Time, go backward!

Russian oil and gas companies have failed to use favorable economic situation to develop their own business. The state has been taking the industry back, hindering its development.

By Ivan Rubanov

For the last couple of years domestic oil and gas industry have been operating under the "golden rain" — against the background of the most favorable world market situation. Current price of hydrocarbons broke all records of the last years and in real terms proved to be the highest – by orders – in the history of new Russia, nearing historic top figures of the 80-ies (diagram 1). The factor has been responsible for gigantic growth of revenues and profits in oil and gas business and together with visible macro-economic stability in Russia brought about multiple growth of capitalization in domestic oil and gas companies.

Favorable factors were not adequately transformed into business development of domestic companies. On the contrary, production seemed to stall (diagram 2), its growth went behind other branches of industry. Investment activity of oil and gas companies even went down: monetary capital investments for the majority of large players grew slower than the inflation rates or even dwindled.

Chronic under-investment in oil and gas business together with hydrocarbons’ increased prices set forth some problems in interacting with other subjects of the Russian economy. Oil companies with refining capacities failed to update their refineries and develop production of quality petrols, which resulted in high (for oil-exporting country) costs of motor fuels at the internal market. In Gazprom-controlled gas industry increased internal demand and export obligations in recent years were accompanied by inadequately poor investments into gas production and delayed development of gigantic deposits and new oil-and-gas provinces. As a result new industrial enterprises recently started having problems with gas limits. Basic oil-and-gas deposits in operation from the Soviet times have reached the stage of declining production, therefore, according to the industry experts, "blue fuel" deficit may cause serious tensions at the domestic market.

Diagram 1. Prices for oil and gas approached historical peak...

Diagram 2. ...but this had a weak affect on the dynamics of hydrocarbon production in Russia

Authorities and misfortunes

Situation in the industry is not adequate to favorable economic conditions and can not be ascribed to overloaded export infrastructure. The problem was on the agenda couple of years ago but was mostly resolved due to close attention of the state-owned companies. Several large pipelines projects were put into practice. The "Blue Stream" pipeline and the Baltic pipeline system – equivalent of the largest Soviet oil pipeline "Druzhba" ("Friendship") – reached their full capacity. Besides, long overdue strategic projects of the Eastern oil pipeline and the "Nord Stream" gas pipeline were launched, plans to expand Caspian pipeline consortium and build oil pipeline "Burgas-Aleksandrupolis" bypassing Turkish straits neared implementation. At last, intergovernmental agreement was reached to build several gas pipelines to China.

The current leading trend may be described as growing state interference into the industry business. The state-owned block of stocks in Gazprom reached the controlling level, later Gazprom acquired privately-owned Sibneft, set control by judicial means over Northgas (independent gas producer); after acquiring Yuganskneftegaz Rosneft took practical control of bankrupted YUKOS remains. So the state influence in the sector has drastically grown up (diagram 3). The state monopoly over main pipelines was secured (de-facto); the "two keys" principle – regional authorities were involved in granting production licenses – was cancelled to give full control over the oil and gas industry to the Federal center. The processes and difficulties in implementing one’s plans slowed down private investors’ activity, finally convincing them: their business in Russia was vulnerable and liable to the power pressure. In comparison, the state-owned companies received serious preferences from loyal authorities and became chief contenders for new lucrative projects.

But the new state "owner" failed to give similar dynamic boost to oil and gas companies. All of its resources were set to resolve global tasks of geo-political and geo-economic nature. Development of new hydrocarbon province in Eastern Siberia to establish eastern (Asia-oriented) vector in hydrocarbon exports and break corresponding European Union monopoly was declared a national project. The Russian government started advancing the idea of new principles of cooperation with leading foreign energy consumers: against the backdrop of hydrocarbon deficit, reduction of its reserves in developed countries and increased role of state-owned companies in exporting countries Russia got a chance to strengthen its stand at the world energy market. Our high-ranking officials started to insist on a new status of Russia as a supplier of energy resources, with provision for domestic producing companies to have access to transport infrastructure, industrial sphere and final consumers in the importing countries – in particular, by exchanging assets and building production chains between producers and buyers.

But so far the state achievements in the field are quite modest. On the one hand, local state-owned companies failed to start practical development of Eastern Siberia deposits. On the other hand, the Russian government and Gazprom have made successful arrangement with the German government and corporation about the asset exchange and construction of Nord Stream. Besides, the gas monopoly has achieved certain results in attempts to increase prices for the former CIS countries and in confrontation with the Ukraine. At the same time the gas monopoly image of reliable resources supplier was tainted – attitude towards the Russian authorities and its affiliated companies cooled down in fear of their energy dictate.

No doubt, future strategy of oil and gas industry will be mapped out by the power elites. But so far the elite does not seem to be ready to concentrate on less geo-political business at hand – like serious increase of gas production or oil recovery factor.