Tuesday, Mar. 6, 2001. Page 1

Germany Dumping OPEC For Russia

By Igor Semenenko Staff Writer The European Union's plan to make Russia its major energy supplier is inching toward reality.

In addition to being the major source of natural gas to Germany, the EU's largest economy, Russia is also gradually becoming its main source of crude oil.

Russia's share of German crude imports should grow to 31.6 percent in 2001, up from 28.7 percent in 2000 and 26.5 percent in 1999, the Association of the German Petroleum Industry said in a new report posted on its web site, www.mwv.de.

"We began to diversify our import structure after two crises [engineered by OPEC]," the association's spokes-woman, Birgit Layes, said in a telephone interview from Hamburg, Germany.

Germany imported 103.6 million tons of crude last year, or about 88 percent of its total consumption. This amount came more or less equally from OPEC, the North Sea (mainly Norway) and the former Soviet Union, which made up 27.6 percent, 31.4 percent and 33 percent of supplies, respectively.

Russian crude, dubbed Urals in the West due to its inferior quality and chemical structure, is popular in Germany because two of the country's 14 refineries are located in former East Germany and were built specifically to handle Soviet-grade crude.

But that alone does not explain the recent spike in imports of Russian oil.

In the 1970s, the Organization of Petroleum Exporting Countries delivered 90 percent of the total amount of crude consumed by the Federal Republic of Germany. But OPEC's mood swings and constant pursuit of higher prices — coupled with never-ending hostilities in the Middle East — have forced Europeans, led by Germany, to rethink their attitudes lately.

Next year, Germany is expected to import 13.8 percent less oil from OPEC, while raising Russian supplies by 33.8 million tons, or 13.4 percent, and North Sea supplies 9.2 percent, according to the AGPI.

Last October, Russia cut a deal with the European Union to double oil and gas exports within the next 20 years.

"We understand that prices are the same worldwide," Layes said. "But we want to diversify our physical supplies away from OPEC."

Russia usually sides with OPEC both because it benefits from a rise in international oil prices and because of its traditional ties with the Arab world.

But it never attempted to become an OPEC member, avoiding the binding resolutions of the oil exporting cartel, whose share of world production dropped from around 70 percent in 1970 to some 40 percent now. Over that time, non-OPEC members, watching crude prices skyrocket, began investing in additional production that undermined the cartel's virtual monopoly on the global market.

On Oct. 12, after OPEC countries cut their output 1.85 percent to an average of 27 million barrels per day, prices hit a 10-year high of $35.30 per barrel, while Russia gradually hiked its yearly production 5.9 percent to 323 million tons, or 2.4 billion barrels.

Tellingly, local statistics failed to catch the increase in supplies to Germany.

According to the State Customs Committee, deliveries of Russian crude to Germany amounted to 19.4 million tons in January-October 2000 — a marginal increase from 19.7 million tons for the whole of 1999.

But those figures are misleading because they don't take into account Russian crude that goes through offshore middlemen.

"This is a natural development given that a large share of crude is sold via companies incorporated offshore," said Valery Nesterov, oil and gas analyst at Troika Dialog.

Among buyers of Urals blend crude, for instance, are several countries largely unnoticed on the international oil map. Between January and September last year, Cyprus took 2.83 million tons of Russian crude, the Virgin Islands imported 3.2 million tons and Gibraltar another 506,000 tons — all apparently resold to Germany and other Western countries. Other importers include Bermuda and several offshore havens that host export arms of local oil companies, whose usual practice is to underreport export proceeds. Estimates made last spring by the Foreign Currency Control Service, shortly before it was dissolved by President Vladimir Putin, showed that oil companies underreport their export earnings by $1 to $2 a barrel.

Another factual discrepancy between German and Russian claims can be seen in data revealed last week by the AGPI, which directly contradict statements made by No. 2 oil major Yukos chairman Mikhail Khodorkovsky in an interview with the Financial Times.

Khodorkovsky complained that Europe was reluctant to buy Russian crude because of political considerations. "Europe does not want to buy our oil," Khodorkovsky said. "Everyone assures us that there are no such policies, but we know that such policies exist — they go by the name of energy independence."

However, industry insiders said Khodorkovsky was playing his own game, trying to win more concessions from the Russian government by making it appear that his company is doing worse than it actually is.

According to the State Customs Committee, Italy and Poland are, respectively, the second- and third-largest importers of Urals crude, after Germany.

Russia also provides 35 percent of Germany's natural gas consumption. Gas giant Gazprom intends to boost exports to Europe to 200 billion cubic meters a year, up 54 percent from 2000, with Germany being its major beneficiary.

http://www.themoscowtimes.com/stories/2001/03/06/002.html

-- Martin Thompson (mthom1927@aol.com), March 07, 2001