Monday, April 18, 2005

Bad Omens
The rate of growth in global oil production over the next two to three years will largely determine whether prices will return to historical levels--in defiance of the current wisdom of the futures markets--or stay in a new, much higher range. Most of the future supply for this period is already "dialed in", with major projects underway in West Africa and the Caspian, and oil sands production ramping up in Canada. The pivot, in my view, is Russia, which has expanded production rapidly over the last few years and has the potential to add more, if it can manage not to scare off everyone with the capital and expertise to make it happen. Current signs aren't good.

During the whole Yukos fiasco, observers wondered whether the persecution and dismemberment of this company was a unique event, targeting one of the "Oligarchs" who had profited enormously from the Yeltsin privatization, or if this simply reflected an effort to put the entire oil sector back into state--or at least comfortably Russian--hands. Most of the PR out of Russia was aimed at supporting the former interpretation. But with BP's big joint venture, TNK-BP, suddenly hit with a $1 bn tax bill for '01 (and more to come?) those who bet on theory number two may feel vindicated.

The other interpretation currently being pushed is that the problem arises from an out-of-control tax agency. That might be right--though it hardly squares with the picture of Vladimir Putin as the man in charge--but it's hardly reassuring. What good is a profitable Russian venture if it can all be taxed away later?

Sadly, it seems little has changed in ten years. In the mid-90s, the big uncertainties for investors in Russia's oil and gas sector were governance and the fiscal/legal system. If Yukos and TNK-BP fit a pattern, things are no different today. All that oil, walled up behind a government unwilling or unable to match progressive rhetoric with meaningful actions.

So Lord Browne is off to chat with Mr. Putin, and let's hope they can sort out this problem. Otherwise, we may be reduced to hoping that OPEC will either realize they've pushed prices too high or degenerate into squabbles for market share.

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