Robin Mills: Post-Soviet oil industries trying still to break free

Twenty-five years after the collapse of the Soviet Union, its former republics are having widely varying degrees of success in making the transition to market economics.

Twenty-five years ago today, the Supreme Soviet of the Soviet Union voted itself out of existence. The fall of the USSR was triggered by an oil price crash; its dissolution opened up vast territories for international oil companies.

The half-dead Soviet system could survive only as long as it bathed in the fresh blood of its petroleum revenue. Its giant energy industry, the fruit of a titanic effort in hostile climates, was grossly inefficient and environmentally negligent. As the former Russian prime minister Yegor Gaidar authoritatively described in his Collapse of an Empire, after the fall in oil prices in 1986 engineered by Saudi Arabia, Moscow could neither feed its people nor service its debts.

After 1991, the former Soviet states followed their own paths in developing hydrocarbon resources. Catchphrases from history were resuscitated as oilmen descended on the “Wild East” of bandit capitalists, BP signed the “Contract of the Century” to bring oil from Azerbaijan to the Mediterranean and westerners, Chinese and Russians played out a “Great Game” in Central Asia to open a “New Silk Road” bringing not silk but gas.

Azerbaijan and Kazakhstan opened up early to international oil companies. With hydrocarbons the pillar of the economy, those countries have come in some ways to resemble their Arabian Gulf petro-counterparts. In Kazakhstan’s Caspian offshore, a star-studded international consortium in 2000 found one of the largest fields of the past 30 years. But Kashagan’s high-pressure oil laced with deadly hydrogen sulphide, deep under a layer of salt, only started production late this year after more than US$50 billion of expenditure.

The post-Soviet market transition is not even near complete in Turkmenistan and Uzbekistan. Though Dubai’s Dragon Oil has done well developing offshore oil, Turkmenistan’s huge gas resources, the world’s fourth-largest, are exported to China but mostly off-limits to international investment.

And what of the biggest bear in the post-Soviet republics? Russian oil production collapsed during the 1990s but the concurrent economic free fall and the elimination of grossly wasteful Soviet industry meant that exports actually increased. Following the 1998 economic crisis and devaluation, the suddenly competitive oil sector grew strongly under the direction of oligarchs such as Mikhail Khodorkovsky and Roman Abramovich. Output increased by 40 per cent in just four years to 2003.

This “West Siberian miracle” would anyway have petered out as it was based on the one-off application of modern methods to Soviet-era fields. The current president Vladimir Putin’s reassertion of central state power and taxation, and the swallowing of Mr Khodorkovsky’s Yukos company by Rosneft under Mr Putin’s right-hand man, Igor Sechin, brought this explosive growth to a sudden end. Under Rosneft and Gazprom, about three quarters of the petroleum industry is now back in state hands.

Western oil companies were only bit players in this drama. BP struggled through tribulations but eventually profited substantially from its joint venture with TNK, later taken over in its entirety by Rosneft. Shell and ExxonMobil have had rocky though lucrative rides in the far eastern island of Sakhalin.

Russia’s new frontiers include the offshore Arctic such as the Kara Sea and probably more promisingly the colossal Bazhenov Shale of West Siberia. Western sanctions that have blocked the technologies needed to develop shale and stymied ExxonMobil’s Kara Sea joint venture with Rosneft may crumble next year.

The Russian oil industry is far more efficient, sophisticated and market-oriented than its Soviet counterpart. Output continues to inch up, defying all forecasts by international agencies and its earnings still underpin Putinism.

Comparisons to the collapse described by Mr Gaidar are facile. Yet despite modernisation and market-oriented transformation, the former USSR’s oil and gas sectors still bear the heavy imprint of Soviet times. Dismantling Communism was the easy part; building diversified economies remains vital but elusive.

Robin Mills is the chief executive of Qamar Energy and the author of The Myth of the Oil Crisis.

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