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Russia: Bigger Than Big Oil

Our former foe quietly surpasses Saudi Arabia's oil output, while U.S. production dwindles. 

For nearly two decades, the U.S. has believed that it emerged victorious from its Cold War against Russia and its Soviet minions.  That may be true politically, but I hope that emerging changes in the global energy market don't prove that we won only a skirmish, with the real war still unresolved. 

Just 10 years ago, the United States produced 6.4 million barrels of crude oil a day.  Today, we're down 20%, to about 5.1 million barrels daily.  At the same time, we consume a whopping 20.8 million barrels daily -- more than four times what we can produce. 

Russia, on the other hand, produces nearly 9.3 million barrels daily -- far more than three times that nation's oil usage of about 2.8 million barrels a day. ( Russia consumes far more natural gas as a percentage of its total energy package than does the U.S. But while available gas demand figures don't separate Mother Russia from its former satellite nations, it still appears that the Russians domestically satisfy their own natural gas needs.) 

Perhaps most astoundingly, late last year Russia quietly passed Saudi Arabia to become the world's biggest oil producer.  After Russian President Vladimir Putin and U.S. Secretary of State Condoleezza Rice recently agreed, face to face, to tone down their increasingly inflammatory rhetoric and concentrate instead on business, Russia's growing oil output and the U.S.'s corresponding decline seem increasingly meaningful, if not ominous. 

Howdy, comradeLately, much of the attention to Russian oil output has involved Sakhalin Island, a remote 500 mile-long swath in the Sea of Okhotsk, east of Russia and north of Japan.  That area's celebrity probably relates to its relative newness, and to the technological sexiness of the production techniques being used by ExxonMobil (NYSE:XOM) and other participants in the program.  But if you lump Sakhalin reserves with those of Russia's Eastern Siberian basin, you've likely accounted for less than 5% of the nation's total deposits. 

Indeed, Russian hydrocarbons are generated from several locations across the nation.  For years, its Texas has been the Western Siberia basin, which appears to account for roughly two-thirds of the nation's total reserves.  The best-known field in the area probably is the behemoth Samotlor field; while it may be in decline, 270 other fields in this huge region apparently pick up the slack quite handily. 

Another significant area of Russian energy activity lies in the Volga/Urals basin, representing something less than 20% of total reserves. ( Production there also seems to be diminishing.)  Close observers of Russian energy assume that the Timan/Pechora basin to the north weighs in with something less than 10% of the nation's total reserves. 

But what might those total reserves amount to?  Not surprisingly, Russian officials are mum on the likely numbers, and estimates in the West vary widely.  Oil & Gas Journal's 60 billion-barrel estimate clashes with the 150 billion- to 200 billion-barrel range proffered by Dallas-based reserve auditing firm DeGolyer & MacNaugton, whose clients include Russian energy producers and a host of private Western companies. 

It's also tough to estimate how long total Russian production might last before it begins to slide.  Part of the difficulty there lies in determining the damage that might have been done from years of operating techniques that seem almost primitive by western standards.  For example, the Russians previously cemented wells with construction cement, rather than a blend formulated specifically for downhole applications. 

Money to be made?Russia has long sustained love-hate relationships with private Western companies, starting with skirmishes between what is now ExxonMobil and Royal Dutch Shell (NYSE:RDS-A)(NYSE:RDS-B) over concessions during and after the Bolshevik Revolution.  As recently as May 7, The Wall Street Journal carried a lead article detailing ExxonMobil's increasingly contentious Sakihalin-1 efforts.  At first, Russian authorities largely deferred to the company's technological and operating expertise.  But as production and prices have risen almost in tandem, Russian administrative interference has increased apace.  Nevertheless, Exxon has been more successful than Shell, whose cost overruns at Sakhalin-2 ultimately forced it to sell its controlling stake in the project to a Russian company. 

Obviously, the Western companies operating in Russia have endeavored mightily to stay on local authorities' good side.  As the Journal article noted, "With most of the big fossil-fuel stores in the West already tapped, oil companies have been moving to the less politically predictable countries where the most alluring fields remain." 

But Fools are investing types, and I can sense my Foolish friends' desire to discuss opportunities for direct investment in the thriving Russian energy scene.  We'll do so, but only after I issue a great big flashing warning: Russian investments -- energy or otherwise -- carry as much potential for risk as reward.  If the Russians can make life difficult for Exxon, ordinary Fools should exercise real caution before investing in the country. 

That said, I'll note that Gazprom (OTC BB: OGZPY) is the largest Russian company and the world's biggest extractor of natural gas.  It accounts for the majority of Russian gas production, operates an array of pipelines, and supplies natural gas to much of Europe, including countries as distant as France.  Gazprom ADRs closed at $37.29 on Wednesday; with the company expected to earn about $4.37 a share this year, its forward P/E ratio is only about 8.5. 

Lukoil (OTC BB: LUKOY) is the nation's largest oil producer; aside from Russia, it operates in such locations as the Caspian area, Iran, Colombia, and Venezuela.  It also owns service stations in numerous places, including some former Getty and Mobil facilities in the U.S. Lukoil's ADRs closed at $74.75 on Wednesday; with earnings expected to reach $8.90 this year, it sports a forward P/E ratio of just 8.4. 

In addition, Fools might consider the relatively new Market Vectors Russia ETF (NYSE:RSX), for which energy represents by far the biggest sector.  Beyond that, I'm compelled to point out that the world's energy situation appears increasingly precarious.  Consider Russia's oil and gas industries if you're so inclined, but please don't ignore such western exploration and production stalwarts as ExxonMobil, Chevron (NYSE:CVX), or ConocoPhillips.