Russia’s interests in the oil sector

Russia is an important but not dominant player in the international oil market. This is due to several factors, the first being the complex and scattered system of Russia’s oil industry. “It was dominated by a combination of vertically- integrated private, semi-private and state oil companies. The [murky] ownership structures complicated issues of domestic control, and lead to the emergence of multiple and competing production, investment and export portfolios across the oil industry. These problems were especially acute in the transportation sector, as private Russian oil firms battled repeatedly with the state pipeline company over access, tariffs and pipeline construction. In sum, the Russian government lacked an effective mechanism to integrate disparate interests into a consistent geo-economic policy towards Caspian energy development”.26 When Putin came to power, he launched a new policy according to which Russian oil companies should not be at war with the state but should collaborate with it. Second, in the 1990s the oil sector was hit hard by the transition process in place in Russia, with domestic production and exports bottoming out in 1996. Russia’s oil monopoly was destroyed quite rapidly. After 1991, Azerbaijan and Kazakhstan opened their energy riches up to Western oil companies such as BP (in Azerbaijan) and Chevron and ExxonMobil (in Kazakhstan). In order to deliver oil to international markets these Western companies attempted to gain access to the existing Soviet oil pipelines controlled by Transneft. But negotiations were stranded due to fears of possible Russian control over the transit of oil. Third, given Russia’s limited import capacity, it represented a rather small regional market for Caspian crude. It was not able to dictate market prices to vie with rival Caspian producers in the integrated global oil market. Fourth, Russia was also poorly positioned to change the course of Caspian oil development and exports. Alternative, direct and politically expedient projects offered larger economies of scale than Russia’s northern route.

In reality Russia’s objectives in the Caspian oil sector have been at odds with Western ones since 1990 when the Soviet Union, frustrated by the technical challenges of exploring and producing in the Caspian basin, invited bids from international energy companies. In the 1990s, the new independent states became contractual partners with various foreign companies - several of which were US based. At that time Russia was unable to be the leading factor in Central Asia due to the latter’s policy of wholehearted devotion to the West. In September 1994, the US, Britain, Japan, Norway, Saudi Arabia and others formed a consortium with the signing of a 30 year contract to develop the 3.8 billion barrel reserve in Azerbaijan. In 1995 the US company Chevron began development of the Tengiz oil field in Kazakhstan. Moscow showed a tendency to regard the Western capital entering Russia’s sphere of influence as a threat to its security, but Russian oil companies showed their inclination towards non-opposition and as a result obtained compensation for their extensive participation.[1] The Caspian states, international energy companies and the US government were set on freeing the region from Russian influence via non-Russian and non-Iranian energy routes. Russia unsuccessfully pursued various tactics (such as the above-mentioned dispute over legal status) to persuade its former Soviet fellow nations and foreign firms to use the Russian pipeline infrastructure for exporting Caspian oil. The US was pushing hard to find a non-Russian/non-Iranian route and viewed this as a strategic project. This stance was provoked by the US disagreement with Turkey over its partnership with Russia in the Blue Stream gas pipeline, which opposed the official Turkish policy of sustaining exports that bypass Russian soil.[2]

This US approach culminated in the 1768 km long BTC pipeline that was intended to lead east - south/west from Baku, via Georgia, to the Ceyhan port in Turkey in the Mediterranean Sea, from where the crude was to be shipped to European markets. The BTC pipeline line fill started in 2005 and the first oil reached the Ceyhan terminal in 2006. The US actively supported the realisation of the project. It helped negotiations between the institutions, international energy companies and international financial institutions concerned and also provided financial support. Russian policy-makers reacted negatively to the pipeline. Aside from questioning the project’s commercial viability, Russian Minister of Foreign Affairs Igor Ivanov stated that the goal of the BTC pipeline was to oust Russia from regions which historically belong to its lawful interest. Russia also resisted Georgian and Azerbaijani integration into the Euro-Atlantic space. The realisation of the pipeline triggered different perceptions. For the US president Clinton it was “the largest achievement of American foreign policy in 1999 [while for] Russia it was a tremendous diplomatic loss and an event that reduced Russia’s influence in the region of the Caspian Sea”.[3] “The aim of the BTC was to increase the market leverage of Azerbaijan and Central Asian producers vis-a-vis Russia and more widely to lessen their political vulnerability to pressure from both Russia and Iran [as it would have provided] an alternative to routes passing through Russia or Iran”.[4]

As a meagre consolation, Russia succeeded in launching negotiations with Kazakhstan on a Caspian Pipeline Consortium (CPC) in charge of constructing a 1510 km pipeline to transport Caspian oil from the Tengiz field to the Novorossiysk terminal on Russia’s Black Sea coast. The pipeline started operating in 2001. Although the Russian and Kazakhstani governments have shares of 24% and 19% respectively, Moscow had to allow the participation of Western companies such as Chevron, Shell, ExxonMobil, Eni and British Gas.

  • [1] Younkyoo Kim, Gu-Ho Eom, “The geopolitics of Caspian oil: Rivalries of the US, Russia and Turkey in theSouth Caucasus”, Global Economic Review: Perspectives on East Asian economies and industries, vol. 37,issue 1, March 2008, p. 90.
  • [2] J.W. Parker, (2009), p. 154.
  • [3] Younkyoo Kim, Gu-Ho Eom, (2008), p.100.
  • [4] J.W. Parker, (2009), p. 155.
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