OPEC calls emergency meeting as oil prices fall

By Jad Mouawad

Published: October 17, 2008

Oil prices dropped below $70 a barrel for the first time in 14 months Thursday, prompting the OPEC cartel to call for an emergency meeting next week to establish some stability in prices that have plummeted recently after rising for months.

Oil prices have tumbled by nearly $40 a barrel in just three weeks as indications grow that demand for energy will slow along with weakening economies around the world. As recently as July, oil was trading at a record of $145 a barrel.

The decline in oil prices could provide a form of stimulus to the global economy as consumers pay less to fill up their tanks. If oil prices stay at current levels, American consumers would have $250 billion more, over a year, to save or spend elsewhere, according to Lawrence Goldstein, an energy economist. Some analysts expect oil prices to keep declining, perhaps to as low as $50 a barrel in coming months.

Americans will probably see lower energy bills this winter, as gasoline and heating oil futures also dropped sharply on Thursday. Gasoline prices now average $3.08 a gallon, or 3.8 liters, down from a summer peak of $4.11 a gallon, according to AAA.

The decline in oil prices came after a U.S. government report showed domestic crude oil stockpiles rose more than expected as Americans use less oil, in part because they are driving less. In the last month, domestic oil demand has fallen to its lowest level since June 1999, at 18.6 million barrels a day, according to the Energy Department.

Oil settled down $4.69 a barrel, at $69.85. The drop, along with other promising signs on the inflation front, was among the reasons investors bid stocks higher, with the Dow Jones industrial average closing up 401.35 points at 8,979.26.

Natural gas prices have also tumbled since their summer peak of $13.58 per thousand cubic feet, or 28 cubic meters. On Thursday, natural gas futures rose 19 cents, to $6.81, after a report showed that stockpiles rose less than expected.

While consumers may have reason to cheer the falling oil prices after such a sharp run-up, the wild roller coaster of volatility is a nightmare for oil producers and petroleum executives who say they need more stability to plan long-term projects to develop new sources of oil.

If they cannot be confident that they will get a stable return on their investment, they may hold back. That in turn could set the stage for possible shortages of oil and higher prices when global demand picks up again.

The sharp drop-off has forced OPEC's hand. The cartel said just last week that it would meet in mid-November, after the United States elections. But on Thursday, it rescheduled its emergency session for next Friday.

The cartel's producers, which control 40 percent of global exports, could curb their output by about a million barrels a day to try to stem the drop in prices, according to analysts.

It is unclear what price range for oil the cartel wants to establish. But the meeting "sends a clear signal that OPEC is concerned about the speed with which oil prices are slipping away from a preferred price of around $80 a barrel," said Lawrence Eagles, an oil analyst at JPMorgan.

The Iranian oil minister, Gholamhossein Nozari, told reporters in Tehran on Tuesday, "I think the low price is a real damage to the future of production."

From its inception, the oil industry has gone through countless cycles, with oil companies cutting investments when prices fell. The price collapse of the 1980s forced companies to slash investments and prompted a wave of large mergers through the industry. But this retrenchment left the world scrambling for oil when demand from Asian and Latin American economies soared.

Concerns that this pattern might be repeated were mentioned frequently during an industry conference in Venice last weekend, where oil executives said they worried that a prolonged recession, tighter credit and lower energy consumption would mean slower growth in energy supplies in coming years.

The credit freeze has already forced some projects to be scaled back, some energy analysts and executives said. "This is a real test," said Jeroen van der Veer, the chief executive of Royal Dutch Shell, in an interview at the conference. "Some people will be overstretched, and there will be some delays in some projects."

Over the last decade, growth in oil consumption has outpaced the ability of producers to meet that demand with more production. Many experts have predicted a new squeeze within the next five years that could once again propel oil prices over $100 a barrel.

The drop in prices has already created problems for oil producers. Iran and Venezuela both need oil prices at $95 a barrel to balance their national budgets, Russia needs $70 and Saudi Arabia needs $55 a barrel, according to Deutsche Bank estimates. The Algerian oil minister, Chakib Khelil, said Thursday that the "ideal" price for crude oil was $70 to $90 a barrel.

In Russia, which is not part of OPEC, the drop in prices is threatening the country's ability to increase production. The Russian government has reportedly agreed to allocate $9 billion to its four major producers — Lukoil, Gazprom, Rosneft and TNK-BP — to help them cope with investment needs amid the credit crisis.

In the United States, Chesapeake Energy, a gas producer, has recently indicated it will reduce its capital investments over the next few years in response to falling prices.

Global oil demand is undeniably slowing down, particularly in developed nations. Japanese oil consumption tumbled by 12 percent in August over the same month a year ago, while in the United States, demand fell by 8 percent in September.

Consumption is still growing in developing nations, but at a slower pace than in recent years. The International Energy Agency expects global oil demand to grow by just 400,000 barrels a day this year, to 86.5 million barrels a day. The agency, which had been revising downward its predictions all year, forecast growth of 2 million barrels a day for 2008 when the year started.

The two-day energy meetings last week were held in private in the baroque setting of the island of San Giorgio Maggiore, home to a 10th-century Benedictine monastery. In many conversations with senior executives outside of the conference meetings, they voiced concerns about their industry becoming increasingly vulnerable to a slowing economy.

"We pretty much know where supplies are going to come from in future years, but today the biggest uncertainty is demand," said Christophe de Margerie, chief executive of Total, the French oil company.

Some executives, though, are still holding out hope that Asian economies may weather the economic storm and help the global economy recover faster. Lower oil prices could also make it harder for some companies to survive on their own, leading to a new wave of mergers and acquisitions.

"This new environment is not all doom and gloom," said van der Veer, of Shell. "It can also provide some opportunities. Certain assets may become available."

Russia politics and oil .. St. Petersburg Times

Here is an article to help you get the Russian political and oil picture all at once.

Excellent piece!!

NEWS ANALYSIS

How the State Got a Grip on Energy, Putting Natural Resources Back in the State’s Hands

By Miriam Elder Staff Writer The Associated Press President Vladimir Putin shaking hands with workers during a presidential campaign stop at an oil field in Surgut on March 3, 2000. His presidency saw a move to state ownership in the sector. It was early March 2000 when Vladimir Putin landed in Surgut, one stop on a long campaign trail that would help take the acting president to the official seat in the Kremlin. He toured the oil fields that surrounded the bleak west Siberian city, shaking hands with the men who toiled to produce the black gold that was the country’s lifeblood. It was in Surgut — before the high-profile arrests and well before the days of $100-per-barrel oil — that Putin first gave a glimpse into what would become a defining strategy of his eight-year rule. “We will support [oil and gas companies] by all means, but we will also control their work,” he said, hinting at a sector-wide review that would boost the state’s presence in an industry that had become the domain of dueling oligarchs. Eight years later, two state champions — Rosneft in oil and Gazprom in gas — tower over a sector that provides for two-thirds of the federal budget and forms the foundation of the country’s swaggering foreign policy. The road to majority state control was rough, leaving a number of private businessmen jailed or exiled and foreign companies largely sidelined. Most worrisome, insiders and analysts said, was that the strategy of state control has left production stagnating at near crisis levels, as the firms were encouraged to focus on acquisitions rather than making much-needed investments in new fields. “We had high hopes that this period, an eight- to 10-year period, would be one of the major breakthroughs in developing certain very important projects,” said Vladimir Milov, a former deputy energy minister. Instead, Milov, who became a Kremlin critic after leaving the Energy Ministry in 2002, speaks of an era of “disappointed expectations.” “Putin’s legacy is largely a bunch of heavy discussions with few delivered projects,” he said. “Putin’s presidency has mostly focused on the redistribution of ownership and using energy resources as a tool for expanding Russia’s international influence.” An Encouraging Start When Putin came to power around 90 percent of the country’s oil production lay in private hands. Foreign oil companies, like Shell and ExxonMobil, ran huge projects in the east, after concluding preferential contracts in the mid-1990s that offered them favorable terms in order to compensate for the country’s volatile tax and legal system. It was a total departure from the policy of the Soviet state that built Putin and an anathema to the powerful state that he hoped to rebuild. He took notice of the fact early, devoting a 1997 doctoral thesis at the St Petersburg Mining Institute to the state’s role in managing natural resources. That role was impossible to realize while the country was run by a gaggle of oligarchs long used to pulling the Kremlin’s strings. Putin quickly moved to rein them in, calling a meeting in late 2000 to announce: Stay out of politics and business is yours. Investors were encouraged. Putin appointed liberals to top government spots. In September 2000 he visited the far eastern island of Sakhalin and called for foreign investors to be supported. He urged a revitalization of the energy industry by bringing online new oil and gas fields in the largely untouched eastern Siberia and offshore regions, as well as new export pipelines, such as a major route to the northern port of Murmansk. The optimism reached its peak in February 2003, when a trio of oligarchs joined with British oil major BP to form TNK-BP, a 50-50 venture formed around the flagship gas field of Kovykta, in largely untapped eastern Siberia. Announcing the deal, Mikhail Fridman, head of TNK-BP shareholder Alfa Group, said: “It is a reflection of the political change that has taken place in Russia over the past three years. Russia has stopped being associated with instability and nontransparency.” The Yukos Attack Five months later, Platon Lebedev, a major shareholder in oil firm Yukos, was arrested on suspicion of illegally acquiring shares in a fertilizer firm Apatit back in 1994. In October 2003, Khodorkovsky, Yukos CEO and then the country’s richest man, was arrested and the legal onslaught on the country’s largest oil company began, forever changing the landscape of the energy sector and the view of Russia and Putin’s Kremlin. What precisely prompted the arrest is anybody’s guess — that Khodorkovsky was on the verge of selling a 25 percent stake in Yukos to a U.S. oil company, that he was planning to build a pipeline to China to bypass state-run pipeline monopoly Transneft, that he was openly funding opposition deputies ahead of December’s State Duma vote, or that he planned to grow even larger through a merger with Roman Abramovich’s Sibneft. The final straw came in February 2003, when Khodorkovsky publicly criticized Putin for state-run Rosneft’s murky acquisition of medium-sized producer Severnaya Neft. “We knew we would have serious problems,” said Alexander Temerko, a former Yukos vice president now living in self-imposed exile in London. “While they had a monopoly position in gas [with Gazprom], they didn’t have one in oil.” Khodorkovsky was sentenced in 2004 to eight years in prison on charges of fraud and tax evasion, and the lion’s share of Yukos assets went to Rosneft in a series of orchestrated auctions, epitomized by the December 2004 sale of Yuganskneftegaz. He accused Igor Sechin, Putin’s powerful deputy chief of staff and chairman of Rosneft’s board, of orchestrating the attack on Yukos. Yuganskneftegaz, which produces 11 percent of all Russian oil, went to an obscure company called Baikal Finance Group for just $9.4 billion. Rosneft bought Baikal weeks later, tripling its own production overnight and putting it on the path to becoming the country’s largest oil producer — a goal it achieved last year after buying the two remaining large Yukos units up for grabs. “We are a state company and at the same time a public company, and one of our strategic priorities is to continue to improve our operations in order to demonstrate to our main shareholder that we are the best partner for developing new assets in Russia,” said Rosneft vice president Peter O’Brien, an American who was brought to the company ahead of its July 2006 initial public offering in London, which saw nearly 15 percent of the company sold off. “During the IPO process, clearly some market participants, whether press or investors, did have a view toward the Yukos process which inhibited them from taking part in the IPO,” he said, but added, “Since the IPO, as we’ve followed through on increasing transparency and profitability, interest and share ownership by leading global institutions has accelerated.” Alexanderr Belenky / The St. Petersburg Times Rosneft’s Yukos acquisitions, plus Gazprom’s purchase of Sibneft in 2005, drastically boosted the state’s share in the energy game. The approach was codified as early as May 2003, when the Cabinet passed an energy strategy through 2020 that signaled the beginning of the end of private reign over the sector. Temerko, the former Yukos vice president, said that, after reading the strategy, “we knew they’d go after some company.” The first line of the strategy reads: “Russia possesses great energy resources and a powerful fuel and energy complex that provide the basis of economic development and are the instrument for carrying out domestic and foreign policy.” “It was then we realized the state runs everything,”

Temerko said. It took foreign oil companies and foreign capitals longer to wise up. The euphoria of the TNK-BP deal faded into widespread concern over the role foreign firms would play, as they functioned in a legal vacuum while the state carved out its strategy through practice rather than regulations. “[TNK-BP] represented the end of that chapter, when foreign companies could get almost unrestricted access to Russia’s energy sector,” said Chris Weafer, chief strategist at UralSib. A notable exception is ConocoPhillips’ 2004 acquisition of a small stake in private oil firm LUKoil, which it has since increased to 20 percent. Foreign oil firms rushed the country in the mid-1990s, capitalizing on its chaotic industrial landscape to win major contracts in the country with the world’s largest proven gas reserves and vast untapped oil fields. For the most part, they were awarded production-sharing agreements, which ensured that the firms would win back all expenditures before paying out revenues to the state. With the oil price inching ever higher on the back of instability in the Middle East and rising demand from China and India, Putin realized that the state was missing out on billions of dollars per year and soon joined the trend of global resource nationalism. Sustained campaigns led by Oleg Mitvol, the deputy head of the Natural Resources Ministry’s environmental watchdog, cast shadows over Royal Dutch Shell’s PSA at Sakhalin-2 and TNK-BP’s flagship Kovykta project. Months of pressure, during which Mitvol threatened to revoke the firms’ licenses over purported environmental violations, ended with Shell handing a controlling stake in Sakhalin-2 to Gazprom and TNK-BP selling the entirety of its 63 percent stake in Kovykta to Gazprom. Rather than codifying a long-awaited law on strategic sectors, which would limit foreign involvement to 49 percent stakes, Putin laid out his strategy through practice. “It’s a strategic sector and certain rules are being applied, like in every country of the world,” Kremlin spokesman Dmitry Peskov said. “The situation with Sakhalin and Kovykta occurred when foreign companies, foreign major shareholders, were having problems with Russian law. It is easier for every company to have a joint venture with Russian partners to avoid that,” he said. Gazprom’s stake in Sakhalin-2, a sprawling project in the Far East, gave it a foothold in the country’s first foray into liquefied natural gas, in which gas is cooled to liquid form so it can be easier stored and shipped on tankers, rather than confined to pipelines. Yet it has failed to follow through on decades-long promises to develop much-needed fields on the Yamal Peninsula and has delayed plans to produce from Shtokman, a field in the Arctic offshore estimated to hold 3.7 trillion cubic meters of gas. “It is much easier to use the windfall to acquire companies that already generate cash” than bring new projects online, Milov said. “I’ll quote a top Gazprom manager, who once said to me, ‘Why should we bury money in Yamal, in the development of projects that will start to deliver in a decade, when many Gazprom managers will be long gone?’” This has prompted concern in Europe, which relies in Russia for one-quarter of its gas supplies — an amount expected to grow to half by 2030. The Gazprom Behemoth Many had held high hopes that Putin would seek to reform Gazprom after replacing Yeltsin’s management team with his own, led by St. Petersburg native Alexei Miller as CEO. Yet, eight years later, Gazprom remains an unwieldy behemoth, employing some 500,000 people and the domain of competing clans eager to shape what has become the country’s largest firm by market capitalization, with a value of $312 billion. Its current chairman is President-Elect Dmitry Medvedev. A politically tinged pricing dispute with Ukraine in January 2006 signaled to Europe the return of “the Russian bear.” “EU fears of over-dependence on Russian gas are a concrete expression of the progressive breakdown of political relations with Moscow, stemming from a range of issues of Russian domestic and international politics,” said Jonathan Stern, gas expert at the Oxford Institute of Energy Studies. Just months after Ukraine’s Orange Revolution ushered in a Western-leaning government, Gazprom abruptly announced its own brand of shock therapy in December 2005, cutting subsidies to Kiev and drastically raising gas prices to its eastern neighbor. When Kiev couldn’t pay, Gazprom shut the taps, reducing shipments not only to Ukraine, but also to Europe, which gets some 80 percent of its Russian gas shipments through pipelines that crisscross the country. “I don’t think it really led to any serious change with Europe, which is traditionally our biggest market,” said Ilya Kochevrin, executive director at Gazprom Export. “The only recognition is that we need to be more proactive in explaining our position.” Igor Tabakov / The St. Petersburg Times Mikhail Khodorkovsky on trial Kochevrin said he did not believe that resistance to Gazprom expansion into Europe, as well as Brussels’ proposal last year to bar non-EU firms from owning majority stakes in pipelines or power grids in the absence of reciprocal agreements, were direct responses to Gazprom’s growing politicized clout. Pricing disputes with neighboring countries prompted Gazprom to pursue a strategy of direct shipments to Europe, including the Nord Stream pipeline, which will pump gas directly to Germany, and South Stream, which will send gas to the Balkans. Putin has spent the past few years eagerly pushing “strategic reciprocity,” hoping to gain a solid foothold in the European market beyond long-term gas supply deals and pipeline agreements. Yet, with the notable exceptions of Germany and Italy, Europe’s two largest gas importers, the opposition has been stiff. “When we talk about the energy sector in Russia it is impossible to separate politics and economics, and that’s never going to change,” said Weafer of UralSib. It is also impossible to separate the personal and professional, since, as one former bureaucrat put it, “everyone is trying to be the next Armand Hammer,” referring to the U.S. oil magnate who won key deals during the Soviet era through strong relationships with the leadership. Putin’s close relationship with Gerhard Schroeder put the former German chancellor at the head of the Nord Stream consortium. Those who fall afoul of the regime and its energy champions tend to suffer. William Browder, CEO of Hermitage Capital Management, then Russia’s biggest foreign portfolio investor, was denied entry into the country upon landing at Sheremetyevo Airport in November 2005, on the suspicion that he posed a threat to national security. The move was widely seen as retaliation for Browder’s outspoken calls to improve Gazprom’s transparency. Supply Shortages One of the most worrisome results of the past eight years, insiders and analysts said, is that Russia may soon face the prospect of failing to produce enough oil and gas supplies to feed growing markets both at home and abroad. One hallmark of Putin’s presidency was the decision to liberalize gas prices inside the country, due to be achieved by 2011, in order to make the domestic market more attractive for its producers. Yet, the fact remains that production at Soviet-era fields in western Siberia is dwindling, and political distraction, in addition to unfavorably high tax regimes, means that the Arctic and eastern offshores remain largely undeveloped. “This is the result of the fact that private initiatives have been curbed and the advantage has been given to state companies, whose interest is not in production, but in the redistribution of control,” Milov said. This has also increased Russia’s dependence on buying gas from Central Asia, in the absence of long-term supply contracts and amid signs that countries like Turkmenistan are seeking to raise their own prices to market levels. Milov said Central Asian gas comprised 8 percent of Gazprom’s reserve base, up from 4 percent in 2002. And oil production, after years of a steady rising, faces the specter of falling flat this year. “Without Rosneft, Russian production recently has basically been flat. With Rosneft, it’s growing 1 to 2 percent annually,” said O’Brien of Rosneft. “The vast majority of other oil producers are now fighting declining production. “Ruble appreciation and inflation and a tax regime that is outdated will soon make it difficult to approve some potential projects,” O’Brien said. “Many projects look questionable in terms of future profitability, even with fairly optimistic, that is, low, inflation assumptions.” “If something is not done soon, then many companies, particularly those with older portfolios, will need to reject investment proposals and as a result will see an accelerating decline in their oil production,” he said. Putin has followed through on promises to reassert the state’s influence. Around 42 percent of Russian production now lies in state hands, versus 10 percent when he first took the reins, according to UralSib research. That proportion is expected to rise if troubled oil producer Russneft, whose former owner Mikhail Gutseriyev last year accused the Kremlin of forcing him to sell, ends up in state hands. The fate of TNK-BP also remains unclear. The world of energy reflects the broader state of the country. Its firms are staffed with Putin’s friends and FSB agents, from new Transneft chief Nikolai Tokarev to Andrei Patrushev, the younger son of Federal Security Service director Nikolai Patrushev who acts as an adviser at Rosneft. It is fiercely controlled from the Kremlin. Before Putin announced that he would take the prime minister’s seat upon Medvedev’s election to the presidency, Moscow’s chattering classes proposed that he might move to chair Gazprom’s board. Beyond the importance of the state’s control over the energy sector, the energy sector’s control over the state is just as key. Despite loud pronouncements on the need to diversify, Russia’s economy remains inextricably linked to the dipping production of oil and gas, with revenues squirreled away in a $168 billion stabilization fund that is intended in large part to encourage wider economic growth. Yet the problem of its politicization remains. “The government has become used to a high oil price that suits what it wants to do in the economy,” Weafer said. An announcement last month that the three-year budget would boost its oil-price prediction to $74 per barrel — a sum that is, for the first time ever, higher than the previous year’s average — provoked worry. UralSib predicts that the country will begin eroding its surplus if the price dips to $64. “It’s a real threat to the fiscal prudence we’ve had, which is part of the Russian story of the past eight years,” Weafer said. “The legacy of the Putin era is that, at the end of it, Russia is even more dependent on energy than . It was at the start of it,” he said

Energy Milestones

September 2000: Putin promises to support foreign investors and production-sharing agreements.

May 2001: Putin replaces Gazprom CEO Rem Vyakhirev with longtime St. Petersburg ally Alexei Miller.

February 2003: TNK-BP formed through BP’s $6.75 billion investment into the joint venture with three oligarchs, the largest ever equity deal in Russia at the time.

February 2003: Yukos CEO Mikhail Khodorkovsky publicly questions Putin on state-run Rosneft’s acquisition of mid-level producer Severnaya Neft.

May 2003: The Cabinet passes a state energy strategy through 2020, calling the energy sector an instrument for carrying out domestic and foreign policy.

July 2003: Major Yukos shareholder Platon Lebedev is arrested.

October 2003: Khodorkovsky is arrested.

December 2003: Yukos hit with a back tax bill of $3.5 billion, the first in a series that eventually reaches $33 billion.

July 2004: Putin’s powerful deputy chief of staff Igor Sechin replaces Economic Development and Trade Minister German Gref as chairman of Rosneft.

September 2004: U.S. oil firm ConocoPhillips buys a 7.59 percent stake in LUKoil for $2 billion.

December 2004: Yukos’ largest production unit, Yuganskneftegaz, is sold at auction for a knockdown price to Baikal Finance Group, later bought by Rosneft.

December 2004: The Energy Ministry approves oil pipeline monopoly Transneft’s plans to build a major pipeline eastward, amid wrangling whether it will end in China or Japan.

May 2005: Khodorkovsky and Lebedev are found guilty of fraud and tax evasion and sentenced to eight years in prison.

May 2005: Gazprom and Rosneft call off a floated merger.

August 2005: Khodorkovsky accuses Sechin of orchestrating the attack on Yukos.

September 2005: Gazprom buys Roman Abramovich’s Sibneft for $13.01 billion in the biggest takeover deal in Russian history at the time.

September 2005: Germany and Russia agree to build Nord Stream pipeline, providing direct gas deliveries to Europe.

November 2005: William Browder, CEO of Hermitage Capital Management and activist Gazprom minority shareholder, is barred from entering Russia on grounds that he poses a threat to national security.

January 2006: Gazprom cuts gas deliveries to Ukraine for three days following a pricing dispute.

March 2006: Putin, during a trip to China, signs a deal pledging to eventually sell gas to the country.

July 2006: Rosneft raises $11 billion during an initial public offering in London.

August 2006: A Moscow court declares Yukos bankrupt.

October 2006: Gazprom says it will develop the Shtokman gas field alone and retain 100 percent ownership, shutting down years of negotiations with foreign partners.

December 2006: Royal Dutch Shell, Mitsui and Mitsubishi each halve their shares in Sakhalin-2 to hand Gazprom a controlling stake in the project for $7.45 billion following months of pressure from environmental authorities.

February 2007: Putin says he finds the idea of a gas OPEC “interesting.”

May 2007: Rosneft buys Samaraneftegaz and Tomskneft, Yukos’ final two production units, at auction for $13.2 billion.

June 2007: TNK-BP seals a deal to sell its 62.9 percent stake in its flagship Kovykta field to Gazprom for $700 million to $900 million following months of pressure from environmental authorities.

July 2007: Russneft owner Mikhail Gutseriyev flees the country after accusing the state of forcing him to sell his firm through the levying of politicized tax charges; Oleg Deripaska’s Basic Element says it is in talks to buy the firm.

July 2007: Reversing course, Gazprom gives France’s Total a 25 percent stake in developing Shtokman.

September 2007: The EU issues proposals on unbundling of its power industry, seen as a move to bloc Gazprom’s access.

October 2007: Gazprom gives Norway’s StatoilHydro a 24 percent stake in developing Shtokman.

— MT

Sakahlian watch - NONenvironmental Russia plans $5 billion dollar investment

Found in the Vancouver Sun - just what the planet does not need -

Putin's plan to host APEC coming apart at the seams

Jonathan Manthorpe, Vancouver Sun

Russia's president-in-waiting Dmitry Medvedev came close to losing his cool a few days ago as he listened to a seemingly endless catalogue of excuses for why preparations to host the Asia-Pacific Economic Co-operation forum in 2012 are behind schedule.

Russky Island, a 98-square-kilometre outcrop of evil reputation in the Sea of Japan several kilometers offshore from Russia's Pacific port of Vladivostok, has been hand-picked by President Vladimir Putin as the site for the 25-nation APEC leaders summit.

Putin has a vision of turning the island, until recently a secret military facility, into a massive resort complex whose construction, together with the international attention of the APEC summit, will help spark investment in and development of the entire Russian Far East.

Moscow sees this as an urgent issue as neighbouring and booming China takes an ever-increasing interest in the region's massive reserves of natural resources. Illegal Chinese immigration to the Russian Far East and cross-border smuggling are almost out of control.

So the Putin government has earmarked about $5 billion for investment in various infrastructure and construction projects focused on the APEC summit, but which will also bring long-term benefit to this neglected region.

But getting the various bureaucrats and state-owned companies involved to attack the agenda with the same sense of purpose felt by Putin has not been easy.

Thus it was that Medvedev, currently first deputy prime minister but sure to be elected president in two weeks time, was dispatched to the regional city of Khabarovsk to knock heads.

And there are plenty of heads that need knocking, from a Moscow point of view. The local daily newspaper commented that "it seemed at times that Medvedev was on the verge of losing his patience."

Another newspaper report tells of Medvedev trying to get some explanation from a local bureaucrat and a representative of the state-owned pipeline construction company Transneft about the progress of a pipeline from the Baikal oil and gas producing region to Kazmino near Vladivostok. The line is only 46-per-cent complete when 67 per cent of the project should have been finished by this time.

Medvedev was not impressed when the officials mumbled on about the need for various appraisals.

"This project is crucial for the Far East," Medvedev interjected. "All this talk about why and where and what's happening to the paperwork is just pathetic."

Medvedev's patience was tested equally on the question of delays in reaching an agreement to build a natural gas pipeline to Vladivostok from production facilities on Sakhalin Island off Russia's Pacific coast.

A test of wills is going on between two huge Russian state-controlled operations, the GazProm energy company and the Rosneft oil company.

At issue is whether the pipeline and gas should come from GazProm's Sakhalin-2 project or from the Sakhalin-1 site in which Rosneft has a 20-per-cent share with principal owner ExxonMobil.

What is clear is that neither GazProm nor Rosneft are keen to shoulder the task of getting gas to Vladivostok, certain they will lose money on the deal. They have been taking every opportunity to delay making a joint-venture agreement.

Medvedev's irritation was evident when he told them "get on with completing your negotiations. Agree a commercial solution -- and build."

And despite Putin's declaration that he wants to see Russky island as the site of the 2012 APEC summit, it remains uncertain that this will be possible or, indeed, sensible.

Moscow has its own share of guilt in this. The island is still owned by the ministry of defence and arrangements have yet to be made to transfer title to Vladivostok so APEC construction projects can start.

And there are reports that people living on the island -- it's unclear exactly how many there are -- are not at all happy about the APEC-associated development.

They say the island already has a serious litter problem because of visitors from Vladivostok. They expect this problem will increase once the planned bridge to the island is built and they fear being evicted to make way for APEC projects.

But the bridge appears to be a big concern. It is noticeable in local newspaper reports that both Putin and Medvedev have been unable to get straight answers from local officials about whether a bridge to Russky Island can be built in time or is feasible at all.

Reports have begun to de-emphasize the island and stress that it is Vladivostok that is hosting APEC, so it may be that the Russky islanders will be left in happy seclusion.

jmanthorpe@png.canwest.com

Read Jonathan Manthorpe's blog at http://communities.canada.com/vancouversun/blogs/dispatches/default. asp

Look at the oil production problems start to spiral

As "inflation" soars due to the rise in oil prices, it was bound to cause problems for the industry itself. Here is the first indication I have found that the someone is getting honest about it .. This appears in Russia Today.

Veeger

December 7, 2007, 4:27

Oil companies feel pinch as costs rise

A sharp increase in production costs is becoming a cause for concern for oil companies all over the world. It's also causing a problem for such companies in Russia, with smaller firms becoming the first to feel the pressure.

Russian companies aren't feeling the effects as much as foreign ones as they're able to use domestic resources.

Market watchers agree, though, that rising costs are starting to affect Russian companies as well.

“What we've seen in Russia is the situation when the price windfall has been taken primarily by the state in the form of taxes and export duties and, therefore, the companies are not really seeing the price of oil at $US 90 per barrel in Russia. What they're seeing is the price at $US 40-45 - and in this sense high costs will have a much greater impact on the bottom line for the Russian companies,” commented Vitaly Ermakov from Cambridge Energy Research Associates.

What can drive up the cost of production is access, as some companies are having difficulty extracting reserves, so their costs are higher in comparison with those that have access to newer and more accessible fields.

Experts say the problem of rising costs concerns all oil operators from small businesses to big giants.

One of them, Russia's Rosneft, says it's ready to tackle the issue.

“Yes, costs are going up, but we remain profitable and we're working hard to fight inflation in the future and to plan capital expenditure better,” said Peter O’Brian, vice-president of Rosneft.

Small companies will be the first to feel the effects of rising costs and the issue has already been named the biggest challenge for the next generation of Russian oil firms.