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US Oil Investment Awaits Outcome of Russian Election

Opening door to oil production could pave way for other ventures

By Scott PendletonStaff writer of The Christian Science Monitor / December 15, 1995



AUSTIN, TEXAS

THE outlook for Western oil projects in Russia will likely be dimmed by Sunday's legislative election there.

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That's bad news for Houston, whose already humming trade with Russia would boom if the projects ever proceeded. And it's a setback to other industries that hoped to follow Big Oil into Russia.

''If you're looking for a quick deal or a quick fix, you're in the wrong country,'' shrugs Tom Hazen, president of Timan Pechora Company in Houston.

As recently as 1988, Russia led the world in oil production. Its output plunged through mismanagement and lack of investment - factors that Western oil companies are eager to reverse.

For instance, Timan Pechora Company - owned by Exxon Corp., Amoco Corp., Texaco Inc., and Norway's Norsk Hydro - obtained rights over an area of Arctic tundra believed to hold billions of barrels of oil.

Whether the company ever drills a well, though, will depend on the attitude of the Russian legislature, or Duma. And that has been shaped by the country's slow, painful journey from communism to capitalism. In the last 12 months alone, Russians' real incomes have fallen 18 percent.

''That's no way to go into an election,'' says Keith Bush, director of the Russia program at the Center for Strategic and International Studies (CSIS) in Washington.

He says he believes that communist and ultranationalist parties will win more than half of the Duma's 450 seats, weakening President Boris Yeltsin's economic reformers. Thus, the Duma that convenes on Jan. 16 ''will be even less welcoming to Western investment and Western business offers,'' Mr. Bush says.

At stake is a critical piece of legislation governing investments in oil projects. This production-sharing agreement (PSA) law would among other things determine which taxes apply, ensure a means of exporting oil, and establish arbitration procedures.

Lack of the law has not prevented Western companies from establishing more than 40 joint ventures in oil with Russian partners. But the oldest such venture, Conoco's Polar Lights project, loses money on the oil it exports for lack of a PSA law. Other ventures are making minimal expenditures for now.

''You have to have the legislation in place before you put the big bucks on the table,'' says Robert Ebel, an expert on Russian oil at CSIS. If an acceptable law passes, Timan Pechora and other confirmed projects alone would bring $70 billion in investment to Russia over the next two decades, says Tim Sherwood, special assistant to the president of the US-Russia Business Council in Washington.

The oil projects would merely be the thin end of the wedge. Mr. Sherwood says the 230 companies belonging to the council have always assumed that Russia would open the door to energy investments first. Then that spending would drive additional economic development, creating opportunities for other ventures from computers to fast food.

The status of a draft PSA law was unclear as the Duma adjourned before the election. At one point, observers say, an intrigue took place in which a pro-investment PSA bill was swiped from an office and a hostile version left in its place.

But the topic had clearly become an issue to the public. ''Russia has become a raw-materials appendage of the capitalistic West,'' is how Bush summarizes the attitude among some voters.

Jacqueline Weaver heard that same concern during 1992, when she and other professors at the University of Houston Law Center helped draft a never-passed PSA law. ''There was this constant fear that Russia was going to be taken for a ride,'' she recalls.

Although wary of allowing Western oil companies to invest, Russia is happy to shop for oil-field services and supplies in Houston. With a million related jobs and $90 billion of economic output, the city owns the title of world oil capital.

Some 800 Russians, including Prime Minister Viktor Chernomyrdin have visited Houston in the past two years. Several gargantuan Russian cargo planes have landed, swallowed a drilling rig whole, and flown home again.

But Houston businesses that sell to Russia encounter the kinds of problems that cause oil companies to await the protection of a PSA law before investing.

Agar Corp., a maker of electronic instruments, will add to its staff of 50 to handle some major Russian orders - if those orders are ever backed by cash.

''The question always is funds,'' sales manager Denny Grandle says. ''Sometimes I wonder if we're too early in that market.''

Dynagraph, whose software determines a well's optimum flow rate, established one of the first joint ventures in Russia. ''You've got to be careful who you deal with,'' warns Dynagraph president William Sapp.