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Russian Oil Exports: Dropping, But Why?

by: Jim Kingsdale August 21, 2008 | about stocks: DBO / OIL / USO    

Jim Kingsdale

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If evidence is needed that the Export Land Model works, Russia has provided it in spades.  The report posted below notes that while production was down in the 1H08 by .8% compared with 1H07, exports suffered a decline of 5.2%.  The implication is that Russian domestic demand ate up the difference between production and exports. 

Of course, that is not necessarily so, as George (Gershwin) once noted.   It could be that Russia simply built its own inventories for whatever (hoarding) reasons.  Or it could be that what seems true is true, that they simply used the balance internally. 

The Export Land Model highlights the arithmetic fact that if a country’s oil production is falling and its internal oil consumption is growing (which is the case in all oil exporting economies), exports will fall at a far greater rate than production falls. 

Of course, the inverse can also be true.  If an oil importing country (say the U.S.) begins to use less oil internally and if its oil production is also increasing,  its imports will decline at a much faster rate than its production is rising.   I don’t expect to see much of a rise in U.S. oil production, but there may be some given higher prices. 

Here is the report from the Russian News and Information Agency:

 

Russia’s oil exports decline 5.2% to 897 mln bbls in 1H08

MOSCOW, August 19 (RIA Novosti) - Russia’s oil exports declined 5.2% year-on-year in January-June to 122.5 million metric tons (897 million barrels), the country’s top statistics body said on Tuesday.

According to the Russian State Statistics Service (Rosstat), oil accounted for 36.4% of Russian exports and 52.3% of fuel and energy product exports in January-June 2008.

Rosstat reported on Monday that oil output in Russia declined 0.8% year-on-year in January-July to 283 million metric tons (2.07 bln bbls).

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This article has 18 comments:

  •  
    Aug 21 01:19 PM
    The production curve of any individual oil well shows a steep drop from the time it is drilled. Production is maintained by continually adding new wells to the fields. That takes reinvestment in the industry.

    In Russia, reinvestment in the energy sector is severely hampered by its ownership structure - nearly all state owned. The incentive for the political class is to skim off as much as possible for their other uses, treating the whole thing as a cash cow. Not to build for long term capacity.

    When foreign majors came in to invest in their fields, the state let them and then took the resulting assets with minimal compensation.

    Thieves are lousy capitalists. Bottom line.
    Reply
  •  
    Aug 21 02:52 PM
    Jason, This is exactly why the Russians ran off Dudley of BP TNK, because he wanted to reinvest to expand production, reducing current yield the Russians wanted to skim.

    ...Prior to the partial TNK acquisition by BP, TNK had aggressively seized several assets from another BP joint venture, wrote The Economist in May 2007, ...

    sgt.red.blue.red
    Reply
  •  
    Aug 21 03:42 PM
    You know that Russia has a policy of crippling its investment partners and it, like many producing countries, lacks an industry to develop and manage its resources. The likely result will be falling production from just poor management, but do not discount peak oil effects. Some Russian fields are old and were poorly developed. Finally, when you play politics with natural resources you are likely to tell lies. Much to be suspicious of with the Russians and their new releases. It is war you know. Z
    Reply
  •  
    Aug 21 05:00 PM
    The Ruskies aren't going to rearm Cuba. They will act in more subtle ways. Like slowing gas and oil exports to force prices up. Or perhaps
    backing leftist terrorists in South America.
    Reply
  •  
    Aug 21 05:40 PM
    "It ain't necessarily so" should be credited to Ira, the lyricist, rather than George, the composer.
    8-D
    Reply
  •  
    Aug 22 08:48 AM
    All good points, one more to consider: Believe NOTHING that comes from the Russian government.
    Reply
  •  
    Aug 22 10:50 AM
    Any company investing in Russia, does so at its own risk. Putin's objective is to restore the Soviet Union. Companies trading with Russia should seek payment in the form of oil or oil equivalents. That would be one way to force Russia to increase its oil production.
    Reply
  •  
    Aug 22 12:27 PM
    The Bear is back!

    Oil and the cash it generates are simply a means to an end.
    Reply
  •  
    Aug 22 12:30 PM
    This is not an altogether dismal prospect, actually.

    It will force the U.S. and Europe to get back to business and out of dreamland.
    Reply
  •  
    Aug 22 03:01 PM
    uh, GEORGE Gershwin didn't write "It Ain't Necessarily So" ... lyricist brother Ira did.
    Reply
  •  
    Aug 22 05:31 PM
    I agree, Putin's objective is to restore the Soviet Union to its original borders. The incursion into Georgia has proven they are ready and willing to do so. The oil will be needed to fuel their Tanks and aircraft. The threat of nuclear retaliation if the U.S. installs the anti- ballistic missle system is real. We have completed the agreement with Poland ! Poland is now part of NATO. Sounds like history may repeat itself should Russia follow through ! God Bless the U.S.A.
    Reply
  •  
    Aug 23 12:59 AM
    Why are you guys so worried about Russian oil? The key word is Russian. It belongs to Russians, who are entitled to do whatever they want. Why don't you go to market and buy it from somebody else? Is not it the essence of capitalism? As far as investing in Russia... there are some good opportunities in pizza making and street cleaning, also a dosen of other fields. I am sure if you work hard, you will succeed in these areas. Just be creative, do not try to steal somebody else's wealth, create your own.
    Reply
  •  
    Aug 23 03:21 AM
    alexxo..."steal&q... When foreign companies come in, and enter into partnership agreements/joint ventures.....investing BILLIONS of dollars, only to have agreements abrogated because of "enviromental&quo... reasons (Shell), or other bogus "failings" (BP)...who's stealing from who?

    I've got a long-standing position in Enel (the Italian utility), which has been aggressive in expanding in the former Eastern bloc countries since deregulation, but when they bought power generating assets in Russia, I DAMN near exited the position. Putin and his KGB thugs are EXACTLY that....thugs.
    Reply
  •  
    Aug 23 10:33 AM
    oldtrdr, before entering into any agreements with the Russian companies, western companies should study all the applicable regulations including environmental etc. If you cannot comply with the laws of the land, you essentially become criminal and should be put out of business. Is not it how law works in Italia? You need to understand, that energy is a strategic sector, and that the only thing Russians actually need is your technology. You gotta be more realistic when you enter strategic Russian economic sectors. If you are coming in with reasonanble profit expectations and know your subordinate position to the Russian national interests, you will be fine, nobody is going to fail you. There is no point in failing a good, understanding partner. Russians only going to fail you if they feel that you are trying to take advantage of them.
    Reply
  •  
    Aug 23 03:56 PM
    please, this is not the place for criptosoviet propaganda (although I cant really decide this is being serious or joke)
    Reply
  •  
    Aug 24 10:35 PM
    With Russian and Saudi oil exports both in steep decline, peak oil is effectively here for the oil-importing countries, regardless of whether the total oil production increases or not. The US is completely unprepared for the sharp reduction in the amount of imported oil that will soon follow. US residents would be well-advised to prepare for radical adjustments to their car-based lifestyle.

    I expect an increasing amount of irrational anti-Russian and anti-Arab rhetoric (as evidenced by some of the comments above), as well as the push to drill in ANWR and off the Florida coasts. Neither will make a difference.
    Reply
  •  
    Aug 25 10:56 AM
    I am a fan of the Export Land Model. Not only does the math work, but it makes common sense. I agree that we are seeing more and more "Anti Arab and Russian" rhetoric. I agree with Alexxo in his overall viewpoint of how to do business in the Russian oil patch. To wit, I would suggest BP visit the Slumberger offices and ask for a tutorial. Lastly, BP are big boys and girls. They know the risks--subjective and objective.

    Russia will have to deal with the challenges of running off the Majors, but again, I would urge one to visit SLB in Moscow for a glimpse of the future.
    Reply
  •  
    Aug 25 12:41 PM
    Author's guess that Russia has engaged in building inventories is probably wrong. Why would Russia build inventories if it is an oil producer? This would have only a short-lived temporary effect on prices. Russian Bull, I would not blame everything on pick oil arrival just yet. The real issue I think is the paper money value currently exchanged for oil. It does not make any sense for oil producers to accept the American currency for it. Russia has NO use for so many dollars. It simply cannot absorb them anymore, it is far beyond its economy capacity. Paper is simply not wanted. US is an addicted oil junkie, who can be forced to give up its real assets for its paper money. But for this to happen, the junkie (no offense to Americans, just a figure of speech) needs to begin feeling the pain. Oil producers seem to be testing the US to find the right balance of pain and relief. And this balance cannot be achieved by building inventories, but by regulating oil production levels. Pick oil or not, I think it would be short-sighted to discount for the possibility of price-fixing by oil producers by lowering production on purpose. Can you blame them? Unless there are certain guaranties on the part of the US regarding its currency long-term value (there is none now), it is a fair game.
    Reply
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