The Russia Journal

With the collapse of the Soviet Union, Russia's oil industry inherited an odd set of management schemes and methods and continued to develop them just out of force of habit. The Russian Ministry of Energy expected that establishing joint ventures would facilitate imports of modern Western technologies and materials and stimulate their adaptation to Russian conditions. Attempts were made to find new forms of cooperation between Russian oilmen and their Western partners, and, though results have been mostly negative, the experience thus accumulated should help in the future.

When a Western investor comes to an Asian or African country he brings everything he needs for business, including equipment, specialists, software, technical standards, etc. Russia is different because the country does have all that, but to very different standards. For example, Russia has stricter specification requirements for pipes that API standards, but much less strict requirements for software.

Are there many specialists in the West who are familiar with the Russian system of standards? Conversely, how many Russian oilmen are familiar with API standards? Add to this the great differences in management and government-supervision systems and the different mentalities. This is why it often takes months for Russian and foreign specialists to get to understand one another.

Lack of understanding has plagued joint ventures from the very start. In addition, there is a language problem: The English words "venture" and "enterprise" are translated into Russian as one and the same word. The result is that what foreigners understand as a "risky attempt" their Russian colleagues perceive as an "enterprise operated by equal partners."

That notwithstanding, Russian oilmen and Western businessmen had such a strong interest in each other that, already by 1998, as many as 13 joint ventures were producing in the Khanty-Mansiisk Autonomous District alone. These joint ventures operated 2,795 oil wells and produced 9.3 million tons of oil a year. Besides, approximately the same number of joint ventures were operated in the fields of maintenance, repair service and geophysical and other research.

There were failures, of course. Ten years ago, the American company Fibro Energy Incorporated and the Russian oil company Varyeganneftegaz established the joint venture White Nights. They planned to boost production of one of the Siberian oil fields by applying horizontal drilling, technology that was not used in Russia back then. The Americans invested $40 million, supplied drilling rigs and assigned their specialists to operate them. But the three horizontal wells that were drilled showed no oil. It was a tragic error made by foreign geologists on the base of incorrect formation data provided by Russian specialists.

Another, happier example is the joint venture Vanyeganneft, established by American Occidental Petroleum and Russian Chernogorneft. The partners agreed that the company would be governed by two managers – one Russian and one American. The first move by Occidental Petroleum was bringing in a team of 106 American specialists, including geologists, oil engineers, financiers, ecologists, etc., who exchanged experience and knowledge with their Russian colleagues. This well-considered strategy produced excellent results: Vanyeganneft successfully pulled through the hard times and crises of 1996-1998 and managed to increase oil production up to 3 million tons, i.e., by nearly 200 percent.

However, the Russian idea of "equal partnership" (which is more a political than an economic approach) was doomed. Many oil-producing joint ventures failed to survive the period of high oil prices.

As their profits soared with the increase of oil prices, the oil giants launched an aggressive offensive against small- and medium-sized companies in the sector, including joint ventures. Of course, not all of Russia's oil giants behaved like that. LUKoil, for example, has been developing its activity abroad and sought to create favorable conditions for Western partners in Russia. Conversely, Slavneft and Tyumen Oil Company have won notoriety as "joint-venture killers."

Furthermore, the Russian government has failed to fulfill its promises in the areas of tax exemptions and oil-export guarantees to joint ventures.

Though the number of joint ventures in the sector has dropped from 13 to five over the last three years (see Table), their combined oil production declined by only 11.8 percent. At the same time, those companies where foreign investments constitute more than 90 percent of issued-share capital have strengthened. The three largest of these produced 1.6 million tons of oil last year. But here we see the very same trend: While large companies are successfully developing, smaller ones are changing hands.

When our liberal politicians and economists loudly invite small and medium-sized enterprises from the West to come do business in Russia, they had better exclude the oil industry from the list. Small investors do not possess enough financial, technical or human resources to have any chances of finding a common ground with Russia's oilmen. Even the mighty BP-Amoco sustained appreciable losses while working with Russia's oil company Sidanko, and it took it three years to stabilize the business.

Not surprisingly, the most successful, though rather slowly progressing, projects involve big companies from both Russia and the West. These are Blue Stream, Sakhalin-1 and Sakhalin-2, and this gives reasons to hope that we will see more oil projects in which the strongest Russian and foreign companies will join forces.

(The author is director the Nature Development Institute, Nizhnevartovsk)