No. 1, 2005

Prof. Vladimir Isayev,
Dr. Sc. (Econ.), Deputy Director of the Institute of Oriental Studies of the RAS


Prospects for energy cooperation between Russia and the Arab countries

The former Soviet Union played a vital role in the establishment and development of such economic sectors as power engineering, metallurgy, and oil and gas production in many Arab countries. Now that Russia and Arab countries are the main participants in the world energy market, new prospects for mutually advantageous cooperation open up before the former partners.

Today's problems

The present system of economic management evolved on the basis of so-called cheap oil use. Until October 1973, a barrel of oil cost less than $2. The late 20th and early 21st centuries showed that the era of cheap nonrenewable sources of energy had come to an end, although oil and gas prices could occasionally go down - as this was, for instance, in the mid-1990s. Nevertheless, considering the ever-growing demand for energy resources, as well as predicted higher production costs of hydrocarbons, oil can no longer be a cheap commodity. This means that the oil and gas exporting countries will constantly remain in the center of attention of the entire world - at any rate, until some new source of energy diminishes the importance of oil and gas.

According to different estimates, the Arab countries account for 60-65% of the world's proved oil reserves; with respect to this index, six out of the top ten are Arab countries. The daily oil deficit in the United States, Canada, Japan, South Korea and the European Union is at present about 25 million barrels, while all of the OPEC states, most of which are Arab countries, export approximately 26 million barrels a day. The ten government-owned companies of the OPEC plus Russia and Mexico possess more than 65% of the world's oil and gas reserves. The share of, say, Saudi Aramco is over 14% of these reserves, of Russia's JSC Gazprom - 10.2%, of the Kuwait Petroleum Company (KPC) - 4.9%, and of the Abu Dhabi National Oil Company(ADNOC) from the United Arab Emirates - 4.4%.

The present situation is not likely to change in the next five to ten years because not a single major oil field has been discovered since 2000, the year when the Kashagan oil field was opened up in Kazakhstan. Moreover, since then the commercial value of the oil fields discovered has not at times justified the outlays made for geological prospecting. Thus, in 2003, BP,

Royal Dutch/Shell, ChevronTexaco, ConocoPhillips, ExxonMobil, ENI, Total, Repsol-YPF, Statoil and Petrobras spent $8 billion for prospecting works, while the actual value of the reserves discovered totaled only $4 billion.

Today, Russia and the Arab countries are unquestionable leaders in terms of explored crude reserves. For instance, at the current rate of oil production the KPC and ADNOC are ensured oil reserves for 160 years, Saudi Aramco - for 83 years, JSC Sibneft - for 20 years, and JSC LUKOIL and JSC Tatneft - for 34 years each. Meanwhile, in the case of Western and international companies this index is around ten years (ExxonMobil, ConocoPhillips and Total have the highest index - 13 years).

Hence, being the main participants in the world energy market, Russia and the Arab countries are bound to cooperate in that field. Their interest in joint action embraces such important aspects as: national control over the oil and gas resources, establishing fair prices on exported energy raw materials, ensuring stable proceeds from their export, working out mechanisms of environmental safety, pursuing the strategy of oil and gas market development, etc.

One of the most important tasks facing Russia and the Arab countries remains eliminating the discrepancies, which developed historically in the production refining system. Thus, ExxonMobil, the world's largest

refining company, handles more than 300 million tons a year, whereas Royal Dutch/Shell and BP refine nearly half as much. In the Russian Federation, the biggest refining companies are joint-stock companies LUKOIL and YUKOS. Refining is not a forte of the Arab countries either. Perhaps, only Saudi Aramco is among the world's top ten refining companies.

It looks like some countries engage in producing oil, while some others profit by refining it. To correct the situation the Arab countries and Russia should not only raise the volume of refining but also develop at an accelerated rate such related sectors as petrochemistry, energy generation, etc. This will allow them to increase the sale of petroleum products by bringing the refining and petrochemical sectors closer to the main markets of their consumption.

Relying on past experience

The similarity of tasks facing the Arab countries and Russia in the sphere of oil and gas production prompts both sides to develop their economic cooperation. True, there has been some activity in that area in recent years.

For instance, 2003 saw the signing of an intergovernmental agreement on cooperation in oil and gas development between the Russian Federation and Saudi Arabia, owing to which Russian companies obtained access to work in the "Desert Kingdom". Today, a joint venture of LUKOIL Overseas Holding Ltd. and Saudi Aramco, LUKSAR, is conducting seismic prospecting in the northern part of the Rub al-Khali desert with good chances of discovering large reserves of gas and gas-condensate.

In 2002, the Russian foreign-economic association Tekhpromexport signed a contract for the construction in Libya of the Western Tripoli thermal power station, which cost about $600 million. In 2003, Russian JSC OMZ signed a contract for the delivery to Syria of four drilling rigs - a deal worth $40 million. Finally, in 2004, LUKOIL commissioned a 100-km oil pipeline in Egypt, and JSC Stroytransgaz won a tender for the construction of a 366-km oil pipeline in Sudan.

Those are just a few isolated examples of cooperation whose overall potential is enormous. It is no secret, for instance, that in the sphere of oil and gas production Russia can offer the Arab countries its advanced experience and technologies which are in no way inferior, and in some respects even superior, to Western ones. For instance, in the past, Soviet imports helped Syria to meet its needs in machines and engineering equipment by 50%, the People's Democratic Republic of Yemen - by 60%, and Egypt - by 30-35%.

Some of the Arab countries, including Egypt for instance, which cooperated closely with the Soviet Union in the past, today need Russian technologies, both of the high and medium level, to modernize their facilities created with Soviet assistance and on the basis of Soviet technologies, and also to set up new ones.

Statistics on the Soviet-Arab trade turnover indicate that the USSR used to satisfy 100% of its import requirements in oil with deliveries from Arab countries. Having imported Arab oil, the Soviet Union re-exported it to India, some of the former socialist countries and several African states. Relying on the positive experience of the past, Russia's private oil and gas companies today are quite capable of taking up a worthy place on the Arab market of petroleum products.

However, considerable efforts are required on both sides to realize at least some of the far-reaching plans of Russian-Arab cooperation in the oil and gas industry. It is necessary for Russia and the Arab countries to ensure efficient control over their own nonrenewable natural resources so that the economic rent would remain in the countries which possess these resources; to coordinate joint efforts aimed at resisting possible external pressure and energy sabotage, and to work out the principles of environmental safety.

Common aims

In view of the generally low cost of the stock of the Russian and Arab oil companies relative to their reserves and production volumes - compared with international oil companies - Russia and the Arab countries will inevitably be compelled to increase the volumes of oil refining and gas processing, including by acquiring and establishing assets at the centers of consumption of petroleum and gas products abroad. This, however, is more than what Russia and some of the Arab countries are able to do on their own, and so they will have to not only establish and step up cooperation in that rather specific sphere, but also to develop jointly such related sectors as the chemistry of petroleum and gas and energy generation, as well as to take joint actions to modernize and evaluate the basic assets of their oil and gas sectors.

Quite probable in this respect is the use of cooperation schemes already tried and tested in the world - schemes in which Russia could take it upon itself to ensure the implementation of long-term and large-scale projects of Russian-Arab economic cooperation by providing the needed technologies, testing and production operations, while Arab oil-exporting countries would help by providing investment and carrying out marketing and sales. Obviously, such schemes of cooperation do not exclude the possibility for the Arab countries - aside from making investments - to take part in the production process. By the way, in doing that, both Russia and the Arab countries can use quite effectively the experience of Soviet-Arab cooperation - when a number of energy generating facilities were constructed with Soviet assistance in Egypt, Syria, Iraq, Algeria, Libya and Yemen.

Of course, stepping up Russian-Arab cooperation in the sphere of oil and gas production will require both sides to elaborate a definite foreign-economic and political strategy which will help overcome the consequences of negative developments in relations between Russia and the Arab countries which came to pass in the first half of the 1990s. Regrettably, during that period much of the original structure of the economic ties between the two sides was destroyed and their orientation was impaired.

It was only in the late 20th and early 21st centuries that both Russia and the Arab countries began to realize that, despite many differences in their political and economic life, they were objectively interested in having a multipolar world in which both sides would occupy a worthy place in accordance with the long-term strategies of their development. To attain that goal both sides should restore the necessary level of confidence and predictability, so that their economic partners could be sure that their efforts to develop cooperation were not a time-serving episode which could be disrupted by some sort of political ambitions.

The more urgent tasks include promoting Russian-Arab cooperation in the field of information and a reappraisal of some of the legislative provisions regulating foreign investment. Also settled have to be a number of legal matters associated with the acquisition of land by foreign partners, export of profits and legal remedies in civil and arbitration lawsuits.

Therefore, promotion of cooperation in the sphere of oil and gas production which is vitally important to both Russia and the Arab countries is based not only on the community of interests of both sides, but also on the appropriate level of mutual trust. The revision of Russia's foreign policy course, which is now under way, and a "thaw" in Russian-Arab relations, which is certain to follow, will open up rather promising prospects for cooperation in the fuel and energy sphere.

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Oil of Russia, No. 1, 2005
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