slightly. But at the least, the decrees add to uncertainty over where the remnants of the Soviet economy--and notably its petroleum sector--are headed.

Meantime, a series of energy profiles of the former Soviet republics in the newsletter Geopolitics of Energy underscores the pivotal role Russia has in the crumbling union's energy industry.

And former Soviet Baltic republic Latvia continues to suffer severe fuel shortages, the Soviet press reports.

WHAT'S AT STAKE

Russian officials were quoted in the international press as saying the oil exports measure was designed to ensure the republic had sufficient oil supplies as winter approaches.

But another likely impetus is Russia's effort to recapture revenues from Russian oil and gas reexported by other republics, industry officials and analysts say.

Some analysts contend the measures simply underscore what the market has been placing an oil price premium on the past year or so: a shortfall in Soviet oil exports while the Organization of Petroleum Exporting Countries produces all out in the wake of lost Iraqi and Kuwaiti oil exports. Without that premium already built into current oil prices, the thinking goes, oil prices would be much lower today even with Iraqi and Kuwaiti exports still out of the picture.

Light sweet crude for delivery in December rose only 27 cents to $22.79/bbl at Nov. 15 closing on the New York Mercantile Exchange. At the same time in Europe, where a cutoff of Soviet supplies would be felt more strongly, Brent blend crude for delivery in January jumped 49 cents to close at $21.59/bbl. However, Nymex crude futures fell 39 cents and Brent futures dropped 43 cents Nov. 18 in the absence of further news of possible disruptions in Soviet oil exports.

After the decrees were unveiled, industry officials remained cautious in assessing how the export controls would affect the climate for foreign joint venture deals in Russia. They see Yeltsin's decrees more as an assertion of Russian dominance of what remains of the crippled Soviet economy than as a bid to cut or halt oil exports or turn back the clock on progress in foreign investment in Russia's oil and gas resources.

The decrees were announced a day after Yeltsin, Soviet President Mikhail Gorbachev, and leaders of six other Soviet republics signed a new treaty creating a Union of Sovereign States, stripping the Kremlin of all but foreign policy and defense authority.

Other Yeltsin decrees, such as expediting repatriation of profits and steps toward ruble convertibility, point to positive signs for foreign investors.

DECREES' EFFECTS

Yeltsin's decrees called for a freeze on all new oil export licenses until Jan. 1 and a review of all existing oil export licenses.

They would set quotas on Russian oil exports, including those to neighboring republics, and impose tougher controls on illegal bartering of oil for other products, a practice Russia says is growing in its oil producing regions. The quotas would take effect Dec. 1.

The resolution covering the controls of Russian oil exports cited "the need to secure the Russian republic's requirements for fuel and energy in the autumn and winter of 1991-92."

Similar tight export and production controls would be placed on Russian diamonds, gold, and other precious metals as collateral, along with oil, critical to the Soviet republics' ability to attract international credit.

There has been growing speculation that the Kremlin has drastically depleted Soviet gold reserves, concentrated in Russia, in efforts to acquire more hard currency abroad.

ANGLO-SUISSE RESPONSE

Anglo-Suisse LP Pres. Gil Labbe said the White Nights joint venture was not affected by Yeltsin's decision to suspend some international oil export licenses.

"A lot of the production affected has to do with barter deals some of the production associations were trying to do," Labbe said. "Also, some of the fringe republics were buying oil with cheap rubles, then reexporting it for dollars to European markets."

White Nights is an exploration/development joint venture of Anglo-Suisse, Houston, and Varyeganneftegaz, a Russian oil production association.

Labbe's view was underscored by comments by Soviet officials in the U.S. shortly after the decrees were announced.

Alexandr Yakovlev, Gorbachev's top adviser, said the Russian republic was more concerned about the shipment of oil to other republics than about international exports. Russia's oil shipments to foreign countries and other republics is estimated at about 3.1 million b/d.

"For rubles, we export oil to another republic," Yakovlev said. "That republic then sells it at a price 3-10 times as much for dollars."

MARKET EFFECTS

"The next 3 weeks will be critical for oil exports from Russia," said Joseph Stanislaw, managing director of Cambridge Energy Research Associates, Cambridge, Mass.

"Ninety percent of Soviet oil exports come from Russia, but 20-30% of Russian oil is exported independently from the provinces under license. They are keeping the hard currency instead of crediting it to Russia's central treasury.

"Yeltsin's initiative to gain control of oil and mineral exports is designed to collect the hard currency for Russia, rather than prohibit exports. If the republics do not fall into line, Yeltsin has threatened to revoke the licenses and divert the oil for internal use.

"This may happen anyway if the winter proves very harsh."

Currently, the combined republics are producing about 10 million b/d of oil and exporting about 1.7 million b/d on the world market.

"The continuing uncertainty over Russian and Soviet exports to global markets strengthens Saudi Arabia's position in the upcoming and future OPEC meetings," Stanislaw said. "The Saudis argue that the shift in the demand/supply equation makes quotas unnecessary in the long term."

OTHER DECREES

Yeltsin's other decrees apparently underscore his impatience with the pace of economic reform in the imploding U.S.S.R., even at the risk of undercutting the union treaty signed shortly before they were announced, some analysts believe.

The measures would remove most controls over imports, exports, and foreign currency transactions on Russian soil.

They also would allow the ruble's value to float according to market rates as of Jan. 1. The value of the ruble currently is fixed by the Soviet central bank, but it is widely traded on the black market.

Floating the ruble would significantly cut its value but at the same time improve the foreign investment climate by letting investors take profits in cash instead of via barter deals.

In addition, the decrees would allow all registered companies in Russia to participate in foreign trade and let Russian citizens hold hard currency bank accounts.

ENERGY PROFILES

Energy profiles of the 15 former Soviet republics illustrate how heavily dependent the others are on Russia to meet their energy needs.

Writing in the Nov. 1 Geopolitics of Energy, a publication of Conant & Associates Ltd., Washington, Department of Energy analysts Lowell Feld, John H. Herbert, and Erik Kreil speculated as to whether a continuing slide in Soviet oil and gas production would provoke an economic and political collapse within the republics.

The authors noted a break in economic ties among the republics could cause a disruption of key imports of raw materials, including energy supplies, and a loss of major export outlets for the smaller republics.

At the same time, Russia, with only one major oil port at Novorossiisk on the Black Sea, would lose export outlets. In addition, Russia's major oil and gas pipelines to Europe cross Ukrainian and Byelorussian territory, and Russia's oil sector depend heavily on oil production equipment produced in other republics, notably Azerbaijan.

Among the republics, only Azerbaijan, Kazakhstan, and Turkmenia are net exporters of petroleum besides Russia (see table, p. 24). Russia alone is the world's biggest oil producer and holds the world's biggest gas reserves as well as one of the world's biggest coal reserves, the authors noted.

In addition to dominating oil, gas, and coal production among the republics, Russia's 8 million b/d of refining capacity accounts for about two thirds of the Soviet total.

"Without the Russian republic, the 'Soviet Union' would be a significant net importer of energy," they wrote. "In 1990 ... the non-Russian republics would have imported about 2.4 million b/d of oil and more than 950,000 b/d oil equivalent (BDOE) of natural gas."

While the non-Russian republics are relatively strong in electrical power generation, many remain dependent on Russia to supply the hydrocarbons to generate that electricity.

Without Russia, the authors contend, the remaining Soviet republics would have been forced to import almost 2.6 million BDOE of energy in 1990 to meet internal needs.

This situation gives Russia a de facto stranglehold on the other republics' economies, they wrote. However, Russia needs them as markets and as transit points for exports to Europe, with the Ukraine and the Baltic states capable of cutting off most Russian oil and gas exports.

"Given such potential for mutual economic destruction, therefore, the rational course of action would be for the former Soviet republics to cooperate and maintain economic ties.

"Without such cooperation, many republics could soon find themselves fighting for their economic and political lives."

LATVIA'S ENERGY WOES

In Latvia, the government has announced emergency measures to provide petroleum products for businesses and the general population.

The Moscow newspaper Izvestia reports that in Riga, the Latvian capital, fuel for transport trucks is in extremely short supply, while the gasoline tanks of police cars and vehicles engaged in other municipal services "are showing empty."

Reports have circulated that two trainloads of fuel from the Russian republic's Ufa refinery were lost "for unknown reasons" en route to Latvia.

Latvian fuel supply officials suggest the current crisis stems from Russia's demand that Latvia pay for oil either in convertible currency or at world prices. It's estimated that the cost of a liter of gasoline under such terms would rise to 10-15 rubles.

Finland has offered to provide gasoline to Latvia for 1.5 markaa/l., but that equals about 15 rubles at the commercial rate of exchange. Latvia still hopes Russia will agree to a barter deal involving Latvian minibuses for petroleum products.

However, Latvia may have an ace in the hole. If Russia insists on stiff terms for selling oil to the Baltic republic, Latvia could place a high levy on Russian oil transported by pipeline across its territory to the big tanker terminal at Ventspils.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.