Tom Lasseter of McClatchy News reports on the depletion of Russia's oil fields: Russia's oil boom may be running on empty. According to this report, investments are going into getting more oil out of old fields, rather than into the development of new reserves:
Most of the oil produced after the country's 1998 financial collapse has come from drilling and re-drilling old Soviet oil fields with more advanced equipment — squeezing more black gold out of the same ground — and efforts to develop new fields have been slow or non-existent.
...Valery Tsvetkov, a deputy of the institute of market problems at the state-funded Academy of Sciences, laid out an array of statistics showing what's wrong with Russia's oil industry.
Among them: In 1990, some 17.3 million feet of new wells were drilled looking for new reserves in the former Soviet Union, almost all of them in what's now the Russian Federation. In 2007, about 3.9 million feet were drilled.
Quotes point to the influence of rent-seeking politicians:
"Why? Because today those who work in the oil industry find it easier to take the cream off the existing fields than to find new fields," Tsvetkov said....
"The Russian government has few people with the mentality of statesmen," Tsvetkov said. "Today, the aim of many people is to become rich at the expense of the state."...
Lasseter also quotes an anonymous western diplomat who implies that Russian business and political leaders have short time horizons and a high discount rates. They can't count on holding their positions long. Their prosperity is tied more to their ability to grab money and squirrel it away in a safe place than it is to the long term health of a specific business or the Russian state. So, there's less interest in exploration and new development that may have a longer term payoff (possibly long after the rent-seeker has been removed from the position):
A Western diplomat in Moscow said drilling in old fields makes sense from the perspective of Russia's ruling elite, who control energy companies only as long as they remain in power.
"If you're running Gazprom (a Russian natural-gas producer) but you don't really own it, then your interest is maximizing short-term profits, not long-term development," said the Western diplomat, who spoke on the condition of anonymity because of the delicacy of the subject. "If you look at most of the Russian companies — the energy companies — that's precisely what's happened. They have focused on profits or dividends and less so on long term development and replacing reserves."
In a nation with a history of economic tumult and social unrest, the diplomat said, it doesn't bode well for the future.
With respect to opportunities for rent-seeking, Russia's new Arctic resources law appears to give the political leadership and bureaucracy more control over the allocation of resource rights: Russia's New Arctic Resources Law.
The leadership of oil firms operating in the Arctic will use a high discount rate to make investment decisions. I've noted in other posts that the cost of raising money for investments will be somewhat higher that it would otherwise have been because of the political risk (Where will the money come from to develop Russia's Arctic assets?; The attack on Georgia raises Russia's Arctic investment costs). Russia's past pattern of interrupting oil and gas deliveries abroad to apply political pressure is going to mean she'll have to accept lower prices on her sales to offset the political risk. Lower prices, higher costs, and higher discount rates all point to slower development of Russian Arctic oil and gas than would otherwise be the case.
August 30: See also Insecure property rights may be helping to maximize current Russian oil output... at Knowledge Problem.
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