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Russia worried as oil production slides

Russia Govt proposes urgent measures to halt a slide in oil production, which threatens to undermine its economic boom. Fred Weir reports.

business Updated: May 28, 2008 09:45 IST
Fred Weir
Fred Weir

Russia's government has proposed urgent measures to halt a slide in oil production, which threatens to undermine the country's petroleum-fuelled economic boom.

"All the proposals have been accepted and will be submitted to parliament at the end of this week," Deputy Finance Minister Sergei Shatalov told journalists after the Presidium, a group of the most powerful ministers created by Prime Minister Vladimir Putin, met to discuss the crisis on Monday.

News of falling oil output has hit Moscow political circles like a bomb, because energy exports now make up over 30 per cent of Russia's gross domestic product and account for almost 70 per cent of government revenue.

The Kremlin has invested heavily in Russia's image as an "energy superpower" and pledged to continue increasing the country's output to meet rising demand, especially in Asia.

But experts have long pointed out that Russia's petroleum industry is working with outdated technology, many of its main fields are old and depleted, and the private tycoons who acquired most of the assets after the collapse of the Soviet Union made almost no fresh investments.

"Oil companies in the past were only interested in exporting crude, and didn't care about the future," says Nodaria Simonia, director of the Centre for World Energy Studies in Moscow. "Now we have to correct years of neglect."

Shatalov said the immediate measures would include tax holidays and cuts that could save energy companies $4.4 billion next year, which they could use to update their technology and search for new petroleum deposits.

Russia's proven oil reserves are a state secret, but the Oil & Gas Journal, a U.S. based industry publication, estimates it has about 60-billion barrels -- the world's eighth largest -- which would last for 17 years at current production rates.

Prices for crude, Russia's main export, have leapt from around $10 per barrel a decade ago to over $130 last week.

The current tax regime takes away over 90 per cent of oil company profits, and has led to complaints that oil majors have been unable to invest in new production facilities.

Russia's oil output fell in the first quarter of this year, causing some experts to warn that the country has reached the limits of supply and will not be able to continue meeting deliveries to oil-thirsty consumers in Europe and Asia.

"Russian oil production has peaked and may never return to current levels," Leonid Fedun, vice president of Russia's largest private oil company Lukoil, told journalists recently.

The new measures were welcomed by oil companies on Tuesday, but some experts warned that it could be too little, too late.