The Court Politics of Russia’s New Shale Oil Drive

Oil shale, from which shale oil is derived.

Oil shale, from which shale oil is derived.

In a 2010 overview of the laws of Russia’s extractive sector, the Europe-Asia Studies journal argued that “the players tend to favour solutions that, in principle, are defective but advantage insiders (themselves) over outsiders (foreigners). … While enabling increased influence of the state and state-controlled companies over subsoil use,” the report concluded, it “does not add to the transparency of the investment regime in Russia’s mineral resources sectors.” Past experience suggests that the Bazhenov shale extraction development will see this pattern holding, but despite this, the prospects are just too good for Exxon (or Statoil) to pass up.

That’s the risk of doing business under Putin.

The Russian government’s recent solicitation of ExxonMobil (US) and Statoil (Norway) to help state-owned firm Rosneft develop a huge field of oil shale in Siberia at a site called Bazhenov follows a plan — such as it is — laid down by Putin early on in his career. Putin wrote — or according to critics, plagiarized — his thesis on Russian energy policy with special emphasis on subsoil laws and returning concessions made by the Yeltsin government to foreign oil majors (BP) and private firms (Yukos) to the state. He regards Russia’s energy reserves as strategic instruments, just as his Soviet predecessors did, yet found his hand constrained by the fact that “around 92% of oil and 83% of gas” (according to the Europe-Asia Studies journal) were in private hands during the Yeltsin era.

Plagiarized or not, Putin’s thesis served as an ideological blueprint for him as he and his associates made halting progress to bring those energy reserves more firmly in the Kremlin’s orbit (since many of those privately owned concessions belonged to oligarchs close to Yeltsin’s family or former Soviet enterprise directors, they were not by any stretch of the imagination truly privately-owned).

While the nationalization efforts made by Putin during his first two terms as President may have worsened ratings of Russia’s investment climate and driven plans for Western-financed independent pipelines, they consolidated control of major reserves under state-owned enterprises such as Gazprom, where Kremlin insiders, including once-and-future President and PM Dmitri Medvedev, helped Putin consolidate state control, or, rather, control by men he felt he could trust, such as Dmitri but also a number of other top officials like Alexi Miller, one of his St. Petersburgers and current head of Gazprom, and former Yeltsin insider Vikotr Chernomyrdin, who founded Gazprom. Foreign investment in the firm Chernomyrdin founded — as of 2006, now Russia’s sole legal natural gas exporter — was permitted only after the state-owned firm Rosneft purchased enough of a stake in Gazprom to give the Kremlin majority ownership.

The approach to Gazprom — and the consolidation of firms like Rosneft and TNK, which had partnered (but ultimately broke) with BP, along with the assault on Yukos — mirrors Putin’s overall approach to the Russian political system. Mazen Labban has written:

Under Putin, however, foreign financial capital returned to consolidate the Russian oil industry under the control of the state. What in effect took place is a process of amalgamation of the Russian state, domestic productive capital and foreign financial capital into hybrid corporations.

Foreign investors entered the Russian oil industry through the state to help it close space further against transnational oil companies and protect the industry from the predation of the domestic oligarchs.

In other words, he has his favored men — former Yeltsin insiders he still needs to varying degrees and the extremely loyal security professionals who came to Moscow with him from St. Petersburg — who he plays off of each other and against those oligarchs whom he regards as political rivals. Yukos is the most infamous example of this, as it ended in the arrest of its CEO and the secretive manner in which its assets were auctioned off. More recently, the partnership BP has made with the Russian TNK firm, which has faced a rocky road under Putin, has been “profitable” for the British oil major, The Scotsman notes, and “accounts for 29 per cent of BP’s [total global] production.” Now, perhaps feeling BP’s usefulness has expired, the Kremlin may be looking to purchase BP’s stake through Rosneft — the same Rosneft working with Exxon (and headed by another of Putin’s favorites, Igor Sechin) — to the chagrin of a consortium of Russian banking oligarchs.

With this approach comes a willingness to overlook his own people’s possible skimming off of the top so long as they recognize their place in his court and adhere to his driving vision to enhance Russia’s international influence, even though Russia’s politicking with its gas suppliers in Central Asia, notably in Kazakhstan and Turkmenistan, and European transit countries (Ukraine and Belarus) has harmed its image, according to the Pipeline & Gas Journal.

Of course, there are limits to how far Russia’s extractive emphasis can go. Not because there is only so much oil and gold and nickel to draw out from Siberia, but because for decades Russia has lagged behind other industrialized countries in being able to exploit its natural resources. For oil and natural gas, this is the legacy of mismanaged Soviet energy planning that split up exploration, technical development and investment — both in the energy sector and in the economy with energy sector revenues — among different agencies (Russia’s limited access to newer Western technologies and credit due to embargoes did not help either, but it became apparent by the 1980s than planning failures in the Brezhnev Era were causing massive waste and shortfalls). Putin was galled by the ways in which production-sharing agreements had been signed under Yeltsin’s rule, but despite his nationalist ardor recognized that Russia required foreign cooperation to maintain its extractive competitiveness and export revenue reliance (60% of Russia’s export revenues derive from extractive exports).

The Wall Street Journal has noted the technical problems involved — more so than several other business news outlets reporting on the Bazhenov field — but unsurprisingly, it and other outlets have said little of the potential environmental costs, since hydraulic fracking would be involved.

With Russia’s lax environmental laws and permissible public debate on the environment being what it is, the only thing really standing in the way of this development, besides potentially prohibitive costs, are the Kremlin’s own court politics.