The early 1990s were burdened by the aftermath of the Soviet Union’s collapse. As such, the industry was hamstrung by low oil prices and declining production. But by the end of the 1990s, production in several newly minted private companies started rising. From 1998 to 1999, Yukos, first among Russian companies, started growing its production, thanks to new technologies and leadership styles. Yukos became the pioneer of the Russian oil industry’s resurrection. With more cash flowing and oil prices rising, most Russian oil and gas companies used the opportunity to hone their business efficiency.

Private companies were the first to engage foreign service companies and new technologies, which helped them overtake the former leading Russian oil companies. Yukos and Sibneft started drilling horizontal wells and executing large hydraulic fracturing jobs with help from leading international service companies like Schlumberger and Halliburton. Yukos and Sibneft were growing at rates between 12 and 20 percent every year, until 2004 when Yukos was broken up and then sold out to state-owned Rosneft in 2005. Meanwhile, Sibneft was taken over by Gazprom. Other industry leaders like Lukoil, TNK-BP, and Surgutneftegaz saw production growing at about half the rate of Yukos and Sibneft.

Between 2005 and 2007, with the state controlling more than half of Russia’s oil production (and with rapidly rising prices), production increases stagnated. Indeed, as the graph shows, between 2000 and 2004, production grew at an average of about 9 percent per year, while in the last three years the trend has been 2.5 percent per year. (Note: As of this writing, there were no official statistics for the last 2 months of 2007, so the final 2 months assumed the average of the prior 10.)

Some company representatives actually claim that production deceleration occurs deliberately, “because of the care by the state for future generations.” But many industry analysts blame the declines on the increased tax burdens being placed on the sector. From 2002 to 2007, royalty taxes increased by 390 percent, export duties by almost 900 percent, technology-dependent lifting costs by 230 percent, and transportation costs by 150 percent. It seems that $100 oil cannot compensate for the state’s voraciousness and mismanagement.

On occasion a lone analyst may attribute the flattening production growth to the over-exploration of the early 2000s. But that doesn’t explain the remarkable coincidence: the decline in production appears in 2004 and 2005, the same years that Yukos – the most efficient oil company in Russia – was destroyed. The Yukos saga forced other private companies to realize there was no light at the end of the tunnel. A classic example is Russneft, headed by Mikhail Gutseriev, who realized quickly that it was pointless to push for higher returns, because the very fields developed by Russneft could be deemed “strategic assets,” and therefore be gobbled up by the state. Once state-run companies became omnipotent or monopolistic owners of oil and gas assets like Rosneft or Gazprom, they were converted into Soviet-style bureaucracies without incentives, happy to maintain the status quo and faithful to their master’s voice.

What is becoming certain today is this: a decline in oil prices, no matter how small, will have a dramatic impact on Russia’s economy.