Russia hurting its own oil production

When the price of oil reached another record on Friday, at more than $126 a barrel, analysts pointed to attacks on pipelines in Nigeria and turmoil in Venezuela and Iraq as the immediate causes.

Even small disruptions to supplies from such places can cause the price to jump, because only Saudi Arabia has the capacity to replace the lost production and it is disinclined to do so.

But to understand how supplies became so scarce in the first place, one must look at the state of the oil industry in Russia, the world's second-biggest producer.

Over the past seven years, according to Citibank, Russia accounted for 80 percent of the growth in oil production outside the Organization of Petroleum Exporting Countries. The increase in the early part of the decade matched the growth in demand from China and India almost barrel for barrel.

Yet in April, Russian production fell for the fourth month in a row. It now is more than 2 percent below the peak of 9.9 million barrels a day reached last October. Before that, growth in Russia's output had steadily slowed, suggesting that the drop is not a blip.

Leonid Fedun, a vice president of Lukoil, a local oil firm, said Russia's production never will top 10 million barrels daily. The discovery that Russia no longer can be relied upon to cater to the world's ever-increasing appetite for oil is naturally helping to propel prices to record levels.

Oil and gas have been the foundation of the regime of Vladimir Putin, Russia's outgoing president, and are also a preoccupation of his successor, Dmitry Medvedev, who was chairman of Gazprom, the state-controlled gas giant.

"Geologically, there is no problem," said Anisa Redman, an analyst at HSBC, a bank.

Seventh-biggest reserves

In principle, Russia's bonanza could continue for years; it has the world's seventh-biggest oil reserves, at 80 billion barrels, according to British oil firm BP. And oilmen reckon there are 100 billion more barrels to find. But Russia has regulated the industry so poorly that production is falling despite the soaring oil price.

"Tax is the major impediment," Redman said. The government levies an export duty of 65 percent at prices over $25 a barrel. Add to that various corporate, payroll and production taxes, oilmen complain, and the state takes as much as 92 percent of profits.

The government does offer tax breaks on production from older fields. So oil firms, naturally, have been concentrating on squeezing as much oil as they can out of those. Until recently, that was an obvious priority anyway, since fields that had fallen into ruin after the collapse of the Soviet Union in the early 1990s could be revived relatively easily and cheaply.

There has been some growth in those areas, mainly thanks to the less heavily taxed projects, called "production-sharing agreements," that the government offered briefly in the late 1990s but since has curtailed. Strip out the production from those projects, and Russia's output has been in fitful decline since August 2006, according to analysts at Citibank.

The government did provide about $4.5 billion in tax breaks last year. But this, the oil companies argue, is barely enough to keep production stable.

In his inaugural speech to the Duma as prime minister on Thursday Putin said taxes on the industry must be reduced. However, new fields can take a decade to develop. The Kremlin has also failed to give exploration rights in the Arctic -- the region oilmen consider most promising.