Raymond James: Russian oil output still growing, but its growth rate 
expected to slow   
By OGJ editors 
HOUSTON, Jan. 26 -- Russian oil production is expected to grow for the 
foreseeable future, but the average 9%/year growth rates observed during 
2000-03 are unsustainable, an analyst said. 

"We are not expecting Russia to continue to provide the panacea for the 
world's oil thirst, and we don't think prudent investors should either," said 
Wayne Andrews, a Houston-based analyst for Raymond James & 
Associates Inc., St. Petersburg, Fla. 

"Even the Russian government itself admits that depletion of existing 
reservoirs is a major long-term challenge for the industry," Andrews said in 
a Jan. 26 research note. "In fact, the energy ministry's own production 
growth forecast for 2004 is a mere 2.5%, an even more conservative 
projection than our 6.1% estimate." 
Production figures 

Russian oil output has reached 8.5 million b/d, or 11% of the world total, 
RJA said. Output grew 10% in 2003, and some analysts have predicted 7-
8% for 2004. 

"We believe that last year's 740,000 b/d increase in Russian oil production 
will not be repeated again—probably ever," Andrews said. 

RJA expects a substantial deceleration in the growth rate. For 2004, the 
firm is predicting an additional 510,000 b/d, or 6.1% growth. For 2005, 
RJA's forecast is 400,000 b/d, or 4.5%. 

"Our outlook is more conservative than that of most other oil analysts, but 
even it may turn out to be too optimistic," he said. 

Combination of factors 
A potent combination of political and economic factors is beginning to 
severely constrain the growth rate of oil production across the entire 
former Soviet Union, Andrews said. 

Low investment is leading to reserve depletion. Russia's infrastructure was 
neglected for decades, and all of the recent investment barely restored oil 
production to pre-1991 levels, he said. 

"Because most of this investment aimed at quick profits rather than 
reserve growth, almost all of the 'low-hanging fruit' has already been 
picked, and reserves at many Soviet-era fields are being rapidly depleted," 
Andrews said. 

Political fears and higher taxes also are making investment less attractive, 
he added. Those fears include the October arrest of Yukos CEO Mikhail 
Khodorkovsky by Russian police (OGJ Online, Oct. 28, 2003). 

"Even before the Kremlin's campaign against Yukos, most super majors 
were leery of committing large amounts of capital to Russia. Now, the 
sudden increase in political uncertainty hangs over the market, scaring 
away potential investors," he said. In addition, the likelihood of higher oil 
taxes also is discouraging. 

Another factor constraining production growth is pipeline bottlenecks, 
which are limiting exports. The Kremlin opposes pipeline deregulation.