Russian Oil Export - Projection Fraught With Risk

Abstract

Economist's Corner Economic risks in the Russian oil sector. With the onset of the global economic decline, last year brought rather unpleasant news to the Russian oil sector. According to Rosstat data, Russia's oil and natural gas liquids production in all of 2008 was lower than the total for only the first 9 months of 2007—notwithstanding the increase of prices to record levels during the first 7 months of last year. In all, 2008 marked the first year since 1998 that Russian oil production has declined. The situation, if anything, was more acute for natural gas. Russian Finance Minister Aleksey Kudrin told journalists in November that gas production had peaked, and the statistics soon seemed to bear him out. While oil production in the first half of 2009 stagnated at 100.1% of the comparable year-on-year (yoy) level, gas production simply collapsed to 79.2% on a yoy-comparison basis. Understandably, the dramatic fall of oil and gas prices in the second half of 2008 only exacerbated the problems of declining production. Both Russia and the West for some years have become used to the constant growth of Russian production, and the sudden declines have a large impact on world hydrocarbon markets. Russia is an extremely important player in those markets, ranking as the world's secondlargest producer (9.8 million B/D) and exporter (7 million B/D) of oil—after Saudi Arabia—and largest exporter of natural gas. Russia's hydrocarbon exports generate roughly 20% of its gross domestic product and account for 64% of all Russian exports.