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Russian Oil is Drying Up Fast, No Hope Offshore

Filed under: Russia

We've previously reported on how Russian oil production is falling off fast. Those who hope that Russia can replenish its production by developing offshore fields may be barking up the wrong oil derrick. The energy industry trade publication Upstream Online reported on April 18th:

Russia needs 61 trillion rubles ($2.6 trillion) of investment to develop offshore oil and gas deposits, Rosneft boss Sergei Bogdanchikov has claimed. Exploration alone of offshore regions until 2050 will cost 16 trillion rubles and production 45 trillion rubles more, Bogdanchikov told reporters and government officials in Moscow today.
UpstreamOnline also reports:
Russian gas giant Gazprom has booked a a worse than predicted 20% fall in second-quarter net profit, blaming lower sales in Europe and higher operating costs. Net profit fell to 113 billion roubles ($4.62 billion), to International Financial Reporting Standards, from 141 billion roubles in the same period last year and below the average of 129 billion roubles in a Reuters poll of 11 analysts. Revenue rose 5% to 532 billion roubles, in line with forecasts, but the bottom line was hurt by high operating expenses, which jumped 18% year-on-year to 390 billion roubles. Gazprom's total long-term borrowings, including affiliates, rose to 1.105 trillion roubles from 806 billion roubles at the end of 2006.

So Russian gas and oil fields are running dry, trillions are needed to refurbish them, and Gazprom is deep in debt, unable to provide such funds. Blogger Tim Newman, who works in the Russian energy sector, adds:

The $2.6 trillion required by Gazprom and Rosneft is only that amount needed to develop Russia's offshore fields. The onshore developments will need separate funding, as in Upstream Online tells us: "Gazprom Neft, which expects Gazprom to hand over the right to develop all of Gazprom's 11 oilfields within the next two to three years, has said it plans to invest up to $4 billion per year to 2020, or around $50 billion, to boost output." $4bn per year is one hell of a lot of money for a single company to invest in oil and gas projects, if not much beside the $62bn per year that they say they are going to have to come up with to develop the offshore fields. Bear this in mind next time you hear about Gazprom investing in trans-saharan pipelines, Libya, and Nigeria. Despite the political rhetoric and talks of the massive potential and influence of Gazprom, it is Russia's most indebted company. In other words, Gazprom is unlikely to be in much of a position to be financing mega-projects any time soon, and if it is going to sink billions into places like Africa, having never run a major project on home soil let alone in a political minefield like Nigeria, Russians might be waiting a while for their offshore gas receipts.

Russia could, of course, solicit foreign investment to provide the needed sums, but then it would have to share the profits and the control, and it's currently in the process of enacting legislation to make this illegal out of pure neo-Soviet paranoia. The Kremlin imagines that it can simply bleed the nation white, just as was done in Soviet times, using the funds from oil and gas proceeds not to develop the nation or even the energy sector, but to wage a new cold war with the West. Meanwhile, just as in Soviet times, the energy sector and the people themselves get sicker and sicker until finally there is a massive collapse.

Russia replaced the USSR after the most recent collapse. What will replace Russia after the coming one?

Hat tip: Robert Amsterdam

NOTE: To comment on this post for publication, write to: kimzigfeld@gmail.com

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