THE OIL INDUSTRY FACES A DIFFICULT CHOICE

By Sergei Kolchin

On the threshold of 1999 the Russian oil industry suddenly found itself again faced with a difficult choice: to progress along the familiar lines of restructuring by developing private holdings and encouraging competition between them, or to return to some form of state control.

The oil industry is rightly considered to be one of Russia’s more advanced industries in terms of privatization. Indeed, it was the oil industry which was the subject of the larger–albeit sometimes the most scandalous–privatization projects. The shares of these companies dominate among the Russian stock market’s blue chip companies. The denationalization process in the oil industry was dynamic, having as its goal the creation of classic vertically integrated private holdings, covering every stage in oil production from geological exploration to the filling station. But toward the end of 1998 there were signs of a reversal of this process–a movement away from private capital toward a strengthening of state influence. At least three factors came together to determine the current turn in economic policy.

The first was the worldwide trend toward concentrating production and capital in the face of a dramatic fall in oil prices and, consequently, in profitability. Last year, unprecedented alliances were formed or proposed among the largest oil companies: Amoco and BP, Exxon and Mobil, Mitsubishi Oil and Nippon Oil, Total and Petrofina. Experts assess that world oil prices will only return to last year’s levels in two or three years’ time. In the coming period of unfavorable prices the best chances for survival lie with the strongest, hence the active regrouping going on in the international oil business.

The second factor was the change of Russia’s government, the failure of the liberal reforms and the ensuing trend toward increasing the state’s role in the state in the economy. The composition of the new cabinet and the statements of its leader–Yevgeny Primakov–leave no doubt that the economy is turning in that direction. At the Asian and Pacific regional forum in Kuala Lumpur, Fuel and Energy Minister Sergei Generalov announced concrete plans to recreate a national oil company based on the companies still under state ownership–Rosneft, Slavneft and ONAKO.

The third factor is the state of the Russian oil companies themselves, which not long ago sought a place among the world’s elite. Financial and industrial integration–achieved by means of lightning privatization for token amounts–did not bring the expected flow of capital into the industry. Things have gotten worse since the banking crisis: Oneximbank is not only not in a position to help the ailing Sidanko oil company, which it acquired in 1995, but is also facing serious financial claims from its investors among other oil companies (particularly Surgutneftegaz). Meanwhile, according to the Bloomberg agency, Bank Menatep is planning to transfer ownership of 15 percent of its shares in the Yukos oil company shares to its creditors.

All of these factors have led to a growing interest in the idea of returning at least a significant part of the oil industry to the state. Vladimir Medvedev, president of the Russian oil and gas union, has even proposed that the state reclaim the majority shareholding in almost all oil companies (with the exception of Lukoil and Surgutneftegaz), and that Gazprom chief Rem Vyakhirev should be appointed deputy prime minister for fuel and energy. Interestingly, many market-oriented managers have also spoken in favor of increasing the state’s influence in the oil sector, though in not quite so radical terms as Medvedev. For example, the former president of Sidanko, Zia Bazhaev, who now heads the “Alliance” group, says: “I agree that in today’s conditions there is no alternative to increasing the role of state intervention in the economy. This does not mean that we are going to close all the public companies, or that they will be converted into state enterprises tomorrow, but that the state should be the consolidating authority.”

Against this background Deputy Prime Minister Vladimir Bulgak held a meeting in December devoted to prospects for developing the oil industry. The meeting included a modified version of the aforementioned Ministry of Fuel and Energy plan to create a national oil company, based on Rosneft, Slavneft, ONAKO and Zarubezhneft. These four oil companies have thus far signed a memorandum on cooperation. Rosneft chief Sergei Bogdanchikov proposed a state holding company which would also include Transneft, the state oil pipeline company. This idea is unlikely to find support among the other players in the oil industry: Transneft services all companies, and including it in the charter of one of them would put the others at a disadvantage.

The heads of the largest oil holdings–Lukoil and Yukos–also presented their proposals for integration. Lukoil wants to take control of Slavneft and ONAKO, and is offering, in exchange, to (1). give the state 6 percent of its shares, (2). provide the Russian North with all of its required fuel supplies and (3). cover 35 percent of the fuel requirements of budget organizations, the Russian national electricity grid and agriculture. Yukos proposed that it merge with Rosneft and ONAKO. But it was Vladimir Bulgak who voiced the main idea behind the transformations: “For a country in today’s conditions, thirteen oil extracting companies is clearly too many.” Representatives of the oil elite–from former Fuel and Energy Minister Yuri Shafranik to Lukoil chief Vagit Alekperov–have been expounding this view for some time. The difference is that now, alongside the previously option of the big companies swallowing the smaller ones, is the alternative of setting up a state company.

There are pros and cons to the creation of a national oil company. It fits logically with the emergency anticrisis economic measures, by giving the state the levers it needs to control this key industry. Russia’s region have reacted positively to the idea of a state oil company–especially those regions which consume oil and oil products. But there is no precedent anywhere in the world for a powerful state holding coexisting with private companies. There are either single national oil companies–such as those in Indonesia, China, Venezuela and Mexico–or international corporations–such as those in the United States, Britain and other developed countries. It will be extremely difficult to dovetail the interests of two sectors of equal size within one oil complex. Moreover, it is naive to suppose that a simple return to state ownership can solve the mounting problems the industry faces. Even now some of Russia’s oil companies are state companies–Rosneft, Slavneft and Tatneft–but they are in no better condition than the private firms. State companies continue to exhibit poor management skills and to have disproportionately large numbers of administrative personnel, while lacking those trained in market relations.

An alternative to nationalizing the oil companies–in their present shape they will only be another headache for the state and the budget–would be introducing methods of indirect state regulation, through taxation, foreign trade and subsoil utilization rights, and so on. This approach was elaborated in State Duma hearings at the end of December. It featured various proposals, including the introduction of export taxes strictly tied to world oil prices and the mandatory disconnection from the oil export pipeline of companies which disrupt oil supplies to refineries. The Duma deputies proposed a return to levying taxes in kind, which is still practiced in a number of regions. But for the state as a whole this is not appropriate at the moment, in view of the continued state monopoly which Transneft represents.

It will soon become apparent what path the transformation will actually take. One thing is clear: The state should distinguish its heightened role in the fate of the oil industry by choosing the best strategy for its development.

Dr. Sergei Kolchin heads the sector of economic statistics and comparative international analysis of the Russian Academy of Sciences’ Institute of International Economic and Political Studies in Moscow.