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. Last Updated: 07/27/2016

Oil Export Decree: Wonder or Waffle?

It is of course too early to decide whether the decree freeing export quotas on oil and gas is a victory for reform or a piece of bureaucratic waffle that will just maintain the status quo. It is all in the fine print.


The government decree which canceled export quotas from Jan. 1 is extremely vague and it could leave bureaucrats considerable scope for interfering with exports.


One Western oil executive said it seemed that his company would actually be allowed to export less oil under the new regime than the old. "It's happening like it always has," he said.


But there are grounds for hope that trade will become freer. First, the Russian government, still paying millions every day for its expedition into Chechnya, desperately needs $13 billion in international loans this year to balance its books.


This gives the West a strong position in arguing for reform. Russia will face strong pressure from the IMF to make liberalization a reality. Apparently, the IMF is now asking for clarification of the decree.


The second thing in favor of reform is that the profit motive is strong and most Russian oil production companies see they can profit from export. They will make a formidable lobby group and will also work hard to exploit loopholes in the legislation.


Many firms will complain that they cannot cope with the 23 ecu per ton export tax that they will now all be required to pay as part of the latest round of reforms.


Previously all firms benefitted from outrageous tax exemptions. Exporting will indeed be less profitable than it was, but all except the most inefficient and high-cost producers should be able to pay the tax and still make money from exports.


So much for bureaucratic problems. There are also of course some technical problems to increasing exports. Oil exports have already jumped from 55 million tons in 1991 to 89 million tons this year, despite quota restrictions.


Russia will need to make major investments before it can increase exports much further. Existing pipelines and ports are either full to capacity, in the wrong places or politically risky.


In the short term, with capacity limited, the government has proposed a system of equal pro-rata access to the pipelines to all producers, whatever that means.


Longer-term, Russia will then face major technical problems increasing its exports. Russia last year exported close to its maximum export capacity, which experts put at between 100 and 140 million tons. Total production was around 290 million tons.


Russian Fuel and Energy Minister Yury Shafranik maintains that Russia will be able to make increased use of the pipelines to the port of Odessa, and of the Druzhba pipeline which leads to Central Europe.


Experts agree that both routes have considerable spare capacity. Port officials at Odessa say they used to pump 20 million tons of oil and oil products in the 1980s and have been down to only 10 million tons in the last few years.


Similarly, traffic on the Druzhba pipeline which serves Hungary, Slovakia and the Czech republic is now well below its '80s levels.


But both routes pose problems, partly because they involve transit through neighboring Ukraine. The problems of using Ukraine as a transit route have already hit Russian exports of natural gas: Ukraine has tapped pipelines for its own needs, cutting supplies to customers in Western Europe.


Ukraine and Russia could face similar disputes over the transit of crude oil. It may be only coincidence, but the same day Russia ended export quotas on oil, it was forced to cut supplies of crude oil to Central Europe because Ukraine unilaterally announced a huge hike in the transit price for oil through its pipelines.


Increasing shipments of crude oil using the Central Europe pipeline will also pose problems since demand for crude oil in the region has shrunk considerably.


Aside from these easy routes, the only way for Russia significantly to increase its export capacity will involve major investments. But in Russia's uncertain business climate, none has passed the planning stage.


The difficulty of investing in pipelines has already been highlighted by Chevron's attempts to build a pipeline across Russia to export oil from its Tenghiz project in Kazakhstan across Russia.





Geoff Winestock is a Moscow-based correspondent for the Journal of Commerce.