The world oil industry has quickly exploited opportunities in the the new Russian Federation. The Russian Arctic republics of Archangelsk and Komi, along with the western Siberian region, are especially attractive. Expectations are that these regions contain more oil than all North American oil reserves combined.
However, uncertainties about legal rights, infrastructure, ownership, and liability have slowed development despite the high hopes of many western corporations. Nonetheless, the Russian desire for new capital and western companies' need to find more profitable fields have been sufficient to overcome early hesitation, and today most of the oil majors and many smaller western companies are active in the Timan-Pechora Basin and elsewhere.
The argument for oil investment by the western companies appears, from a narrowly financial viewpoint, to be sound. Western financial and technical capital will flow in, to be used to perform major upgrading of pipelines, refineries, and wells.
In return, investors receive oil for sale on world markets with favourable profit margins to guarantee an adequate return.
However, western corporations have been more successful than their Russian hosts in wringing major financial and political concessions which are to their advantage. The Russian oil industry has been compared to the `wild west' with `petroleum cowboys' making fortunes on the back of cheap and abundant labour, anarchic accounting and legal practices, and total disregard for the natural environment and local people.
The main features include: tax exemptions and `oil-swapping'.
Mobil (USA), Exxon (USA), Shell (Netherlands), Elf (France), and Phibro Energy (USA) grouped together under the Petroleum Advisory Foundation in April, 1993, to lobby for changes in Russian oil taxation.
In October 1994, just weeks after the spills of thousands of tonnes of oil into the Arctic tundra, six major joint ventures were granted 100% relief from export duties on oil exports. The Cabinet resolution, signed by Prime Minister Viktor Chernomyrdin on October 11, was not made public until it appeared in the western trade press. The decree grants tax exemptions for three years or until the ventures have recovered their investments, whichever comes first.
The companies operating in the Timan-Pechora Basin who benefit from this giveaway are:
KomiArcticOil: Gulf Canada, British Gas PLC
Polar Lights: Conoco (USA)
AmKomi: Aminex (Ireland)
KomiArcticOil's investors were given this tax break retroactively to January 1, 1994; the remaining companies received relief from September 1, 1994.
The tax is about US$5 per barrel. So, for example, Conoco has been handed a windfall of US$110,000 per day until they regain their entire investment, or US$120 million if the arrangement lasts for the full three years.
Whatever the merits of the view that tax concessions are needed to attract foreign capital, it is clear that the costs of the environmental disaster in the Arctic, and the ongoing damage to local people's health and livelihood, will not be paid for by the companies who are taking the oil from the ground. The Russian government will pay these costs, if at all, without the benefit of taxes accrued from oil exports by these corporations.
The new investment flowing into Russia from the formation of the joint ventures might have been expected to provide the resources for pipeline upgrading. KomiNeft, after all, is the dominant partner in the joint ventures and also operates the local pipeline.
But the question obviously arises as to why the oil companies do not step in to fix the line, given that oil is only valuable when it reaches the market, and that a sizeable portion of their oil is disappearing into the tundra?
One reason is Russia's concern to maintain full ownership of the pipeline. But the joint ventures receive a credit note from Russian authorities for every barrel of oil pumped through the wellhead and into the pipeline. The companies then redeem their credits--barrel-for-barrel--at the refineries. In other words, it makes no financial difference to western companies whether their oil goes to the refinery or into the surrounding streams and lakes. The oil companies have no incentive to concern themselves with the pipeline; with their credit notes they get their oil at the other end.
It is difficult not to make comparisons to the Stalinist ideology of `production at all costs'--as long as the oil passes the wellhead, `the universe is unfolding as it should' from the point of view of Conoco, Gulf Canada, or British Gas.
What is abundantly clear, though, is that the Russian economy and the northern ecosystem is absorbing the entire cost of the inefficiency which this arrangement represents. The oil companies are `externalising' a major and crucial cost of production, ie. effective transport of their product to market, leaving this to the Russian people and the natural environment on which they depend.