RUSSIA: To put it crude-ly, it's rush hour in Russia!

by Santanu Saikia
Somewhere my love there will be oil to wring All through the flow discovers the hope to bring Somewhere a drill blossoms in green and gold And there are dreams, all that your heart can hold With due apologies to Doctor Zhivago, this is the theme song playing in modern-day Russia (and some of its neighbours). At the risk of sounding crude, it's crude that resounds! Russia, of late, has fired the imagination of the Indian petroleum industry, and Indian companies -- with giddy enthusiasm -- are exploring the possibility of investing in cash-strapped Russian oil and gas fields. The Russians, if inside reports are to be believed, have responded to the overture with warmth. And it is this reassuring response to petroleum minister Mani Shankar Aiyar's grand offer in Moscow to invest billions of dollars into Russian equity oil which has spurred on the Indian fervor. But, in many ways more

significant -- though less obvious -- are the limitless possibilities that the so-far-inaccessible crude produced in Russia -- and in the neighboring Kazakhstan and Azerbaijan -- provide if some of it is diverted to India and, for that matter, to other Asia-Pacific customers, specifically China, Korea and China. There can be no denying that the sky is the limit if mutuality of interest is the unit of measure here. Countries in the Asia-Pacific region will, no doubt, be keen to diversify their supply sources from the politically-volatile Middle East.

And, equally, Russia and Central Asia could benefit from finding alternative markets away from their traditional dependence on Western European (64% of exports) and US markets (18% of total exports from the region). Cash -- and technology-- could move from the Asia-Pacific to Russia and Central Asia. Add to this the fact that the recent rise in Russian and Central Asian crude oil production bestows the region with an opportunity to develop new markets in the Asia-Pacific. The Soviet era production rate of oil was more than 12 million barrels per day (mpbd) but with the collapse of communism, production from the region -- including from the breakaway CIS republics -- had come down to a little more than 7mpbd in the 1990s, before recovering again. In recent years, Russia's crude production has surged -- by as much as 40% to 8.5 mbpd in 2003 in comparison to 1998 levels -- and this is expected to scale the 9 mpbd mark this year. If Central Asian production is taken into account, the output will be close to a staggering 11 mpbd. Production is expected to go up further when the Sakhalin and East Siberian fields begin to spurt oil.

Complimenting this is the prospect that a large portion of incremental global demand is likely to come from the increasing exigency for crude from China and India. The crucial issue, then, is the pricing of Russian crude to India and the Asia-Pacific region as a whole. It is no secret that the costs of delivering Russian crude to the US are higher than those charged by Middle Eastern producers. It would, therefore, be difficult for Russia to replace the Gulf as a source of oil to the US. Similarly, Central Asian republics face a problem of freight diseconomy to the US. In this context, just as the Gulf producers provide a discount to their western buyers while charging a premium in the Asia-Pacific, Russian and Central Asian countries should offer competitive prices to their Asian consumers.

Differential pricing, similar to that employed by Saudi Arabia, could be applied by them with an intent at garnering a significant chunk of the rapidly growing market. Besides, India has had a long history of crude imports from Russia. India was provided Middle East grades by the Soviet Union under a swap system right up to the collapse of the country, which stopped all imports some ten years ago. Currently, 74% of our import volume of 1.8 mbpd of crude is of the high sulphur variety while the balance is made up of low sulphur requirement. In this context, Russia can be a source for high sulphur crude whereas the Kazakh and Azerbaijan crude oils can satisfy India's appetite for North African sweet crude. An issue which needs to be addressed, however, is how the supply bottlenecks, particularly to India, will be overcome. The following formulations seem to provide some tangible answers:

Transport the crude from Russia/Azerbaijan and Kazakhstan to the Mediterranean and then route it through the new pipeline being constructed in consortium with Egypt from the Mediterranean to the Red Sea. From the Red Sea, Very Large Crude Carriers (VLCCs) can ferry the crude to India.

Crude from Kazakhstan can move by pipeline from the Caspian Sea to the Black sea and then take the above route to India. A crude pipeline project -- jointly promoted by Russia, Iran and Kazakhstan -- originating in Russia and traversing through Kazakhstan, Iran and Pakistan to India. Link pipelines can join from Iraq and Azerbaijan to the main line.

Russia and Kazakhstan are setting up pipeline projects to China. This network can be extended to India, skirting Pakistan.

Clearly, the reverie can turn out to bigger and brighter than the dream woven by petroleum minister Mani Shankar Aiyar. There can be no debate that billions of dollars of Indian money ought to be channeled not just into Russia, but also into the oil fields of Iran, Kazakhstan and Azerbaijan. The equity oil, in turn, could be ferried to India using any of the alternative transportation links mapped above. India's oil security would be addressed to a large extent through this. Big and bold -- that's what India needs to be, that's what Aiyar is beginning to learn. Conditioned by decades of socialism and scarcity, the Indian mindset is mired more by Gandhian guilt than by the confident pragmatism of conspicuous consumption along global lines.

A new worldview is required to pursue equity oil prospects aggressively not just in Russia, but in the surrounding countries as well. India has to change the rules of the game, and stop playing second-fiddle to the astute Chinese. A time has come for India to stand up and be counted, to attain its rightful role in the world. Where the head is held high. And the mind is without fear! And then, as Zhivago, the doc, would have said in his theme to Lara: The world will come to us, out of the long-ago....

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