Russia's battered oil industry will undergo the most drastic changes since the 1917 Bolshevik revolution if a draft decree by President Boris Yeltsin is implemented despite stiff opposition by Communists and ultranationalists.
The proposal specifies that oil production, refining, and distribution would no longer be exempt from Russia's move toward privatization.
Yeltsin's advisers have concluded that shuffling petroleum related ministries and appointing new chiefs led only to more administrative chaos while failing to stop the 4 year plunge in crude oil production. Sharp price increases haven't been effective in protecting the petroleum industry from nationwide hyperinflation, thus weakening the incentives designed to stimulate oil flow.
Russia's crude and condensate production plummeted from nearly 11.4 million b/d in 1988 to a little more than 11 million b/d in 1989, 10.36 million b/d in 1990, and 9.22 million b/d in 1991.
OIL PRODUCTION DECLINE
In disclosing details of Yeltsin's draft decree on petroleum industry privatization, Moscow's Izvestia newspaper said the latest forecasts show Russian oil flow could be falling at a rate of 80 million metric tons/year (1.6 million b/d) by December. Thus the republic's average 1992 production may slip below the 7.84 million b/d predicted only last month (OGJ, Oct. 19, p. 31).
The number of Russian oil wells shut in at mid-October was about 25,000. This state of affairs, Izvestia declared, "not only places in doubt further oil exports, the nation's main source of hard currency, but will create serious difficulties in supplying motor fuel and other petroleum products for the domestic market.
The newspaper said, "While the strong winds of market reform have swirled through much of the Russian economy, the oil industry has until now maintained its loyalty to state monopoly ownership. Even when petrodollars were providing an oxygen mask for the government and great attention was paid to the oil sector, the planned administrative approach was leading the industry into a blind alley."
A. Samusev, Russia's deputy minister for fuel and energy, was quoted as saying the oil production complex during recent years constantly lagged other sectors that were pushing toward market conditions. He said the more the oil industry fell behind and the greater the next administratively imposed price jump for petroleum products, the stronger became the vicious circle and the more painful was the effect on the entire economy.
PRIVATIZATION PROCESS
Samusev said, "The need for structural changes, including privatization, in the oil producing industry became obvious. However, this sector's great inertia and its priority importance to the government didn't permit application of the harsh, fundamental measures capable of solving its problems.
"For this reason, the president's draft decree provides that the first stage of the privatization process includes a stock ownership setup for enterprises in the oil producing and refining industries."
The stockholder arrangement must be put in place before the end of 1992, Izvestia reported. It said the privatization process will be carefully monitored and will take about 3 years to carry out, "although a faster tempo would be welcome."
During the first stage privatization, the government would continue to control several big vertically structured stock companies that would dominate Russia's oil industry. This is necessary to minimize the risks that will inevitably occur during the initial period of radical structural reform, Samusev said.
He explained that the state enterprises Rosneft, Lukoil, and Yukos would at first play leading roles in transforming Russia's oil industry.
"One of their most important functions would be to boost investment in modernization and expansion of a branch of the economy that has fallen into decay. Majority government ownership of stock in such firms is necessary during the first stage of privatization because management's instincts are still rudimentary, tending toward putting a substantial portion of profits into higher wages or negotiating barter deals to obtain scarce materials and equipment."
When conditions permit, part of the government's capital, confined initially to three firms, may be invested in new companies. Yeltsin's economic advisers believe this would create the mechanism for "demonopolization" of the oil industry through formation of competing stock firms.
An important objective is to ensure that no single company would control more than 10-15% of Russia's overall oil production and refining.
FAVORABLE REACTION
Izvestia said the reaction of Russia's "oil industry generals" to Yeltsin's draft decree on privatization is favorable because it represents a significant step in the right direction even though there is no guarantee of success. The "generals" even agreed to relinquish a larger part of their profits to achieve the aims of the proposed reforms.
"It's expected that the first result of transforming the government's oil industry monopoly into stock companies will be greater investment by foreign firms," Izvestia said.
"Foreign companies aren't exactly thrilled over dealing with a government in which nobody takes responsibility. As for oil product prices, establishment of competing firms should promote market stabilization."
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
