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Co-operation pact signed

THE WORLD'S two biggest oil producers and exporters have signed an oil and gas co-operation pact pledging to work together to stabilise world oil markets and seek joint investment projects.

Russia's president, Vladimir Putin, and Saudi Arabia's de facto leader, Crown Prince Abdullah bin Abdul Aziz, looked on while Russia's energy minister, Igor Yusufov, and Saudi oil minister, Ali Naimi, signed the agreement in the Kremlin. This was the first time since 1932 that such a leading official from the kingdom has visited Moscow and it looks as if relations between the countries may stay at least warmish. King Fahd has invited Putin to visit Riyadh and the Russian leader has accepted.

In the oil sector, the only contract signed during the visit was a strategic partnership between Saudi Oger and Russia's Stroytransgaz, which are bidding together for oil, gas and water construction projects in the kingdom.

Some experts think Russian/Saudi relations are a history of lost opportunities, said Stroytransgaz' vice-president, Leonid Bokhanovsky. If that is really the case, then our goal is to make up for lost time as fast as possible. But Bokhanovsky is more optimistic than most. Oil and gas co-operation between Russia and Saudi Arabia will probably remain limited because the pair are competitors.

In the long term, Saudi dominance of the world oil stage is assured.

The kingdom's oil reserves dwarf those of Russia and it is much cheaper to produce oil in Saudi Arabia than in Siberia. But, for now, with Russian production leaping higher month by month, the Saudis are unlikely to want to sink finance in projects that could help their closest rival overtake their own output and erode Saudi Arabia's market share.

Saudi Arabia could produce 2m barrels a day (b/d) more oil almost immediately if it were not for Opec constraints. Russian output is rising unchecked by over 11% a year, with almost all the incremental oil being exported. And, while Russia is grabbing a bigger and bigger share of world markets, it has remained a dedicated price taker. Saudi Arabia is stuck with the role of price maker.

Russia has repeatedly refused invitations to join Opec. And the country's efforts to help the organisation prop up prices during the most recent threatened collapse in early 2002 were generally viewed as rather half- hearted.

Russia's declared policy is to boost oil exports, particularly to the US, where, until 2001, its Urals crude was hardly seen. US disenchantment with its main supplier, Saudi Arabia, since 11 September 2002 has played into Russian hands and the invasion of US oil markets has begun in earnest. Deliveries across the Atlantic reached a record 400,000 b/d in June, thanks mainly to the disappearance of Iraqi oil. US refiners have adapted to Russian Urals, traders say, and the door is opening for larger supplies.

Russia will never oust Saudi oil from US markets. It has not even yet established a deep-water oil harbour capable of accommodating VLCCs that could improve the economics of trans-Atlantic oil trade.

But budding Russian/US energy co-operation must concern the Saudis, especially while Riyadh's own relations with the US have soured so badly.

Diplomatically, it made good sense for Prince Abdullah to build bridges in Moscow at a time when oil prices are high and the mood in producer countries is buoyant. However, prices will not stay high forever. Perhaps with better relations between the two countries, Russia may be slightly more inclined to listen to future requests from Opec for restraint, says Stephen O'Sullivan, head of research at UFG.

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