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Moscow Times, September 28, 2002

Russia and U.S. to Discuss Collaborative Oil Ventures

By Sabrina Tavernise

MOSCOW, Sept. 27 - Energy executives and government officials from Russia and the United States will meet in Houston next week to discuss energy cooperation at a time when concerns over the safety of world oil supplies have been heightened by the Bush administration's push for action against Iraq.

The conference is expected to include a who's who of leaders of the Russian oil industry as well as executives from American energy companies. The secretary of commerce, Donald L. Evans, and the secretary of the Treasury, Paul H. O'Neill, are also scheduled to take part.

The conference, a product of the summit meeting between President Bush and President Putin in May, was originally seen as a step to cement the new relationship between the countries after the terror attacks of Sept. 11. But it has taken on added significance since, as the United States seeks international support for a drive to oust Iraq's president, Saddam Hussein.

Those efforts have set oil markets on edge: crude prices have risen 27 percent since mid-June. And the possibility of warfare that could disrupt oil supplies from the Persian Gulf has thrown a spotlight on the growing importance of Russian oil.

The Russian companies say they will use the conference to propose projects that would bring more Russian oil more rapidly to world markets, especially the United States. Right now, almost the only export routes open to substantial shipments of Russian oil lead to Western Europe.

"The whole idea is to see whether Russia can become a marketer and a supplier of crude oil to the U.S.," said Simon Kukes, president of Tyumen Oil, Russia's fourth-largest producer. "It could reduce reliance of the U.S. on OPEC and lead to more stability in supply."

American officials have frequently mentioned Russia as a growing world energy supplier, as tensions have risen in the Middle East. Russian output has grown by about 7 percent annually in recent years, and now stands at 7.7 million barrels a day, comparable to that of Saudi Arabia, though Russia consumes about half of its production domestically.

Speaking to reporters by telephone on Thursday, Mr. Evans said Russia was "a major contributor to the global energy supply, and I expect it to grow."

Mr. Evans would not say whether Russian business interests in Iraq would be a topic at the conference. But Russian companies say it ought to be. Russia has been one of Iraq's biggest trading partners since the United Nations allowed Iraq to start trading oil for food in 1996. Russian companies want assurances from Washington that an American-backed post-Hussein government will honor their contracts with the current regime.

"Everyone is just marking off their territory," said one influential Russian businessman, referring to Russian companies in Iraq. "It's a smart strategy - signing contracts to get a head start."

Even so, few people here are confident that Russian companies will be able to return to choice projects in Iraq quickly after military action.

"No one here believes that the Americans will be able to install relative order soon," said Sergei Karaganov, the chairman of the board of the Council on Foreign and Defense Policy. "Very few people here are pro-Hussein. He is seen as a dictator and dangerous. But the cure looks more dangerous than the sickness."

Russian companies have said they can supply 10 percent of the United States' demand for imported crude, a figure many analysts dismiss as too optimistic. Indeed, most oil analysts say Russian exports could not offset a major disruption in flows from the Middle East, by far the world's largest oil-producing region.

Still, Russian output is growing, and companies need new markets since demand is stagnant in their existing markets in Europe.

The Russian industry hopes to reach 9.5 million barrels a day by 2010, and will need to expand export facilities extensively to handle the oil. The cramped pipeline network will have to be expanded, and new deepwater ports built to accommodate the supertankers used in the trans-Atlantic oil trade.

The Russian oil companies, led by Lukoil, the biggest producer, will tell the conference of a plan to build 930 miles of pipeline and new loading facilities in the northern port city of Murmansk as a new route for exports to North America.

"American companies could supply services and equipment and share financing costs for this project," said Gennady Krasovsky, a Lukoil spokesman. "This pipeline means more supplies for American consumers, and gives Russia more outlets for its crude."

But the Murmansk project will take years to complete, according to Mr. Kukes, who has called for more immediate steps. He said that international commodity exchanges could help by listing prices for Russia's benchmark oil grade, known as Urals (after the Russian mountain range), and the United States could help by leasing international oil storage facilities to Russian oil companies.

Russian politicians have applauded the new energy rapport between Moscow and Washington as a counterweight to OPEC. Russia is not a member of the cartel, and has sometimes defied the cartel's demands that it limit its exports in the interest of higher prices.

"The ultimate goal of American and Russian energy cooperation is tearing down the OPEC monopoly," Grigory A. Yavlinsky, the leader of the liberal Yabloko Party, said in an interview. It will, he said, "take away the stick that they are using to terrorize everyone."

Russia's energy sector has only begun to attract a flow of foreign investment after years of unstable economics and bureaucratic hurdles, and there are few signs that major commercial deals will be struck at the conference. But the interest level is rising on both sides.

ChevronTexaco's chief executive, David O'Reilly, was in Moscow this week to survey energy opportunities in Russia. A spokesman for Russia's energy minister said ChevronTexaco had been invited to participate in developing new reserves in Eastern Siberia and the Russian Far East.

Moscow Times, September 28, 2002

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