Investors shy of Russian oil

A five-year oil boom is ending in Russia, the world's second-largest oil exporter, as President Vladimir Putin increases Government control over the industry, hurting investment in new wells, rigs and pipelines.

Output will rise 3.8 per cent this year, less than half the average rate during the past five years and the lowest since US$10 oil hurt investment in 1999, the Paris-based International Energy Agency estimates.

A tax increase last year means the Government takes most of the gains as crude trades above US$50 a barrel.

Drilling in Russia fell last year as the Government demanded US$28 billion in back taxes from Yukos Oil, raising concern that other oil companies may face similar claims.

The jailing of Yukos's biggest investor, Mikhail Khodorkovsky, contributed to a US$7.8 billion outflow of capital from Russia last year, causing the worst year for stocks since 2000.

"The situation is dreadful," said Ivan Mazalov, of Prosperity Capital Management, one of the three largest foreign funds based in Moscow. "When property is torn apart, people forget about business development."

A slowdown in Russian oil production gives greater power to the Organisation of Petroleum Exporting Countries as world oil demand rises. The group, whose members pump about 40 per cent of the world's oil, is scheduled to meet in Isfahan, Iran, tomorrow to discuss second-quarter output.

Industry and Energy Ministry data shows Russian oil drilling declined 2.8 per cent to 9 million metres of wells last year. Yukos, based in Moscow, reduced drilling by 37 per cent, more than any other Russian oil company, followed by Lukoil, Russia's largest oil producer, with a 6.2 per cent decline.

Yukos shares have plunged 96 per cent since October 2003, when Khodorkovsky was arrested in Siberia and jailed in Moscow on charges of fraud and tax evasion that he denies. He calls the allegations a retribution for backing Putin opponents.

Exxon Mobil, the world's largest publicly traded oil company, in 2003 held talks to acquire a stake in Yukos, which then was the largest producer of Russian oil. Chairman Lee Raymond said in December he was wary of making large, new investments in Russia because of the Yukos crackdown.

Raymond said the Government's actions raised questions about Russia's energy policy. "Until some clarity comes to that, I think it's going to be pretty difficult for people to think about putting large sums of money in as an investment," he said.

Putin is consolidating the Government's energy interests in Gazprom, the state-run natural gas producer. The Government also planned to let only local companies bid for the largest oil, gas and metal fields, the Natural Resources Ministry said.

Last year, Russia cancelled the rights of Exxon Mobil and ChevronTexaco to the Sakhalin-3 oil fields in the Pacific Ocean, which hold an estimated 4.1 billion barrels of oil reserves. The fields also hold 1.5 trillion cubic metres of gas reserves, enough to fuel the US for more than two years.

"For many potential investors and for many commentators and observers, Russia remains a dark and hostile place, a source of risk rather than of opportunity," said BP chief John Browne.

Slippery slope

Oil output will rise 3.8 per cent this year, half the average rate of the past five years.

A tax increase means the Russian Government will take most of the price gains over US$50 a barrel.

Drilling fell dramatically after Government action over back taxes.

Russia is still suffering from a multi-billion-dollar capital outflow.

- BLOOMBERG