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Winking at OPEC

Beyond that, we can speculate about what might be next: an alliance with the Organization of Petroleum Exporting Countries (OPEC)? That would be the United States' and Europe's worst nightmare. Such a consortium would produce 56 percent of the world's oil and hold most of its spare capacity. Such an ultra-OPEC could name its price for oil, and the rest of the world would simply have to pay—at least for a period of years. And any offer from its leader on any matter would be hard for any country to refuse.

As already mentioned, Europe has steadily increased its reliance on Russian oil.

The United States is in a better position, enjoying the highest domestic oil production numbers in years, and its dependence on imports has fallen dramatically. In 2005, it depended on imported oil for 60 percent of its consumption, but in 2013 for only 32 percent—a remarkable improvement. However, about one-sixth of its oil still comes from Russia and OPEC.

Would OPEC welcome Russia into its fraternity? Perhaps. On the one hand, some of its leaders have been courting Putin for years. Russian representatives frequently attend OPEC meetings, and on occasion the country has pledged to cooperate with OPEC production cuts. On the other hand, Russia has a history of reneging on its promises and has repeatedly tried to undermine OPEC's price setting.

So far, Putin hasn't shown any interest in joining the cartel. Giving up control over the pricing of Russian resources is not his way.

Nor does he believe higher oil prices are always good for the producer. His concern is that excessively high prices would boomerang on the Russian economy by raising domestic energy costs.

Rosneft CEO Igor Sechin also weighed in on the topic, in an interview with the Wall Street Journal. "It would be irresponsible for Russia to join OPEC," he said, "because we can't directly regulate the activity of our companies," which he noted are nearly all privately owned, as opposed to the state ownership in OPEC.

Still, never say never. Once, when asked about the possibility, Putin stated flatly, "Russia is not going to join OPEC." However, he added, "We are a comfortable partner for OPEC," without explaining what Russian partnering with OPEC would entail.

Dmitry Medvedev, while Russian president, went further (presumably with Putin's blessing). When oil prices plunged during the recession of 2008, he said:

We are prepared for [joining OPEC]. We must defend ourselves, since this is our revenue base, both from oil and gas. These kinds of defensive measures could be tied to lowering oil production, and participating in the existing suppliers' organization, and participating in new organizations, if we can come to an agreement beforehand, so to speak.

I believe that we can't exclude any options for ourselves. Let me say this again: this is an issue of our country's revenue base, an issue of her development, and we cannot be ruled by any abstract criteria, by recommendations of other international organizations, and so forth. These are our national interests. We will proceed as we see fit.[1]

Oil Pipelines

Meanwhile, Putin has moved quickly on export infrastructure. When he came to power, he couldn't help but see room for improvement, and he immediately set to work on pipelines and ports.

One big accomplishment was the East Siberian Pacific Ocean (ESPO) pipeline, which began operating early in 2010. In its first phase, with a capacity of 600,000 bpd, the pipe linked oil fields in eastern Siberia with the city of Skovorodino, near the border with China. From there, 300,000 barrels were sent into China each day via a connecting line, under a 20-year contract with China National Petroleum Company (CNPC). The other 300,000 bpd were taken by rail to the new export terminal at Kozmino (on the Pacific Coast), to be sold on the spot market.

The second stage of ESPO increased daily capacity to 1 million barrels and extended the pipe to the terminal at Kozmino, which eliminated the need for rail transport. It was completed in 2012, two years ahead of schedule. With ESPO, Russia gained a direct oil line to Asia and considerable clout in the growing Chinese market, one of the keys to Putin's overall strategy. There will undoubtedly be more such connections, especially if Exxon and Rosneft succeed in tapping the vast oil reserves beneath Russia's Arctic seas.

Putin also built a port for exporting oil, his answer to a pipeline transit dispute. Ukraine may be the most famous pipeline squabbler, but it's not the only one.

In this instance it was Belarus, at odds with Moscow over the Druzhba pipeline. Druzhba is the longest pipeline in the world, carrying 1 million barrels of Russian oil every day across Belarus to refiners in Poland, Germany, the Czech Republic, Slovakia, and Hungary. Belarus wanted a bigger cut of the profits.

Putin's response was the port of Ust-Luga, which opened in March 2012. It's on Russia's Baltic coast, at the Gulf of Finland, at the end of the Baltic Pipeline System that brings oil south from the Timan-Pechora and West Siberian basins. Now instead of having to send all of its northern oil through the Druzhba pipeline and across Belarus, Russia can load some of it directly onto tankers and set sail.

The port also helps Putin in another of his oil quests, which is to promote the predominant type of Russian crude, called Urals, as an international standard. Ust-Luga reduces concern over disruptions in the supply of Urals by providing a reliable export route, and that increases traders' confidence in the blend's steady availability. To give Urals even more vigor, Russia constructed a $1 billion storage facility and terminal in the busy trading port of Rotterdam dedicated to Urals oil.

I'll have a lot more to say about pipeline issues, especially regarding natural gas, in the chapters that follow. They've played a key role in the geopolitics of recent years.

The point for now is that here, once again, Putin showed his energy savvy and creativity, peacefully turning a source of friction into a resource advantage for Russia.

  • [1] Medvedev Russia May Join OPEC, Cut Crude Output," The Other Russia, December 12, 2008, www theotherrussia org/2008/12/12/medvedev-russia-may-join-opec-cut-crude-output
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