Oil

Russia's oil industry

Trouble in the pipeline
May 8th 2008
From The Economist print edition

Despite booming demand and record prices, Russia's oil industry faces problems

WHEN the price of oil reached another record on May 6th, of over $122 a barrel, analysts pointed to attacks on pipelines in Nigeria and turmoil in Iraq as the immediate causes. Even small disruptions to supplies from such places can cause the price to jump, since only Saudi Arabia has the capacity to replace the lost production, and it does not seem inclined to do so. But to understand how supplies became so scarce in the first place, one must look at the state of the oil industry in Russia, the world's second-biggest producer.

Over the past seven years, according to Citibank, Russia accounted for 80% of the growth in oil production outside the Organisation of the Petroleum Exporting Countries. The increase in its output in the early part of the decade matched the growth in demand from China and India almost barrel for barrel. Yet in April, production fell for the fourth month in a row. It is now over 2% below the peak of 9.9m barrels a day (b/d) reached in October last year. Before that, the growth in Russia's output had been slowing steadily, suggesting that the drop is not a blip. Leonid Fedun, a vice-president of Lukoil, a local oil firm, says Russia's production will never top 10m b/d. The discovery that Russia can no longer be relied upon to cater to the world's ever-increasing appetite for oil is naturally helping to propel prices to record levels.

Oil and gas have been the foundation of the regime of Vladimir Putin, Russia's outgoing president, and are also a preoccupation of his successor, Dmitry Medvedev, who was chairman of Gazprom, the state-controlled gas giant. The flow of petrodollars has created a sense of stability, masked economic woes and given Russia more clout on the world stage. Yet the malaise afflicting its most important industry is almost entirely man-made. “Geologically, there is no problem,” says Anisa Redman, an analyst at HSBC, a bank.

In principle, Russia's bonanza could continue for years: it has the world's seventh-biggest oil reserves, at 80 billion barrels, according to BP, a British oil firm. And oilmen reckon there are 100 billion more barrels to find—“the biggest exploration prize in the world”, in the words of Robert Dudley, the boss of TNK-BP, BP's Russian joint venture. But Russia has regulated the industry so poorly that production is falling despite the soaring oil price.

“Tax is the major impediment,” says Ms Redman. The government levies an export duty of 65% at prices over $25 a barrel. Add to that various corporate, payroll and production taxes, oilmen complain, and the state creams off as much as 92% of profits. Executives at TNK-BP have argued that rising costs across the oil industry will make many investments in Russia unprofitable unless the tax regime is changed. As it is, TNK-BP accounts for a fifth of BP's production, but only a tenth of its profits.

The government does offer tax breaks on production from older fields. So oil firms, naturally, have been concentrating on squeezing as much oil as they can out of those. Until recently, that was an obvious priority anyway, since fields that had fallen into ruin after the collapse of the Soviet Union in the early 1990s could be revived relatively easily and cheaply. By mapping existing fields more precisely, installing new pumps and injecting water and chemicals into wells to maintain pressure, private oil firms were able to raise Russia's production from 6m b/d to almost 10m b/d, mainly from western Siberia. In 2003 alone, output jumped by 12%.

But this strategy is now yielding diminishing returns. Mr Fedun says the western Siberian fields have reached their natural limit. To keep production at today's levels requires ever more investment. To get Russia's output growing again, firms must make huge investments to develop new fields in remote provinces such as eastern Siberia and the Sakhalin region.

There has been some growth in these areas, mainly thanks to the less heavily taxed projects, called “production-sharing agreements”, that the government offered briefly in the late 1990s but has since curtailed. Strip out the production from these projects, and Russia's output has been in fitful decline since August 2006, according to analysts at Citibank. Worse, the output from these projects declined last month too. The government's ill concealed expropriation of various prize assets over the past few years has only added to the reluctance to embark upon big new projects.

Lukoil, for example, is investing $10 billion a year, but roughly 30% of that goes into gas production, which is now more lucrative than oil, given rising domestic prices for gas and lower taxation, says Mr Fedun. It has also been investing in refining, since the export tax on petrol and diesel is lower than that on crude oil. It is still projecting 4% annual growth in its output over the next 15 years, but the figure would be much higher if the government eased the tax burden, says Mr Fedun. Rosneft, the state-controlled oil champion, took on so much debt buying the plum divisions of Yukos, a private firm bankrupted by the Kremlin's zealous tax collectors, that it has little leeway for expensive new projects. Other firms are hoarding their profits and waiting for the tax regime to change.

The government did provide some $4.5 billion in tax breaks last year. But this, the oil companies argue, is barely enough to keep production stable. In his inaugural speech to the Duma as prime minister on May 8th, Mr Putin said that taxes on the industry must be reduced. However, new fields can take a decade to develop. The Kremlin has also failed to hand out exploration rights in the Arctic—the region oilmen consider most promising. And it says that in future the foreign firms with the expertise to tap offshore fields beneath frozen seas will be limited to minority shareholdings in big projects. “Oil production will be whatever the government decides it to be,” says Mr Fedun.

Meanwhile, Russia today is more dependent on oil and gas than it has ever been, argues Chris Weafer, a long-time Russia watcher and chief strategist at Uralsib, a bank. The share of oil and gas in Russia's gross domestic product has more than doubled since 1999 and now stands at above 30%, according to the Institute of Economic Analysis, a think-tank. Oil and gas account for 50% of Russian budget revenues and 65% of its exports. Yet the government has put at risk the goose that lays these golden eggs.

Long Ball

GOLF JOURNAL
By JOHN PAUL NEWPORT
The Drive to Drive

Putting? Bah. Why Everyone Digs the Long Ball
May 10, 2008;

The advice from instructors is universal: To lower your scores, work on your short game. Two-thirds of all shots, they point out, inarguably, are from 100 yards and in. That's the scoring zone. Driving is important, yes, but only as a means of placing the ball safely into play and setting up your approach shots. Straining to boom extra-long drives is counterproductive, they say, if it's coupled with a falloff in accuracy. Those long 46-inch-plus shafts that come standard in modern drivers are two inches too long for most players; the extra length may generate more clubhead speed, and thus distance, but with an unacceptable loss of control.

All of this is true. True, true, true.

On the other hand, the heck with it. There's nothing in golf -- and very little in life generally -- as deeply thrilling as knocking the bejeebers out of a golf ball and watching it soar away, gravity-free, as things normally soar only in dreams.

To look at drives merely as a means of putting your ball in the fairway is like looking at food merely as a means of getting nutrition. Maybe that works for you if you're a strict ascetic, or a Tour player trying to earn a living. But most golfers live for the long ball. Who wouldn't happily exchange an arching 300-yard beauty off the tee, even if it leads to a double bogey, for a 210-yard squibbler leading to a par? Not many, I suspect, except perhaps reluctantly on the final hole of a big-money match.

We love big drives for at least a couple of reasons. The first is the sheer intoxicating pleasure of catching one pure. Even for someone whose long drive is only 200 yards, if that's 50 yards longer than normal, it's a kick. The power seems to come from nowhere. When all the levers of the swing fire in rare perfect sequence, the ball explodes off the clubface and seems to hang in the air forever. For most of us that sensation, when we first experienced it, marks the moment golf got us in its stranglehold.

And there's no question this feeling excites women as much as men. Jim McMahon, an instructor at the range I often go to north of New York City, said that more than one of his female students, when she first connected with a clean, perfect drive, used terms to describe it that, shall we say, made him blush.

We also love monster drives because, however courteously administered, they are violent, aggressive acts, and there's always satisfaction in that. To smash a drive with all your might is to dish some serious hurt. Watching John Daly wind up and crush ball after ball over the practice-range fence may not be the catharsis that some people find in watching a wrecking ball take down a building, but it's close. It's primal and awesome. And it makes us even happier when we're the one delivering the blow successfully and not John Daly.

For men in particular, and some women, there's also the silverback-ape appeal of hitting a tee ball farther than anybody else. Women tend to bond, I'm told, around sharing experiences and finding common ground, whereas for men the subtext of any encounter is usually determining relative status. On the golf course, high status accrues to the long hitter. The low handicapper also enjoys status, but frequently his skills are the function of a country-club upbringing, or wonkish practice regimes, which impose a discount. The long hitter's aura is animal and immutable, more like that of the former college athlete. A guy may now be a CEO or a brain surgeon, but if he played linebacker at Notre Dame, that's still going to be the first thing most guys think about him.

Golfers hell-bent on learning to hit the ball deep spend lots of time at the driving range, usually ignoring the golden rule of golf practice (that nonsense above about focusing on the short game). It can get pretty ugly: beefy guys lunging at the ball, all muscle and no timing; kids with helicopter backswings and out-their-socks finishes; the majority who, despite flailing and grunting for all they are worth, squander power by swinging mainly with their arms and finishing on their back foot instead of on the front. But everyone connects every once in a while, soaking up the Pavlovian reinforcement they need to carry on. It's a noble, comic battle.

I've had a chance over the years to talk to several long-hitting Tour pros about their skills. None of them claim any special technique. Most said simply that they were always able to hit the ball longer than their peers. "It's just a gift," said 2005 U.S. Open champion Michael Campbell.

That said, they all agree that the one non-negotiable key to distance is hitting the ball square in the center of the clubface, and that to accomplish that consistently they try to feel as if they are swinging at less than full speed. Mr. Campbell uses 80% of full tilt as his goal, and others are in the same range. When the time comes for an extra-long poke on a given hole, their swing thought is often to s-l-o-w d-o-w-n, especially during the transition between backswing and forward swing.

This is the kind of analysis that most of us don't want to hear. It's too sensible and thus hopeless. Arnold Palmer's standard advice to young golfers is more appealing: "Hit it hard," he says. This strikes me as just right, so that's what I'm going with.