Russian Oil

One autumn day in 1990 I was in Tyumen, capital of west Siberia's rich oil province. I knew Tyumen well and was a frequent visitor. Here were the 'competent organs' of party and government whose consent was necessary to make anything happen. And the city was a transit-point from Moscow for the great oil and gas producing centres lying in a huge arc around Tyumen from Yamal and Khantii-Manssisk in the north, to Urengoi, Tobolsk and the oil fields further south and west.

I had just come from Tobolsk a few hundred miles further west, where I had negotiated a barter deal for the purchase of liquid petroleum gas (LPG) from an enterprise there. I planned to stopover in Tyumen on my way back to Moscow, to finalise matters and perhaps follow up some business proposals.

This was the time when the Soviet Union was juddering towards collapse. In Moscow, there was open conflict between the Soviet authorities, still nominally in power, and the youthful tyros gathered around Boris Yeltsin's Russian Federation government, a few miles from the Kremlin in downtown Moscow. It was the so-called 'War of Laws', when the republics were asserting their sovereignty and enterprises which had been under Moscow's thumb were learning how to make deals and to trade. A side-effect of the struggle between competing powers was the increased volume of paperwork. Even the smallest transaction required large numbers of documents, signed and sealed by ten or sometimes twenty or more bureaucrats (and often those signatures had to be bought). As the War of Laws intensified, it became necessary to have two sets of everything. At border-crossings, competing teams of Russian and Soviet customs officials vied for the right to extract bribes. It was necessary to have duplicate sets of export licences, issued by the Soviet ministry in Moscow and its upstart Russian Federation rival.

Matters were worst in the oil trade, because there were so many opportunities to skim off such a lucrative business. For the deal I struck to export 100,000 tonnes of propane (around a quarter of the United Kingdom's annual requirement), I needed not just duplicate export licences issued in Moscow, but transit papers for just about everyone along the way, from railway controllers to pipeline managers to the city officials who insisted that propane was a dangerous cargo and could not be taken through populous areas in darkness for fear of the tank- cars exploding (an unheard of event). Everyone had to be seen right.

The traditional export route for LPG was through Riga, capital of the Baltic republic of Latvia three thousand kilometres away. Latvia, too, had its aspirations to independence and the Latvian government, which for the first tiem was contemplating a future with no indigenous fuel reserves, also wanted a slice of action (the Soviet government, to punish Latvia for its desire to break away, had turned off the energy taps, and rural Latvia, highly dependent on LPG, was suffering. When I started exporting LPG ex-Riga, the Soviets assumed I was blockade running, the Latvians hoped I was -- I wasn't -- and Boris Yeltsin's Russian Federation government was happy to support anything which embarrassed Mikhail Gorbachev in the Kremlin; somehow I managed lift 80,000 tonnes, that year, and bought a magnificent hotel in the Latvian resort of Jurmala into the bargain). My success was noticed in unexpected quarters. I received gloomy stares from KGB men who visited my Moscow office, but dozens of business proposals from Soviet biznismeni desperate for trading partners. Often such people were not acting for themselves, but for powerful patrons who preferred to remain in the shadows.

In Tyumen immensely-powerful oil chieftains were interested in carving out a new future in what everyone knew (though no-one admitted) would soon be post- Soviet Russia. These were men who'd mostly never been abroad, and had no conception at all of modern business. In five years time they would re-emerge as polished, cosmopolitan industrialists and oilmen, the kind you can meet in Houston or who turn up in Davos at the annual conferences of world political and industry leaders, and nowadays they look more or less at home. In those days, they were a lot wilder. I'd spend whole days and nights with such people, drinking vodka, relaxing in saunas, explaining the elementary facts about stock markets, and discussing how a state enterprise might be turned into a corporation with quoted stocks. Such discussions were confidential, but they were permitted. President Gorbachev wanted to reform the USSR on market lines. I was not alone; already there were many westerners doing the same kind of things. But I was among the first, in Tyumen anyway.

I'd grown used to unexpected invitations to parties and hunting trips, where you might find yourself rubbing shoulders with Russian political and industry leaders, some of whom were soon to become household names. Others, the most powerful (and dangerous) among them, remain shrouded in anonymity to this day.

So, preoccupied as I was with the lists of Tyumen- based bureaucrats whose rubber stamps I needed to make my LPG deal happen, I was not surprised to find myself side-tracked soon after I flew in from Tobolsk that rain-sodden autumn day.

We'd expected to be taken to meet some officials in Tyumen regional government. Instead, on the first morning I was there someone I'd never met before arrived at my hotel room in the exclusive governmental hotel Lebed, set among woods and lakes a few miles outside the city.

The man, whom I shall call Padushkin, was small, greying, early-fifties, with protuberant eyes that darted around, and a nervous manner which he compensated for by adopting a pushy, pigeon-breasted kind of walk; we came to call him Little Napoleon. Padushkin's business card announced that he was an administrator at GlavTyumengeologiya (GTG), the provincial geological service. He was nervous, and chain- smoked.

I had expected to meet a party of Tyumen factory- directors. No-one explained their absence, and I'd learnt enough not to ask anything so obvious. On the face of it, Padushkin was an obscure functionary lacking their rank. But (without consulting us) he'd scrapped a meeting they'd been pestering us for weeks to have. As we sat in almost-complete silence over breakfast in a bijou private dining-room, while Padushkin paced up and down, or over-officiously supervised the waitresses, the hairs rose on my neck. Something big was starting; I'd been here before and knew the signs. Padushkin's minimalist conversation style itself told a story. He didn't even want to crack jokes in that big, pretentious lakeside hotel when the microphones were plastered liberally into the walls. So with scarcely a word exchanged, we left with him in his downmarket black Volga and headed back to Tyumen. Over breakfast I'd been thinking through my recent round of meetings in and wondering what invisible lines I might have crossed that might result in trouble. In a country without laws (especially regarding commerce), everything was legal - and nothing was. Maybe this Padushkin, with the smudgy grey eyes that avoided mine, was some local KGB type, and I was being taken not to meet the high-rankers I hoped to, but to spend a few quiet days being debriefed in one of those large anonymous office buildings which never had nameplates. That, too, had happened to me.

Either way, Padushkin was someone I couldn't refuse. We went straight to the headquarters of GTG. In the Soviet Union, where the country's vast and often- untapped mineral reserves were the basis of the national wealth, a geologist was someone special and the Tyumen geological service was a gigantic concern employing more than 80,000 people, with its own system of sanitoria, resorts, hospitals and the like. Its headquarters was a big, imposing Soviet-style high-rise. The floors, staircases and even walls were all marble, jasper, or valuable hardwoods. There were big glass display cases housing lumps of anonymous ore, models of derricks, and plaques and small red pennants announcing the labour heroism of the geologists. But the place was dusty and most of the lights were out.

We followed Padushkin down empty corridors, arriving at the director's suite of offices. Along the way, he'd begun to ask the kind of pointed questions which indicated what was afoot. Now he was making up for lost time, and the conversation proceeded in hurried whispers. Where we interested in doing more than just trade oil?

You bet we were: name it.

Were we interested in upstream activities?

What kind of upstream activities? I asked.

Recommissioning abandoned oilfields, that kind of stuff? There'd been talk about this in informed circles. Soviet oil production had plateau'd and begun to decline, it was rumoured. Everyone knew they'd suffered from bad reservoir-depletion policies, low technology, under- investment, and it was clear that many of the Soviet Union's economic and social problems could be laid at the door of the energy industry, which was losing momentum. The international oil price had fallen through the floor, and the Soviet balance of external payments showed only red ink.

I had spent enough time with Soviet oilmen to suspect the truth: production has risen in a steep line to more than 600 million tonnes a year, bringing a cornucopia of benefits to the system and helping keep the Soviet show on the road. At some point it had to peak, although some Soviet geologists denied even this and there was a school of thought which argued that oil was not the product of fossil-deposition and therefore limited by definition, but was constantly being manufactured by deep and unknown process within the earth's magma. Few in the West bought that kind of heroic theorising about the industry's future; and events within the Soviet industry were about to deliver a cruel rebuff to any such optimism. But oil was the stuff of high state strategy. Very little was known in public about the extent of Soviet reserves or the scale of production difficulties it might be experiencing. The Communist Party was still fiercely hanging onto power. Oil had always been shrouded in secrecy; students studied things called 'extended civil engineering structures' because the textbooks were not allowed to use the word 'pipeline'. Yet in these few hurried remarks of Padushkin, we got a sudden insight into the truth. By the time we arrived in the director's reception room we were privy to things we had no right to know, and which few people in the world did know, outside the Kremlin, the CIA -- and those like Padushkin who simply had to know because it was their job.

We met the director, Sergei Ivanov. Four people were present at this meeting: myself, my wife Natalya, Padushkin and Ivanov himself.

As was often the case with the invisible string-pullers of Soviet society, this first meeting was tense. Ivanov was, a big, brawny, square-shouldered Ukrainian with a misshapen face, an unhealthy pallor and eyes like flecks of Wedgwood blue. His manner was bluff to the point of outright rudeness. He asked a great many questions, some of which he perhaps had a right to, most of which he definitely did not. We answered them anyway, patiently, at length.

This was a standard approach, not just to meeting westerners, but in general. It was the command- administrative method at first hand. Ivanov was one of the 'red directors', the nomenklatura who did not get where they were by being nice. And, like most of his kind, he was negotiating the rapids of social change which was still accelerating and would soon engulf the Soviet Union. As it happened, we were not the first western company he'd met, far from it - as we were to discover. But such meetings were still unusual.

By the end of the meeting we understood that much more was at stake than just recommissioning dead wells or helping provide technology and perhaps investment to beef-up production in mismanaged oilfields. That was, and is, big business, enough to have western oil majors chafing at the bit.

But what Ivanov had in mind was something else. A scheme so vast in its implications, not just for us, and not even just for the Soviet Union, but for the West too, that it would be many months before we even understood what it really entailed. And years more before the real enormity of it sank in. By that time the Russian oil business, which had become a preserve of the rival chieftains organised in the so-called FIGs (Financial- Industrial Groups) which now dominate Russian industry and society, and which form the ruling Russian oligarchy. The plan Padushkin told us about will happen, in the next decade. But we are no longer part of it.

Only the oil majors have the clout to deal with the FIGs. This is how home-grown Russian capitalism has developed. Now the Russians FIGs are meshing into a key part of the 21st century's global energy complex, as we shall see.

Today the Russian oil and gas industry has been incorporated as a subordinate part of the world industry. This is true even though individual Russian oil corporations have emerged as some of the world's largest, especially in terms of reserves. They are equal players with western oil majors and have forward investment strategies which cast them as true international firms, engaged in exploration and production in many parts of the world outside the former Soviet Union, and even in downstream activities to the extent of controlling chains of retail gasoline outlets in North America and elsewhere.

Thus the collapse of the Soviet oil industry (in the 1990s production in the former Soviet Union (FSU) has fallen by more than half) was also the rebirth after more than 70 years of a Russian (and Kazakh, and Azerbaijani) capitalist oil industry. It had global implications.

My meetings with the moguls of Tyumen oil continued; amid whirlwind sessions in banyas and drinking-dens we talked the future of worl oil.

This restructuring of the global energy complex has given it immense new strength and resilience and greatly deepened both its resource base and its strategic reach, helping insulate the world market from its dependence on OPEC and the Persian Gulf. Restructuring has coincided with headlong privatisation and deregulation occurring in all countries.

This has set the stage for the final chapter in the world oil industry, which will take place in the coming decades as global production peaks and then declines, much as it peaked and declined in the Soviet Union. The world energy market is now unified and integrated as it has never been since its earliest days.

The transition from a fossil-fuel based economy to what lies beyond it will be managed by market forces themselves, within the existing structure of world capitalism, with a globalised economy dominated and policed by the United States. As the dust has settled following the collapse of the Soviet Union, that much is clear, and the outlines of the new world energy system can be analysed and its performance predicted. Since fossil fuels, above all oil, remain at the heart of capitalist economy and no substitutes exist which will not require at best, wrenching transformations in how we live, and at worst may entail social convulsions, understanding the new energy complex is crucial to understanding the future.

What Padushkin and Ivanov offered us that day in Tyumen was a stake in developing one of the industry's last great oil and gas frontiers -- the Arctic, whose deposits are among the world's largest. What we found out, then and later, forced us to realise the fragile nature of the world energy system, and the way of life it sustains. Ivanov and the Soviet oil chieftains had already made their minds up. They knew that Soviet oil production was about to go into a decline so steep that the whole Soviet economy would be overthrown. They were among the first to see that communism was about to collapse. They decided to use the moment for themselves. Something would be left after the collapse: the elements of a much leaner, meaner Russian oil industry, one that was privatised, and fully integrated into the world energy system that the big western energy corporations dominate.

From being the Soviet system's paycheque the oil industry overnight became its worst enemy. The oil 'generals' talked the same old way, but they meant to topple the Soviet Union as soon as possible, and in the process to make sure the treasure left in the ground would belong to them.

The collapse of Soviet oil led directly to the demise of the Soviet Union, which was too inefficient, too energy- intensive to compete with the west. The growing oil shortage passed a death sentence on the system. In reality the USSR had already been incorporated into the world market as a supplier of primary commodities, particularly oil and gas, for decades. Now the thin and squalid veil of socialist rhetoric covering up the truth, was torn away. The same processes which destroyed the USSR are at work in the global economy. The capitalist world now faces the same quandary as the USSR did: demand for energy continues to rise. Production, too, continues to rise. But for how long?

Soviet oil production fell by almost half in a three year period. Ominous parallels exist between the energy politics of the United States and what took place in the dying days of the USSR. On the face of it, the rush to privatisation and deregulation marks the final victory of market over plan. From this point of view, there is no need for governments even to think about the future. Will the oil run out, or not? is not even a question they bother to ask, or acknowledge the relevance of. The public attitude, too, is wait-and-see. If and when energy prices rise, people argue, the transition to renewables will kick in for real, the markets will perform their magic, and the world will smoothly make the transition to low-carbon, non-polluting alternatives to fossils. Don't second-guess the market, learn the lessons from the failure of bureaucratic planning, and all will be well, say the prophets of hurrah-capitalism. It's a dog-eat-dog, know- nothing kind of credo which relies on the idea that if you bang people on the head hard enough you stop them from protesting at all. Impoverish them, throw them in the dole-queue, take away their nation (53% per cent of people on the FSU say 'Soviet Union' when asked to name their fatherland, according to one recent poll) -- parade glittering regalia of privatised wealth before them (Moscow has let its mass transit systems collapse, but built six-lane highways for the New Russians in their BMWs and Mercs, of which there are now more per head of population than in any other capital city. Thus, hundreds of thousands cram onto reeduced-frequency buses and metro lines, while the country's leaders build the infrastructure for a petroleum based transport system: just at the time when Russian oil is drying up!) This was the strategy which the West proposed to Yeltsin and his willing henchmen, most of whom despise and fear their fellow citizens in a way which even the elites in other countries can find alien and incomprehensible when they encounter it.

None of this was clear in 1991. There was still general public optimism, and genuine enthusiasm for Yeltsin's market reforms. The Russian oil generals themselves did what they could to generate euphoria about the future. While production was collapsing, they invited the West to join in what was really a fantasy-world of unreal expectations and wildly-exaggerated reserve statistics.

And the West was happy to oblige, because Russian oil and gas reserves, depleted as they are, nevertheless have actually increased in importance. The oil corps. are playing the same con-trick on us as the mayor of Moscow is on his benighted inhabitants: they want us to believe that oil is the energy of the future just as it is running out. This extraordinary abdication of historical responsibility has no precedent cince Marie Antoinette. Why does the oil patch, its government sponsors, and western elites generally, collude in what is nothing more than a vast conspiracy theory to blind us to the truth? They do it to from fear, and preserve their own position, because it isn't just the fate of the oil industry that's at stake, but of capitalism itself. We, too, were completely taken in by the tale Ivanov that chilly morning in Tyumen. In glowing terms, he described vistas of the future which I would have said were crazed fantasy coming from anyone else. But Ivanov was one of the most powerful - and well-informed - men in Tyumen and therefore in the Soviet Union.

In the West, geology is a humdrum occupation. Oil companies keep their earth scientists on a short leash indeed and when the price of oil barrels through the floor, as it did in 1996-97, they sack them by the bushel, confident they'll be around when the inevitable upturn comes, and grateful for a job.

In the USSR, the special status afforded these people was not just because they often had gold literally under their fingernails. It was the result of the Plan psychology which had always informed Soviet economic development. In the West, if an oil corp. finds oil, they want to pump it out as soon as possible. Exploration and production operations are combined and if a survey well strikes oil, that well will be fitted out for production. In the USSR there were no combined Expro operations. Survey work was segregated from production. That make a lot of sense when you had no market to chase and the idea was to consolidate all economic growth- opportunities in a future Five-Year plan. Survey wells were routinely capped and left for later exploitation. They mostly became unusable. At a cost of $3 million a shot, that was expensive, except that western accounting methods didn't apply. Geologists did science; they didn't have a bottom line to worry about.

The result of this system was to produce a paradox: the Soviet geology concerns began to resemble a normal upstream oil operation. They had their own investment plans, and they developed a massive technological base. As perestroika took hold in Russia in the 1980s, and each enterprise had to be more self-financing, it became clear to outfits like GTG that they were just as capable of mining for oil -- and pumping it, and selling it to the refineries -- as anyone else; and what's more, although they might often lack clear legal title, they at least knew better than anyone else where the oil actually was. So we had found ourselves at the heart of a battle between rival Soviet systems, for control of one if the last great untapped assets, Arctic oil and gas. The geologists were competing with Gazprom, the great state gas enterprise only recently spun out of the old gas ministry, and fronted by former gas minister Viktor Chernomyrdin. Afraid to make direct approaches to the big western oil firms who were already deeply involved with Gazprom and might blow their cover, the geologists were looking, as Ivanov bluntly put it, for 'a single thread. One that we can use to reel in the big partners we need.' Ivanov thought we might be that thread; the company I had created was small but dynamic and we were well- respected by industry insiders. After all, we had restarted Soviet LPG exports, stitching together transit routes when no-one else had.

As our meeting ended, Ivanov produced a bottle of Ararat cognac and we drank it with bitter coffee and chocolate biscuits. Ararat was not the best Soviet cognac; it came from Azerbaijan, whose Islamic people had abandoned viticulture centuries before the Soviet era which combined official atheism with a love of booze. But Soviet oilmen preferred Ararat for preference: many were Azeris, for Baku had been the traditional centre of the Russian oil business. As we toasted our partnership, I struggled to absorb Ivanov's tour d'horizon. The most telling thing was the absence of the Soviet Union in it. I felt I'd entered the clandestine world of the nomenklatura. It was a rite de passage, like becoming a goodfella, a 'made man': koresh in Soviet gangster parlance. I did not enjoy the feeling. Outside in the streets passers-by went about their business oblivious of what their masters were preparing for them.

A few days later we went to Ivanov's office again. This time we found an elegant, showy woman, sitting on his desk, legs crossed, smoking American cigarettes. I recognised her at once -- hers was perhaps the most famous face in the USSR. She was Russian rock music doyenne, Alla Pugacheva. I'd seen her show, staged in Moscow's Olympic stadium before twenty thousand delirious fans, not long before. Dressed in a foxfur stole, tight black dress and slinky ankle boots, Pugacheva would show a surprising knowledge of Siberian oil in the course of our talk. She was another of Ivanov's secret partners. A big map of the USSR covered most of one wall. Pugacheva stood on her toes to point out the Yamal Peninsula, which sticks like a thumb from northern Siberia into the Karsk Sea. 'All the peninsulas on Earth point south, except this one,' she told us. Yamal: this was what Ivanov wanted to talk about. In the days and weeks that followed, we hardly talked about anything else. He was looking for a western partner to help him stake a claim to Yamal gas. His idea was simple: we would incorporate a joint venture company in London, in which GTG would vest its rights to extract gas from two supergiant gas and condensate fields in the Yamal Peninsula. Ivanov wanted to head off rival Gazprom, which was already talking to Conoco, BP and other oil majors. He'd heard of my proposals to create a joint venture in Tobolsk, although that was strictly downstream activity.

Up until then no western firm, large or small, had yet managed to acquire a stake in the oil and gas still in the ground: the very idea struck at the heart of Soviet ideas of nationhood since the time of Lenin. But Ivanov was thinking ahead. He knew that couldn't last, because western investments were essential and they had to be collateralised, which meant giving them a stake, even if only in the form of a production-sharing agreement falling short of actual ownership. The scale of Ivanov's proposal was vast. In the first decades of the next century, he would tell us, as the oil runs out natural gas will assume a new importance. Russia has immense reserves, perhaps a third of the world's total. But most of it is in the inaccessible Arctic north, hard to extract without western capital and technology: 'It will cost at least $100 billion to bring Yamal gas to market,' he said. 'Maybe three or four times that much.'

It was these kind of numbers that doomed communism - - not ideology, but dollars and cents. How do you guarantee such colossal investments? That kind of investment was unthinkable without a major, geostrategic transformation in relations between the West and the Soviet bloc. That meant reincoporating the USSR into the world market, which would certainly put most of Soviet industry into receivership. But without such guarantees, the West would keep its distance, 'even though you need us more than we need you. Europe will come to depend on Yamal gas; it's that simple.' The Soviet Union had existed for seventy years, an enclave within world capitalism, uncertainly dependent on its technology and markets, intermittently and hesitantly opposed to it. But now history's judgment was in, and it was a Soviet oil general who said it. The attempt to build an autarkic industrial base had failed because, in the end, the volumes of capital needed could not be generated on a stand-alone basis. But what was true of the USSR is also true of planet earth, which also operates on a stand-alone basis. The Soviets developed a powerful industrial economy but it was not powerful enough to overcome the problems its own growth created in the first place. And what was true of the USSR may also be true of the capitalist world system as a whole.

Thus, the unresolved question left by the Soviet collapse -- and the theme of this book -- is whether such flood- tides of capital as the system needs to project it onto a new growth-path, exist anywhere? The Soviet Union struggled increasingly desperately to transform its economy from an energy-intensive to an energy-efficient basis. It was hugely inefficient by any standards. But the problems which brought it down are faced on a larger scale, by the now all-embracing capitalist world- economy. For more than two decades, since the first oil-shocks of the 1970s, the world has been struggling to move from the fossil-fuel basis which has been behind industrial capitalism since it began two centuries ago. It has still not succeeded, and it it does not then the collapse of world capitalism will make the fall of communism look like a tea-party.

This book is a study of the survivability of world- capitalism. Its history has always been one of growing dependence on fossil fuels, despite success in squeezing energy-intensity out of the system. Energy inputs per unit of GDP have fallen continuously since the Industrial Revolution began in England in the 1750s. But overall growth of population, energy-consumption and the world-economy have continuously outstripped increased efficiency. Today's attempts at 'dematerialising' production and 'virtualising' the system, substituting networks for much of traditional economic activity, are only twists in an old saga.

It is not a question of cutting the history (and future) of capitalism to fit a finite-resource depletion template. That is not the model deployed here. Instead, the focus is on the contradictoriness of capitalist accumulation, and the fact that time's arrow applies: if capitalism fails, there can be no road back to some earlier state of affairs. The system is heading somewhere, but where?

As the Soviet Union unravelled, the claustrophobic atmosphere of the bureaucratic system was dispelled. Everyone could lay claim to something, however private, perhaps no more than the sovereignty of self. A very few laid claim to much more than that, obviously.

But the euphoria was distinctly short-lived. Soon a tide of despair swept a population whose subsequent experience of capitalism has been mostly one of cold, darkness, unemployment, hunger and premature mortality. Average Russians will never again enjoy the relative prosperity of Soviet times.

--Mark Jones