By Marina Pustilnik

21-08-04

The Russian authorities spearheaded by the Natural Resources Ministry decided to establish a very tight control over the country's oil companies and their activities. Whether they do this for the common good or for their own profit seems unclear.

It started in June with a threat of a license withdrawal for a number of large oil fields which are not being developed in accordance with licensing agreements. Then a few weeks ago the oil companies were given a month to prepare new licensing agreements that would stipulate such things as volumes of proposed extraction.
Furthermore, on August 12, the Natural Resources Ministry launched a campaign to investigate all oil companies on suspicions of underreporting their oil production figures. These three consecutive steps follow a logical pattern and show that the government is set on carrying out a certain re-distribution of wealth between the oil companies and the state budget.

On June 16 Russia's Natural Resource Minister Yuri Trutnev announced that his agency will closely examine ten large oil and gas fields which at present are not being developed despite the licensing agreements. Trutnev explained that by doing this the Ministry wants to impede the monopoly of large oil and gas companies which buy licenses just to eliminate smaller competitors.

After securing the license the companies fail to actually develop the deposits. Among the companies that were up for examination were such majors as TNK-BP, Gazprom, Rosneft, LUKoil, Yukos, Surgutneftegaz, Shell and ExxonMobil. The Ministry threatened to withdraw licenses if the companies do not present objective conditions and hurdles which prevent them from starting development and extraction on time.

Actually, the measure was a necessary one, because it has been long discussed that riding the wave of high world oil prices, Russian companies were putting all their money into further extraction on the already existing sites, instead of thinking a little bit ahead into the future. Almost no money and labour were put into exploration and development, and in this view the government's move can definitely be considered as a good thing.

At the same time the Ministry's spokesman admitted that from now on the authorities plan to tightly control the use of the country's natural resources in contrast to the wild 1990s when licenses were granted and bought and the state washed its hands of any further responsibility.

Then on August 3 President Putin met with Minister Trutnev to discuss new government policies in granting mining and extraction licenses to oil companies. To show that the authorities try to be objective, Putin said that the most important thing about granting licenses is to avoid "preferential treatment to any company that is extracting natural resources".

But the most important topic of the discussion was the state control over the usage of deposit fields for which licenses had already been granted. Inadvertently placing the blame on his predecessor, the Natural Resources Minister said that over the last four years licenses have been given out with virtually no strings attached.

"There were no conditions, stipulating when the deposits have to come into operation, no substantial rights that the state receives in exchange for granting licenses," said Trutnev.

The Minister also cited data which showed that if the companies actually begin to operate the licensed fields, the size of Russia's oil deposits would grow by 20 %. The oil companies won't even have to invest in exploration, they would simply have to "unfreeze" the already known deposits, said Trutnev.

The authorities decided that it is time to act decisively on the matter and announced their demand that all of the companies re-draft the already signed licensing agreements and submit new versions within a month. The new agreements have to clearly stipulate when the deposit will be placed into operation and what are the volumes of proposed extraction on each site.

Having declared the solution to the problem of undeveloped oil fields, the government moved on to its next goal, which is re-distribution of wealth between the super rich oil companies and the state budget. The Natural Resources Ministry voiced its suspicion that oil companies underreport their production figures in order to lower their natural resource extraction taxes.

"The Ministry doubts that oil production figures declared by the companies are accurate," a ministry source was quoted as saying on August 12. "Most likely, what they declare is lower than the actual figures."

As a result, the Natural Resources Ministry, along with the Interior Ministry and the Federal Security Service (FSB), launched an investigation that will audit the total volume of oil transported inside Russia. The figures of oil exported abroad are already accurate, said the ministry source, so it remains to be found whether any "surplus" oil is to be found in domestic deliveries.

Along with the dramatically increased oil export tariffs that came into effect on August 1, all of the above measures fall into a pattern which has as its goal a visible re-distribution of wealth between the oil companies and the state budget. The government shows that the years of wild capitalism, when the authorities paid virtually no attention to the excessive profits of oil companies, as long as the government officials got their share, are over.

Concentrating on the oil producers, which are still the most profitable enterprises in the Russian economy, the government declares, at least on paper, that the oil companies have to pay for the development and growth of the rest of the economy and for the well being of the people.

The oil companies, the authorities explain, have to pay higher taxes in order to offset decreases in unified social taxes and value added tax. They have to pay for the years of opulence that they enjoyed, riding the wave of high oil prices. They have to pay, finally, for the right to use the country's natural resources that belong to all of the country's citizens.

The rhetoric and logic of such statements are very populist at their core, but they don't lack conviction. The only problem is that there is no proof that the new campaign has these noble goals as its one and only reason for being.

The events of recent months make too many people see the basic re-distribution of wealth between the old and the new political elite as the real reason behind this crackdown on the oil industry. There is virtually no guarantee that the money that will be received by the state budget as a result of the introduction of new game rules will actually be used to finance social welfare programs or to provide government support to other sectors. If the government wanted to make the oil companies share their wealth, it could come up with other ways to do that.

Economic incentives for those who invest in exploration and development and create new jobs, would be one. Tax breaks for those who invest part of their profits in other sectors of the economy, where Russia has a possible competitive edge, would be another. Clearly defined parameters of "social responsibility" that is now demanded from businesses, would also be useful.

That way the oil magnates would spend their money on real charity, such as educational projects, instead of buying Faberge eggs, which are good for prestige, but have absolutely no use for young people, who lack a chance to receive good education and to become the foundation of future economic growth. Unfortunately all of this seems to be no more than wishful thinking.

Source: The Moscow News