FEATURE-Post-Soviet energy boom fails to ignite
01:48 a.m. Mar 15, 1999 Eastern
By Sebastian Alison
MOSCOW, March 15 (Reuters) - When the Soviet Union came
apart at the end of 1991, many of its former republics expected to
become rich by luring foreign investment to develop their vast
energy resources.
Seven years on, combined former Soviet oil output is little over
half its 1987 peak, oil prices are at a 25-year low and most
members of the former union, including energy producers, are in
an economic mess.
How has it all gone wrong?
Industry sources point to a mix of political and economic
mismanagement, legal and tax regimes which scare investors away,
exaggerated hype over reserves, low oil prices and huge
differences in attitude between the two sides. The longed-for
boom shows no sign of coming soon.
''The main reason underlying all the setbacks is that there is still a
huge wall between the Western perception of what to do in these
countries and the Soviet-type mentality of the host countries,'' says
Yevgeny Khartukov, a veteran of the Soviet oil industry and now
head of the GAPMER oil consultancy in Moscow.
''To find a common business language between those who have
never been on the same footing is not just a question of signing a
couple of deals or waiting for the change of a couple of
governments. It takes decades, the change of generations.''
The Soviet Union used to be the world's biggest oil producer.
Peak output of well over 12 million barrels of crude per day was
half as much again as Saudi Arabia's.
Because the industry concentrated on huge, geologically simple
Siberian reserves discovered in the 1960s which were relatively
cheap to exploit, other areas got low priority.
In Azerbaijan, the source of over half the world's oil in 1900, and
Kazakhstan and Turkmenistan, the other main energy republics,
little was done to develop remote, costly fields.
Independence was meant to change all that. These states
immediately started attracting foreigners to develop the wealth.
In Russia too, foreigners began to look for opportunities, awaiting
the implementation of promised legislation to create a favourable
tax regime and protect their investments.
But Russia now faces a desperate economic crisis following
currency devaluation and debt default last year, foreign oil
companies are leaving Azerbaijan, and Turkmenistan is exporting a
fraction of the gas it sold before independence.
Only Kazakhstan is enjoying some success in raising oil exports,
and then only through the success of a single project.
RUSSIA TO BLAME FOR ITS OWN FAILINGS
Russia is largely to blame for its failure to develop the sector.
Although reserves are huge and cheap to exploit compared to
marginal fields such as those in the North Sea, lawmakers
consistently failed to approve laws protecting investors until this
year.
Production sharing laws, which protect investors by giving them a
chance to seek redress through international arbitration, were only
amended when all other sources of investment had dried up, said
Richard Freeman, president and CEO of Timan Pechora Co LLC,
an exploration company formed by foreign oil majors.
''It was only when Russia realised there would be absolutely no
financial help at all from Western governments (following
Moscow's debt default) and there wasn't going to be any more
portfolio investment for the time being, that they realised foreign
direct investment was the only investment they would get,'' he said.
He added that Russia had lost at least three years in passing the
legislation and even now it was ''not perfect.''
The tax regime has also been subject to so many changes that few
can keep up. One analyst said the regime was ''strangling the
industry.'' As a result, few foreign oil companies have got much
further than opening representative offices in Moscow.
Those that have may wish they had not.
When British Petroleum bought 10 percent of promising oil
company Sidanko for over half a billion dollars in 1997, it could
hardly have guessed that 16 months later many of Sidanko's units
would be bankrupt and the whole company facing bankruptcy.
BP Amoco failed in its bid to have Sidanko placed under
independent external management earlier this month, and a
company spokesman described it as ''a sad and damaging day for
foreign investment in Russia.''
This lack of foreign confidence and investment, coupled with a
lack of domestic cash for investment, has led output to slump. Last
year Russia produced six million barrels per day compared with
over 11 million in the 1980s.
Given that oil is worth only half what it was a few years ago, the
economic impact of the decline has been catastrophic.
OTHER REPUBLICS ALSO FAIL TO BOOM
Few other republics are faring much better, though for different
reasons.
Azerbaijan has been awarding exploration contracts since 1994
for production in the Caspian Sea, once described as a new
Kuwait and the industry's new frontier for next century.
But reserves so far have proved disappointingly low, and because
the Caspian is landlocked, the cost of moving oil to markets will
always make the oil expensive to produce.
Five years after the first Azeri exploration contract was signed, a
further 15 have followed.
But so far only one group is actually producing oil, and two
consortia have quit the country this year, citing low reserves and
costs which are simply too high at current price levels.
A senior official with a major Western oil company stressed the
importance of further exploration in Azerbaijan.
''There is a fairly normal exploration cycle going on here of
excitement, some disappointment, some successes, and the picture
will only emerge with time,'' he said. But whatever the outcome of
future exploration, Azerbaijan will not be rich soon.
Turkmenistan's potential wealth is based on gas, not oil. But it is
also miles from markets, and will need billions of dollars to build
pipelines before it can raise any revenues.
Turkmen President Saparmurat Niyazov has given a contract to a
U.S. company to build a pipeline to Turkey, but has yet to sell any
of the gas. Normal industry procedure is to sell gas for years
ahead before building the pipeline.
Both Russia and Iran have already stolen a march on
Turkmenistan by selling long-term gas supplies to Turkey, making
it quite possible Turkey will never need Turkmen gas.
Even if the country does conclude a contract, several years will be
needed to build the pipeline, after which revenues for years more
will be needed to pay back the construction cost. Few expect the
country to receive major net gas revenues soon.
Only Kazakhstan has had some success through the work of a
single joint venture company, Tengizchevroil, developing the
gigantic Tengiz field in the west of the country under the leadership
of U.S. major Chevron.
An international consortium is now building an oil pipeline from
Tengiz across Russia to the Black Sea which is expected to be
completed by 2001. Eventually it will deliver 1.3 million barrels
per day of Kazakh crude to world markets.
But even in Kazakhstan, other fields have been in limbo for years,
with exploration deals signed but no work started.
Both Western firms and former Soviet states are disappointed that
the initial euphoria has not led to greater results.
''The problem is that expectations were too high,'' said
GAPMER's Khartukov. ''Now we have what should have been
expected from the beginning.''
Copyright 1999 Reuters Limited. |
