Uncle Volodya says, "Je crois avoir égaré mon béret. Allons, enfants de la patrie...."
Regular readers will remember the article, “On the Politics of Russia”, which appeared here as a translation from Alexander Latsa’s great blog, “Dissonance”. It inspired a spirited and excellent discussion, and I hope others learned as much from it as I did. Recently Dissonance featured a republication of the controversial, “Brève histoire de l’oligarchie en Russie”, by Xavier Moreau of Realpolitik.tv. I’m delighted to offer it to you here, in translation from the original French.
Mr. Moreau is certainly not afraid to commit to an opinion, and some may find his analysis a little on the rosy side. That might be a result of my translation, as any translation must fail to capture entirely the passion of the original in its initial language. He might also be taking the long view, as some will argue that the Russian government has certainly not removed the oligarchical system. But he didn’t say that, if you look; Mr. Moreau’s contention is that businessmen who use their government connections to add to their fortunes are certainly not unique to Russia, and that such businessmen are by nature much less a threat to the country’s leadership than those who involve themselves – through their wealth – directly in policymaking to their personal advantage.
Most interesting to me, though, was the way people – many of them journalists – toss around the term “oligarchy” without understanding much about it except that Glenn Beck can’t spell it. Or the way some people howl that Russia is ruled by crooked businessmen with money practically falling out their asses, but who remove their hats in reverent solemnity whenever they say the words, “Mikhail Khodorkovsky”. Is it possible that in the mid-nineties, more than 50% of the Russian economy was concentrated under the direct – and private – control of only seven people? If that seems crazy to you, buckle up – it’s going to be a wild ride. Let’s meet them. Allons y, Monsieur Moreau.
Je t'present l'auteur, Xavier Moreau
“The word “Oligarch” is itself symbolic of Russian history over the past twenty years, and has been used to mean anything and everything. Synonymous with power and openly claimed if not sought after in the mid-nineties, its use is now challenged by the great fortunes of Russia as they relate to the darkest hours of the Yeltsin era.
The oligarchy has evolved substantially in this period – some oligarchs are forgotten, others have fled and still others are imprisoned. The more pragmatic have adapted by renouncing all claim to political influence, which makes it a less appropriate label for them today. Boris Berezovsky, the eminence grise of President Yeltsin, first popularized the term in 1996 during an interview with the Financial Times. He described himself as one of seven bankers who had pooled their resources to enable President Yeltsin’s re-election. Disastrous management, and the resultant anarchy and misery into which Russia was plunged, made a second term unlikely. These seven bankers claimed control over 50% of the Russian economy, and were nicknamed “semibankirschina”. The term was a contemporary adaptation of “Semiboyarschina”, the seven boyars who betrayed the Tsar and defied Moscow for the invasion of Poland in 1610. In 1996, it was for these seven bankers to save the industrial assets dishonestly privatized during the early years of Yeltsin, against a possible return of the Communists to power.
After enriching themselves through the diversion of public funds with the complicity of highly-placed politicians, these businessmen next secured control of large shares of Russia’s industrial heritage worth ridiculous sums, especially in the Natural Resources sector. In these uneasy times, to ensure the safety of their stolen spoils, they formed associations with the emerging Russian mafia. These Mafiosi included economic entities with substantial liquidity, at a time when that capability was lacking and everything was for sale. The most notorious of these thugs was Anatoly Bykov, who took part in the “aluminum war”.
Boris Abramovitch Berezovsky, a Russian-Jewish businessman, is the best-known of the oligarchs. His fortune has its origins in the fraudulent sale of automobiles produced by the state company AvtoVAZ, better known in Europe as Lada. He became a member of the Yeltsin “family”, seizing control of oil and industrial assets as well as management of Aeroflot, and bringing them to the brink of bankruptcy. The (former) editor of Forbes Russia, the Russian-American Paul Klebnikov, devoted a highly critical book to him: “The Godfather of the Kremlin”. His free speech ended in his murder July 9th, 2004, in Moscow. His open support for the restoration of Vladimir Putin’s rule perhaps accounts for his murder’s lack of resonance in France, unlike that of Anna Politkovskaya two years later.
Vladimir Aleksandrovich Gusinsky is also a Russian-Jewish businessman. His fortune originates with the bank he founded in 1989, as well as his alliance with (former) Moscow mayor Yury Luzhkov. He founded the first Russian private media group, and consolidated its activities as “MediaMost”. He offered Berezovsky a fight to the death in the early nineties, but reconciled with him to support Yeltsin’s candidacy. A prominent member of the World Jewish Congress, he co-founded the Russian Jewish Congress with Mikhail Friedman. The 1998 crisis weakened him for the long term.
Vladimir Olegovitch Potanin – whose position in the Department of Foreign Trade enabled his considerable self-enrichment – is the creator of the financial group Interros, the bank ONEXIM, and another famous oligarch. In 1995 he was the architect of the system of loans against shares which allowed bankers to gain control over entire sectors of Russian industry for bargain-basement prices. For hundreds of millions of dollars lent to the Russian state to stave off bankruptcy, the oligarchs seized control of assets worth billions. Through this system, Vladimir Potanin took over Norilsk Nickel.
Mikhail Borisovitch Khodorkovsky began his career as an influential member of Komsomol; with the support of this organization and its ties to the Communist Party, he founded his bank, Menatep. Using the loans-against shares instrument, he gained control of energy company Yukos. The privatization of Yukos was punctuated with numerous murders, and displayed the grossest contempt for the rights of minority shareholders, including foreigners. The mayor of Nefteyugansk, centre of Yukos’s assets – who had begun a hunger strike to protest the non-payment of fees while his city was on the brink of ruin – was murdered June 26th, 1998. Yukos (former) Chief of Security Alexei Pichugin is still in prison for that crime. Those who sympathize with the oligarchs for the financial risk they incurred would do well to learn from the Khodorkovsky era. Khodorkovsky bonds with the American business community and its free-spending advertising agencies to build a positive image, abusing the compliant Western media.
Mikhail Maratovich Friedman remains one of Russia’s most powerful businessmen. With his business partner Pyotr Aven, Minister of Foreign Trade in the early nineties, he founded the group consortium Alfa, whose flagships are Alfa Bank and the oil company TNK.
Vladimir Viktorovitch Vinagradov privatized state bank Inkombank to his own profit in 1993. He disappeared from the political-economic scene following the bankruptcy of his bank in the 1998 financial crisis.
Alexander Pavelovitch Smolensky was condemned during Soviet times for his involvement in the creation of the Stolichny bank. Privatization-for-profit of state bank Agroprom allowed him to start SBS AGRO, the first private bank and second-largest bank in Russia. In 1998 the bank was wiped out by the financial crisis, ruining millions of small savers. He lost political influence, but held onto his fortune.
Not the only wealthy and influential men of the Yeltsin era, surely: these are, however, the “kingmakers”. They built their fortunes on the triptych “Tchekovnik”; politician/mafia/businessman. Local and very powerful oligarchs of the Russian provinces built their power on the same base. The 1998 financial collapse led to the disappearance of two of the seven bankers; Vinagradov and Smolensky. A new generation sprang from the ruins of post-crisis Russia. They made their fortunes during the nineties, and are now at the height of their power: younger than the first generation, they remain very much connected to it.
The most celebrated are Mikhail Prokhorov, Vladimir Potanin’s partner in Norilsk Nickel; Roman Abramovich with his close ties to Berezovsky, and Oleg Deripaska, vassal of the Chernoy brothers Mikhail and Lev (formerly) of Russian Aluminum (RUSAL). It is also during this time that businessmen begin to distance themselves from the mafia who had been their protectors.
In the early 2000’s, the oligarchs were – again, as in 1996 – facing the risk of a return to power of the Communists. Even with almost complete control of the Russian media, the oligarchs needed a credible candidate who would defend their interests. They set their sights on a man whose loyalty to President Yeltsin causes them to suppose he can be as easily manipulated as the outgoing president. Buoyed by his victory in Chechnya, Vladimir Putin is elected president March 26th, 2000. But for the oligarchs, it is the beginning of the end.
After his election, the question that occupies the western press is whether the new president will be a puppet in the hands of the oligarchs. Surprisingly, the more Putin goes over the heads of the oligarchs, the more he is the target of attacks by this press, which only a few months ago denounced their grip on Russia. The first to feel the winds of change is Vladimir Gusinsky, whose media had attacked Putin during the elections. He flees to Spain, and then to Israel in 2000. The MediaMost holding company, riddled with debt, ends up in the hands of the public gas monopoly GAZPROM. That same month, July 2000, Vladimir Putin calls the oligarchs together to announce new rules with which they must comply if they do not wish to be held to account for their predatory practices. These rules are fourfold: Pay taxes, stop tax evasion, reinvest profits in Russia. Finally, and most importantly, stay out of policy-making.
Most of the oligarchs bow to the winds, and accept the changes. Two of the seven bankers still attempt to oppose the new president’s will. The first is Boris Berezovsky, who will not submit to his new status. But Vladimir Putin now leads Russia with an iron fist. He rapidly purges the presidential administration, knowing he can count on the support of force structures. In 2001, Berezovsky is forced to flee to London. Since then, he plots from the English capital, and becomes a sworn enemy of the Kremlin. He funds all manner of opposition to Vladimir Putin, domestically and abroad. He supports the ascension to power of Mikheil Saakashvili in Georgia in 2003, followed by the Orange Revolution in Ukraine in 2004. He supports the Chechen terrorist Ahmed Zakayev, also a refugee in London. He regularly promises major revelations about Vladimir Putin, but nothing substantial is ever published. He also enjoys the protection of the British Secret Service.
The second oligarch not to accept the new order is Mikhail Khodorkovsky. The western media, fuelled by U.S. public relations agencies, wrongly attributes the oligarch’s arrest to his supposed political ambitions, and portrays him as a new Solzhenitsyn. The reasons for Khodorkovsky’s fall are less glorious: from 2003, he begins to fund all potential opposition in the Duma, from the Communists to the liberals. He hopes to form a parliamentary bloc which will allow him to block Vladimir Putin’s tax reform plans. Between 2003 and 2004, effective taxes on profits jump from 5% to 30% on average. The oligarch also plans to significantly increase the involvement of American companies in Yukos’s shareholdings, which would be Chevron or Exxon. Finally, he wants to break the Transneft oil transport monopoly and, with the Chinese, build a direct pipeline from the wellhead to China. Real political ambition on Khodorvsky’s part is unlikely, as he is too smart not to know that he represents everything the Russian people hate. The conviction of Khodorkovsky and his associates – extremely popular among Russians – marks the real end of the oligarchy in Russia. It appears Vladimir Putin also personally considers that Khodorkovsky must pay for bloody crimes that attended the privatization of Yukos, notably the murder of Nefteyugansk’s mayor. It is in this context that Putin recently likened the Khodorkovsky situation to that of American mobster Al Capone – brought down not by his bloody but unproven crimes, but for tax evasion.
The Khodorkovsky example bears fruit, and raw-materials conglomerates pay their taxes. The Kremlin profits from the opportunity to lay hands on several industrial assets; those of YUKOS come under the control of public company GAZPROM in 2004. In 2005 Sibneft – Berezovsky’s company, acquired by Abramovich – is also bought by GAZPROM and becomes GazpromNeft.
Of the seven bankers of 1996, only two remain. One of them, Vladimir Potanin, announces in February 2010 that he bequeaths his entire fortune of over $5 Billion to charitable organizations. The fall of the second, Mikhail Friedman, is announced several times over the years without it ever actually happening. The younger generation of Deripaska, Prokhorov and Abramovich have largely abandoned politics in favour of business and ski and football clubs. Moreover, the 2008 financial crisis severely weakened Deripaska, who would have been unable to preserve his empire were it not for a $4.5 Billion loan given him by the Russian government through VnechEconomBank.
As a sign of the times, Dmitry Medvedev and Vladimir Putin announced the launch of a wave of privatizations, but this time they will return more than $40 Billion to the Russian state, and allow foreign companies to participate in the capital and management of these companies. The era of the oligarchs is ended: no Russian businessman, no matter how rich, will have the means to challenge the President of the Russian Federation. Contrary to the fictitious assertions of Pierre Avril in Le Figaro, those he calls the “new oligarchs” are actually businessmen who, while remaining close to government and profiting from opportunity to increase their fortunes, are not influential in politics. This challenge which Vladimir Putin has managed to overcome, the vanquishing of the oligarchs – some of whom had aspirations to power – is the same as that which today confronts Viktor Yanukovych of Ukraine and….Barack Obama of the United States.”
The Kremlin Stooge 
those of YUKOS come under the control of public company GAZPROM in 2004
I think it was Rosneft which wound up with Yukos’ assets. From what I can gather from former employees who jumped ship once the takeover happened, Yukos was pretty well run and the employees benefitted from western-style management practices, decent salaries, and bonuses. Rosneft, by contrast, seems to be stuck in the Soviet Union.
I’d also be keen to see which “oligarchs” in the US think they are above the law, especially that of the IRS.
So Goldman Sachs paying 1% in taxes is a commonplace practice in the US? Everyone can do that, including ordinary people?
Firstly, the article you link to states Goldman Sachs is paying 1% tax worldwide, not in the US. Secondly, companies engaging in legal tax avoidance (largely enabled by stupidly complex tax legislation) is hardly a case of Obama needing to face down oligarch. Thirdly, asking why ordinary people cannot arrange their tax affairs in the manner of corporations is like asking why car passengers cannot access an airport lounge.
All you’re saying is true, but there is a small detail. Legal tax avoidance is shaky ground as the laws defining the legality are written with direct participation of financial industry lobbyists. However, the result is clear: Goldman Sachs is permitted to do something that a small pizza parlor can’t even dream of.
Legal tax avoidance is shaky ground as the laws defining the legality are written with direct participation of financial industry lobbyists.
How does this make the ground shaky? All laws are written by human beings subject to all manner of lobbyists’ persuasions, but the law remains the law as is written. Putin’s main task in dealing with the oligarchs was their acting outwith the law, not their complying with laws which they’d helped write.
Goldman Sachs is permitted to do something that a small pizza parlor can’t even dream of.;
Yes, because a small pizza parlour is not a corporation. You can complain about corporation taxes all you like and I'd probably agree with you, but it is no use complaining that individuals or small, non-incorporated businesses are not treated as if they were corporations for tax purposes. It's like complaining that steel mills are allowed to engage in activities that a small workshop isn't.
“How does this make the ground shaky”
Because a law can be written with loopholes that only selected few can exploit. I was speaking about US, not Russia, and Putin had a completely different situation on hand of course.
“It’s like complaining that steel mills are allowed to engage in activities that a small workshop isn’t.”
Once again, there is a small, but important distinction: while it’s supposed that steel mills can engage in activities that a small workshop isn’t up to, one of the basic principles of taxation is its universalism. The same applies to individual citizens: it’s not a big secret that, for example, any of the Goldman top managers pays a significantly lower rate than the owner of the said pizza parlor. Despite the fact that US has a progressive scale of taxation.
The same applies to individual citizens: it’s not a big secret that, for example, any of the Goldman top managers pays a significantly lower rate than the owner of the said pizza parlor.
I’m going to be a pain and ask for evidence of this.
Just off the top of my head: http://www.timesonline.co.uk/tol/money/tax/article1996735.ece
Besides, there is a number of tax evasion schemes that are quasi-legal and virtualy unpunishable: http://www.economist.com/node/13356664
Because a law can be written with loopholes that only selected few can exploit.
I think you are confusing universality with applicability. Yes, corporation tax laws will contain clauses that only corporations can exploit. But all corporations can exploit them, not just certain ones.
Here we go again with the so-called “excellent corporate governance” of Michael Khodorkovsky. I am currently writing a research paper on this so let me explain why this is NOT the case.
First of all as people might now, the energy sector (like all sectors in the Soviet Union) were not only managed in a highly centralized way but also in a horizontal way. All the refineries were being run by one ministry, whilst the exploratory division (with all its companies) were the prime responsibility of another ministry.
Enter Gorbachev and Yeltsin. Under Yeltsin the restructuring of the oil sector begins. But the first man who starts the creation of the modern day Russian oil companies is Alekperov. In a time in which various ministries were competing for power, several plans came on the table, including building a kind of Gazprom to encompass the entire oil industry. Not sure what to do, the government assigned Rossneftegaz to oversee Russia’s oil sector but Alekperov refused to become part of this and, together with 3 other directors, formed LUKoil the first Vertically Integrated Oil Company (or VIOC). During Yeltsin’s privatization drive the Lukoil example was used as a base to create other VIOC’s like Onaco, TNK, Yukos, Sidanco, Slavneft and others.
Now how did these companies look? What kind of structure? There are two levels in a Russian oil company: the level of the subsidiaries and the holding level.
The holding company typically had shares in these subsidiaries (together with the state, workers etc).
Now I am going to skip the whole early 90’s here, otherwise my comment is going to be much too long.
Enter Khodorkovsky. Khodorkovsy managed (by using his bank Menatep) to buy the majority of the shares in both the holding company AND the subsidiaries. Both just obtaining the majority was not enough, he wanted all. Thus comes the assasination of the mayor of Nefteyugansk (who refused to sell his shares to Menatep), the car bomb aimed to kill Evgeny Rybin of Eastern Oil and the murder of Valentina Korneyeva who paid dearly for having refused to sell propery coveted by the Khodorkovsky’s Bank.
Ofcourse, this does not have a lot to do with the supposed “excellent” performance. However, Khodorkovsky did engage in strippig the assets of production companies (ask Kenneth Dart about that) and thus looting the subsidiaries.
What did he do? As director of the holding company, he bought oil from the subsidiaries far below the market price (and price or production) and then sold the oil against market prices (and sending the difference to all kinds of off-shore companies by which he now pays for his PR).
Indeed the holding company performed very well when Khodorkovsky was at the helm but it was kinda hard NOT to perform well. The guy who previously had run Yukos, Muravlenko, really made a mess of things. In addition, people often overlook the influence of the 1998 crisis on the oil sector. The devaluation of the Ruble meant that production costs were cut and, at the same time, the OPEC decided to curb production thus increasing the oil price.
In the highly unstable economic environment of Russia, Khodorkovsky used short term strategies to increase profitability (adopting western technology to increase production and to restart production at oil fields deemed empty by the Soviet-Union). At the same time other oil companies with a more conservative management achieved about the same results, Lukoil was only 1% behind Yukos in production and Surgut about 5%.
Did Khodorkovsky increase performance at his company? Well, his holding company performed rather well but his subsidiaries were nearing bankrupcy (when Menatep went bankrupt, it threatened to bankrupt these companies as well because Khodorkovsky had used illegally obtained shares as a collateral for loans.)
Well I can hold a far more longer story here (my paper has 4800 words) but I hope this puts things into perspective.
By the way, Yukos was indeed sold to Rossneft, Sibneft was sold to Gazprom. “Rossneft seems to be stuck in the Soviet-Union”.. I do not understand this what do you want to say here? Surgutneftegaz has a very conservative leadership and is still (and was leader during the 90’s) a very, very profitable company. Same deal with Lukoil (Alekperov is a former Soviet minister and is listed on the London stock exchange !!!!!!!!!!)
Extremely interesting, Nils; when is your paper due? It would make a hell of a post, or even a series! I can’t imagine why Khodorkovsky remains the darling of the western media…..never mind – scratch that. The west often respects success without looking too carefully how it came about. Good eye on the RosNeft thing, Tim: I hope Mr. Moreau saw it. It’s a minor error, but an error nonetheless.
I wouldn’t want to take anything away from Mr. Khodorkovsky’s success (well, apart from being in jail), because he’s an extremely clever guy who knows how to make money. But this suggests the notion that “Yukosization” as a synonym for success based on western management principles – while not entirely nonsense – is one companies might want to be careful about citing.
The employees of MBK are still loyal and maintain their nuisance lawsuits against the Russian government. I just hope Tim does not take their testimony and judge it as the correct one. Their employer has been involved in Clearstream and IMF money laundering scandals too.
US oligarchs don’t need to be above the law, because they buy the law that fits their needs. For example, they bought deregulation of the financial sector and when the shit hit the fan (due to said deregulation) they bought government intervention. Khodorkovsky tried to get the same thing in Russia and failed.
This piece is clearly a bunch of lies. Incontrovertible evidence: Uncle Volodya doesn’t speak French.
Interesting article, thanks! Does anyone know how the various oligarchs relate among themselves? For example, according to the article, Khodorkovski helped fund at least some of the color-coded revolutions, and, of couse, so did George Soros. Do these international oligarchs work together or coordinate their efforts? How does that work? Just curious.
Khodorkovsky has a suspiciously high support among the Russian liberals. I do not know if the oligarchs coordinate their efforts but it would be interesting to find out.
I also think that the attack on oligarch, so derided in the Western press, was nothing but showing the oligarchs that the only sovereign in the Russian state is the Russian state.
As for Khodorkovsky representing everything Russians hate this is what I wrote elsewhere:
“I saw a video where Smolensky tells how back in the nineties when 99.9% of Russians were drinking tap water and even the oligarchs did not mind drinking tap water, Khodorkovsky had Perrier delivered because he would not drink what was on the table. Well, I hope they have Perrier in jail.”
I could add that even Smolensky asks what that thing in green bottle is…
The video is among the 600+ videos of this user:
http://www.youtube.com/user/TheGentelev
Regarding the subject of Russian oligarchs and Russian “liberals”:
http://adage.com/mediaworks/article?article_id=146920
Over the course of time, the owner of Snob hasn’t exhibited the same kind of missionary zeal as Snob’s editor.
A seemingly positive sign of an “open society” is a scenario where big business is involved in funding minority views in the given society. Consider who owns Ekho Moskvy and how a key person at RIA Novosti has uncritically propped openDemocracy on his RIA Novosti show.
Just off the top of my head:
I’m sorry, but you made a specific claim that the top managers of Goldman Sachs pay tax at a lower rate than the owner of a pizza parlour. The article you link to shows Warren Buffett – who owns his company – pays at a lesser rate than his cleaner, an employee. There is no reason why the owner of a pizza parlour cannot arrange his financial affairs in such a manner that he can enjoy similar tax rates to Warren Buffett, and I would be extremely surprised if Goldman Sachs managers – who are employees – can reduce their tax bill to a rate less than a cleaner.
And the article from The Economist about the existence of tax havens shows only that tax havens exist and are often used for tax evasion, which nobody is disputing.
There is no reason why the owner of a pizza parlour cannot arrange his financial affairs in such a manner that he can enjoy similar tax rates to Warren Buffett, and I would be extremely surprised if Goldman Sachs managers – who are employees – can reduce their tax bill to a rate less than a cleaner.
There is a reason and I find it surprising you seem not to know about it. Top managers are paid not only with a wage, but also (and mainly) with share of fund profits that are taxed at 15%. Ordinary workers that qualify for a 15% rate are those with an income between $8,375 and $34,000. There was a proposal to raise the 15% rate to 30%, but now it is dead.
Top managers are paid not only with a wage, but also (and mainly) with share of fund profits that are taxed at 15%
Right. And the reason cleaners can’t get this is because they, quite sensibly, want their salary to be paid 100% in wages and not in shares of profits because in a lean year they’d not have enough to live on. In other words, once you have guaranteed enough to live comfortably you can take a bit more risk with whatever you earn thereafter, trading the uncertainty for a lower tax rate. So there is a trade off, it is not simply managers enjoying lower tax rates than others enjoy. Indeed, if the cleaner were offered 50% of his salary linked to performance but at a lower tax rate, he’d most probably refuse it as he’d not want to take the additional risk.
Actually, if the GS top management are being paid a percentage of the profits, i.e. a dividend, then they are effectively owners for the part of the salary they enjoy at a lower rate. And there’s nothing whatsoever stopping a pizza parlour owner doing exactly the same thing by paying himself dividends.
If I were a cleaner at GS or Barclays I would gladly accept 100% of my salary in capital gains, because the actual risk is zero. Not because GS or Barclays are run so wonderfully by their managers, but for the “Too Big to Fail” principle, i.e. when things go wrong the US or UK government pay the bill, no questions asked and no strings attached. You may ask why no cleaner at GS is payed with share of fund profits. Simply because the cleaners at GS aren’t employed by GS, but by a cleaning enterprise to which GS outsourced the work.
And there’s nothing whatsoever stopping a pizza parlour owner doing exactly the same thing by paying himself dividends.
Nothing besides being listed in the New York Stock Exchange. To your knowledge, is there any pizza parlour listed at the NYSE? If there isn’t, why?
Finally, can you explain why the owner of a pizza parlour has to pay an higher tax rate than someone who own shares, like a top manager? In theory these two takes the same risk, so they should be rewarded with the same tax privileges.
Nothing besides being listed in the New York Stock Exchange.
You don’t need to be listed on a stock exchange to pay yourself dividends. Not in the UK, anyway.
Finally, can you explain why the owner of a pizza parlour has to pay an higher tax rate than someone who own shares, like a top manager?
I don’t think they do. As I said, the owner of a pizza parlour can set himself up as a limited liability company and pay himself dividends taxed at 15%.
The 15% tax is on capital gains, not on dividends, so the pizza parlour owner needs to be listed in NYSE.
As for Barclays, it was bailed out by US government money through AIG.
Not because GS or Barclays are run so wonderfully by their managers, but for the “Too Big to Fail” principle, i.e. when things go wrong the US or UK government pay the bill, no questions asked and no strings attached.
Barclays was not bailed out by the government. It recapitalised on its own.
Also just off the top of my head, U.S. tax law says (among other things in thousands of pages) that nobody is obligated to pay more than the law says he absolutely must. Individuals as well as corporations are entitled to use every measure within the law to minimize their tax burden – but it’s surprising how many don’t, because they don’t know the law. I imagine this is true in every country, as it’s difficult to make tax law racy enough that ordinary people will read and understand it. In fact, I’m told American tax law was used to make prisoners talk at Guantanamo.
I’ll try to find something more substantial for you; that was just from memory because I referenced it for another post a couple of months back.
Just on the general subject of taxes, here’s a definition I’ve found helpful for differentiating between the legal and the illegal – this is close enough to exactly the terminology I was using just off the top of my head. This site (ignore the blatantly commercial pitch and focus on the information) is fairly informative at the layman level of the principles of tax havens and offshore tax avoidance or “tax mitigation” strategies.
I guess if there’s a major complaint to be made regarding U.S. tax law, it’s that it is unnecessarily cumbersome, and there probably are unethical practices that prevail simply because the effort of finding out if it’s illegal is just too exhausting. At the individual and small-business level, the main detraction is that most need a professional to help them with their taxes if they’re not to risk paying too much because they don’t know how to make the law work in their favour. Again, they might save only a few dollars where a corporation – by reason of scale – might save millions.
The point, however, that Vlidimir Putin’s fight was with tax evaders rather than tax avoiders is valid.
Here are a few specifics. As you say, perfectly legal, but strategies with vaguely sexy names like “The Double Irish” and “The Dutch Sandwich” must be pretty hard to justify on moral grounds when the country is in a recession. This example, however, refers to corporations which do a good deal of their business overseas and does not fit the pizza parlour role very well. Businesses that exclusively market their product domestically rather than internationally are liable to take a bit more of a beating from U.S. tax law, but they also pay no international taxes at all. Still, it does specifically mention that corporations which use the Double Irish (which might not be long for this world, as Ireland trembles at the abyss of default) “avoid taxes at home and abroad”.
Here are a few specifics. As you say, perfectly legal, but strategies with vaguely sexy names like “The Double Irish” and “The Dutch Sandwich” must be pretty hard to justify on moral grounds when the country is in a recession.
But everybody almost without exception pays a minimised tax bill. I certainly don’t know anyone who pays more than is required by law, as the law is written. That individuals pay a minimised tax bill without any effort does not make them morally superior to those whose circumstances are a lot more complicated and need to spend a bit of effort in minimising their own.
Actually, according to commercial law sites who naturally want to sell you their services, two in five Americans do little or nothing to minimize their tax liability. Here’s a survey that substantiates that assessment.
Even if we presume (conservatively, I suggest) that only half America’s 308 million population are adult taxpayers and then take 20% of that, it’s still almost 39 million. That adds up to a significant amount, obviously, even if each of them were off by only a dollar.
Actually, according to commercial law sites who naturally want to sell you their services, two in five Americans do little or nothing to minimize their tax liability.
I can believe that: I’d guess 80% of Brits don’t, mainly because they don’t have to as they are part of a straightforward PAYE system. Maybe they could reduce it more in places, but probably the benefits would not outweigh the costs. But even independent sole-traders employ accountants to minimise their tax bills.
And I agree, the problem is the stupidly complex tax codes: the more complex, the more loopholes there are to exploit.
Interesting piece.
Power and Money have always been interchangeable currencies, but the days of passing around envelopes of cash seem pretty quaint compared to today’s complicated Clout Market. Influence today is peddled through PACs, Lobbying Firms, Industry and Trade Organizations, “News” Outlets, Broadcast Organizations, PR Firms, Astroturf Front-groups, Anonymous Campaign Spending, and good old fashioned Mobs of Screaming Rubes spouting their favorite corporate propaganda. Gotta love that American innovation…
I’m not sure, but I would wager Russian influence is being traded in similar fashion these days. So it goes.
On a lighter note, this website cracked me up…
Uncomfortable Moments With Putin
Yes and no. There is a political similarity, in that protest by the liberal opposition is discouraged in both countries. However, in Russia that discouragement is used by the liberal opposition to imply that its popularity and influence are orders of magnitude larger than actual surveys suggest, and in Russia it is the liberals rather than the conservatives who have no plan with which to address the issues they complain about. In the U.S. the liberals are rather self-effacing – much to their detriment, as their sliding support screams at them to grow a pair – and it is the conservatives who have endless silly complaints but no plan.
You’re right, though, that money talks, although it wields greater influence come election time in the USA than in Russia.
“but you made a specific claim that the top managers of Goldman Sachs pay tax at a lower rate than the owner of a pizza parlour.”
Nope, I said “that, for example, any of the Goldman top managers pays”. In other words, I didn’t accuse Goldman top managers specifically, but was speaking about top managers of corporations in general. Of course I will not provide any evidence, Lloyd Blankfein refused to send the list of all his accounts, but my point is that they have the access to the best lawyers to legally minimize taxes. Besides, their companies operate internationally, so using offshore accounts for personal purposes is much easier for them than for some poor schmuck who is drudging as a teacher. You can argue all you want that if he worked harder, was smarter and was willing to risk more, he also could pay less taxes. But this wont change the fact that while America was becoming richer and richer, the income of the middle class was stagnant since the 70s, IIRC.
Of course I will not provide any evidence, Lloyd Blankfein refused to send the list of all his accounts, but my point is that they have the access to the best lawyers to legally minimize taxes.
Right, but they are the only ones that need to. A teacher, for example, has a minimised tax bill by default. As their operations get more complicated, so does the task of keeping their tax bill minimised.
Besides, their companies operate internationally, so using offshore accounts for personal purposes is much easier for them than for some poor schmuck who is drudging as a teacher.
No, it’s not. As somebody who has accounts in Switzerland, Jersey, and the Isle of Man, I can assure you that it is not at all easy to live in somewhere like the UK or US and shovel a load of earnings into such accounts without the taxman clobbering you. You have to spend a lot of time out of the country, which is what I do.
Certainly true if you make most or all your money in one country, like the UK, for example. I’m interested in how Google – to use the example I provided earlier – manages to cut $3.1 Billion off its taxes in 3 years just by moving its profits through certain countries. That reference suggests $60 Billion is lost in tax loopholes, and specifically mentions that U.S.- headquartered companies (like Google) dramatically cut their taxes both at home and abroad.
Information I provided earlier suggests that Americans (and I can’t speak for anyone else except Canadians; the one because I researched it and the other because I am one) who are employed even in modest jobs need the help of a professional tax preparer (although not necessarily a lawyer) to help them minimize their tax burden, at the risk of paying more than the minimum they are required to do by law. Again, I can’t speak to other countries, but American tax law is incredibly complicated, and even professionals say so. Canadian tax law is quite simple by comparison, but I never attempt to do my own taxes. Not because I stink at math (although I do), but because the pros always know something you can deduct that you didn’t know, and the tax code doesn’t make it simple to find out. In fact, tax lawyers use their personalities as birth control.
It is funny that London is the epicenter for some of these dissident movements that are supported by exiled oligarchs.
Gorbachev decided the Soviet Union should stay out of Britain’s domestic affairs when their miners were on strike.
http://www.guardian.co.uk/politics/2010/aug/29/margaret-thatcher-soviet-aid-miners
What a sucker!
@cartman
It is not a coincidence that they are centred in London just like all the major players in international terrorism especially in the Balkans and Chechnya some in the pay or used by British intelligence as even admitted by western/British media and Soros representing Rothschild/City of London banking interests who pushed shock therapy and British banks forwarded money to the Oligarchs in Russia to buy up state assets at fire sale prices.
In fact it was Lord Jacob Rothschild himself through the Menatep bank that transferred money to Khoderkovsky who set up and ran the honey privatisation auction that would create the YUKO’s oil company.
Even today Russia’s major non-state companies are based in British offshore tax havens.
This is a good website that outlines British connections to Islamic terrorism using western media and think tank organisations as a reference.
http://www.nlpwessex.org/docs/ukraine-caspian.htm
There are other sources as well that admit http://www.dailykos.com/story/2008/7/15/551916/-Sibel-Edmonds-Case:-The-Central-Asia-Islamization-Cocktail:-Mosques,-Madrassas,-HeroinTerrorism this but this puts it into one website.
Most interesting is there connection to the 98 African Embassy bombings by a Libyan terrorist posted on the FBI’s Most Wanted terrorists with involvement in it who MI6 recruited as part of an Al Qaeda cell in a failed assassination attempt against Gadaffi in Libya in 96.
LaRouche has done some good insightful work on Russia like this video explains the origins which started under Gorbachev of the young reformers who implemented economic shock therapy in Russia were trained in London and British/Soros related organisations in Budapest and Vienna.
This is a better outline of Russia’s Oligarchs exclusively from western news sources during the 90’s and early 2000 up to 2003.
http://www.jewishtribalreview.org/capitalists.htm
Khodorkovsky used short term strategies to increase profitability (adopting western technology to increase production and to restart production at oil fields deemed empty by the Soviet-Union).
I don’t know why you think adopting western technology to increase production represents a short-term strategy. Most oil companies I’ve worked for did so as part of a long-term strategy.
“Rossneft seems to be stuck in the Soviet-Union”.. I do not understand this what do you want to say here?
I mean the management practices seem to be left over from the Soviet Union. People get promoted on seniority or connections, not competenece. Nobody other than a few senior people can make any kind of decision on a facility, i.e. there is no delegation of authority. Those who should make decisions either don’t or take a year to do so. They are more interested in generating piles of paper than progressing, although perhaps they equate one with the other. And their environmental record, at least in Sakhalin, was appalling as they enjoyed near-immunity from the environmental regulator.
“I don’t know why you think adopting western technology to increase production represents a short-term strategy. Most oil companies I’ve worked for did so as part of a long-term strategy.”
Quite simple. He used Western Technology to restart production at some of the former Soviet oilfields. Keep in mind that the Soviet Union deemed them empty so how much oil do you think is left in there? Maybe a few years. Yukos continued to lack behind in taking new fields into production, my Dutch oil friends tell me that is a long term strategy. Surgutneftegaz en Lukoil did drill dozens of new oil fields, also with Western-Technology.
Like I already said, I do not understand your point. The Lukoil and Surgut management are former Soviet as well. Especially Surgut, which has quite some issues with transparency. I would argue that, since the break-up of the Soviet-Union, not Yukos but Surgut has been the best performing one. By the way: in 2001 the profits of both Yukos and Lukoil dropped, when the oil price went down, with 21%.
On the whole, the oligarchs have been really bad for Russia’s oil companies. In 1996, three oil companies were sold to: Berezovsky (Sibneft), Khodorkovsky (Yukos) and Sidanco (Potanin). Sidanco went bankrupt in the wake of the 1998 financial crisis (Potanin had also used shares as a collateral for (western) loans). It went bankrupt because its shareholders refused to continue financing ineffective management (actually, Potanin was also buying oil from its subsidiaries against a very low price and selling it again against market prices). Berezovsky was even better. The main subsidiary of Sibneft, Noyabrskneftegaz, made a profit of 600 million dollar in 1996, this was the year in which Berezovsky got his hands on Sibneft. By the beginning of 1997 however, the 600 million had suddenly vanished and appeared as profit of the holding company. Noyabrskneftegaz was left starved for cash. Berezovsky did this illegally as Russian Company Law dictated that minority shareholders should approve such a step which they would not have ofcourse.
Thanks Mark, I should hand in my paper at the 8th of December, presentations at the 14th of December. Indeed it would make a nice post))!
@Nils: I look forward to reading your paper too. Great job researching, and it’s great that you will be able to share it with us.
Thanks Yalensis, would love to do so.
Quite simple. He used Western Technology to restart production at some of the former Soviet oilfields. Keep in mind that the Soviet Union deemed them empty so how much oil do you think is left in there? Maybe a few years.
All oil companies do this. When trying to kick-start an operation, they get some production going (or increase existing production) to help pay for the capital outlay of developing the next new field. Sakhalin Energy did this with the Moliqpaq on Sakahlin-II, Exxon did it with Chayvo on Sakhalin-1, and BP and Shell are doing similar things in Iraq. The Soviet reservoirs were appallingly managed meaning recovery rates were low. It is therefore entirely sensible that a newly formed oil company in Russia would seek to increase production from existing fields instead of starting a new project with huge capital outlay and ni income. That they took this approach does not constitute evidence that their strategy was short-term, it is standard practice the world over. Incidentally, what new fields are Rosneft or Gazprom developing?
Like I already said, I do not understand your point. The Lukoil and Surgut management are former Soviet as well.
I cannot comment on Lukoil or Surgut, I’ve never worked with them. But I have dealt with Rosneft, and as I have described, their management in mentality and practice, plus their work practices, are stuck in the Soviet Union. I have also been told by engineers who worked in Yukos that it was a pretty good company to work for and had adopted good western management practices, which contrasts greatly from what I have seen and heard about Rosneft.
I like Russia, and it’s people, and hope for them to be successful. I’m motivated to defend them when russophobes dump on them simply because they’re Russians – but I don’t want to fall into the trap of carrying out a knee-jerk defense when they’re wrong, and I’m here to learn. You know the oil business better than any of us, I’d imagine. If you were able to change three things about the Russian energy industry and you wanted changes that would benefit the state, changes that would also have a rapid and noticeable effect – what would those be? Try to pretend you’re a Russian, and not a foreign investor who is looking for a quick buck for his own country at the expense of the Russian state; if these changes would be broadly beneficial without hurting anyone, well and good, but the interests of Russia must come first.
1. License exploration blocks by auction.
2. Tax production.
3. Implement a robust but corruption-free regulatory system.
OK, number three’s pretty much a given, and easy to understand. I don’t know much about the energy industry except the money side of it – how would the preceding two help the Russian state, how would you go about implementing them, and how would the state maintain control over blocks it auctioned off? I fully understand foreign investors are in business to make a profit, and I’m OK with it as I imagine Russia is. But do investors just get carte blanche to do what they wish with their exploration blocks? That might fall afoul of number three. Additionally, production-sharing agreements would be the kiss of death in Iraq (for Iraqis), so I’m guessing Russians would want to avoid those. If you weren’t thinking along those lines, kindly ignore that altogether.
I have to confess I have only been looking at the transformation of the Russian oil industry in 3 phases: (early) privatization, loans for shares and the renationalisation drive. For this, I only had 4000 words, so that caused my to leave a lot of things out (like the Germans say, in der Beschreakung zeigt zich der Meister), including the foreign part of it. I just noticed some odities, like the not-so-privatization of the oil companies in the early 90’s, the lack of vertical integration in some oil companies, the ownership structure, the asset striping of the oligarchs and the influence of the 1998 crisis on the profitability of the oil companies.
Actually Mark according to the material I read for my paper, at the end of the 1990’s, PSA agreements became really popular in Russia but that is the only sensible thing I can say about it.
how would the preceding two help the Russian state,
It would bring them immediate cash from the highest bidder, would result in multiple companies operating in the oil and gas sector, and would bring in a steady stream of cash revenue. All for minimum effort.
how would you go about implementing them, and how would the state maintain control over blocks it auctioned off?
They could implement it in exactly the same way as is done in the Norwegian, Dutch, and British sectors off the North Sea, offshore Brazil, the US waters of the Mexican Gulf, offshore Nigeria, Indonesia, and Australia. Licensing blocks and taxing production is a remarkably common way of developing a country’s oil and gas sector. The state maintains control over the blocks by attaching conditions to the lease.
But do investors just get carte blanche to do what they wish with their exploration blocks? That might fall afoul of number three.
The regulatory body ensures that certain production criteria are met, HSE standards are maintained, and the reservoirs are not mismanaged. Other than that, the companies can prety much do what they want.
Additionally, production-sharing agreements would be the kiss of death in Iraq (for Iraqis),
This is what gets trotted out in the media a lot, but I’ve yet to hear why. I wrote an article here explaining why PSAs would not have been a bad thing for the Iraqis, especially considering their development plans are already miles behind schedule and mired in political bickering.
Thanks for an excellent and comprehensive response, Tim; this is extremely instructive, and although the real Russian heavyweights are unlikely to be readers, perhaps someone in the Russian oil and gas sector will point their way to enlightenment. As I’m sure I’ve said elsewhere before, I believe much of the bureaucratic inefficiencies in the Russian systems are holdovers from the Soviet economy, when layers and layers of supervision at both the municipal and federal levels were created so that everybody got a chance to make a little money, since the state took care of basic needs and figured you didn’t need much else. If you tried Communism on machines insead of people, with the human animal’s failings and greed and stupidity, it’d probably work. All it takes to make the perfect system fail is one greedy predator. Why they don’t winkle these out now that the transition to a cash-based economy is more or less complete, I don’t know. Kovane had some nice insights on this awhile back with his piece on Stalin, which is still a steady hit-maker.
There was a great piece awhile ago – around 2003, I think – quoting data from the U.S. Army Corps of Engineers if I recall correctly, which went into great detail on the Iraqi oil industry and its potential. It seems incredible, and perhaps is, that they reckoned they could bring a barrel of Iraqi oil to market for less than $5.00, including a kickback to the government. The rest would be pure profit. PSA’s were discussed in detail, one major pitfall being that they allowed the company to recover and sell cost oil until they’d made up their initial investment, and more or less just took their word for it. Iraq had a very bad experience with Turkey running their oil industry and telling the Iraqis bugger-all, and they’re probably wise to be cautious. I’ll see if I can find that piece for you.
Great questions, Mark. You really hit the nail on the head! Is interesting to see what happens when you force certain people to come up with constructive criticisms instead of routine propagandistic carping.
Mark,
I replied to this but your spam filter appears to have eaten it, probably because I posted a link in it.
Fixed; thanks, Tim. Yes, that does happen, although the filter is a good one and almost everything it catches actually is spam.
Cheers!
@Tim Newman
Lord Rothschild has major shareholder ownership of Lukoil as part of a secret meeting in Moscow with Putin, Rothschild and Kissinger after his YUKO’s oil company was dissolved so it is not exactly strictly “Russian” in fact it is part of Azerbaijan International Operating Company (AIOC) foreign oil consortium that is developing pipelines to bypass Russia to European markets which include Saudi oil firm Delta Nimir Khazar that financed the Taliban accent to power in Afghanistan and secured there rule as revealed in court documents and testimony during the African Embassy bombings referenced in the 9/11 lawsuit.
http://www.azer.com/aiweb/categories/topics/Oil/oil.html
Click to access 1239.pdf
Interesting, John: I don’t know where you find these connections, but they appear to be factual. Excellent research.
Well, under that criteria I doubt it could have been considered strictly “Russian” since 2004 when Conoco-Philips bougth a stake in it.
All oil companies do this. When trying to kick-start an operation, they get some production going (or increase existing production) to help pay for the capital outlay of developing the next new field. Sakhalin Energy did this with the Moliqpaq on Sakahlin-II, Exxon did it with Chayvo on Sakhalin-1, and BP and Shell are doing similar things in Iraq. The Soviet reservoirs were appallingly managed meaning recovery rates were low. It is therefore entirely sensible that a newly formed oil company in Russia would seek to increase production from existing fields instead of starting a new project with huge capital outlay and ni income. That they took this approach does not constitute evidence that their strategy was short-term, it is standard practice the world over. Incidentally, what new fields are Rosneft or Gazprom developing?
Well could be but the Russian oil companies stuck with the re-developing of old oil fields. Come on, in the first few years after 1998 the oil business was so profitable in Russia, Yukos could have easily developed new oil fields. Lukoil for example, conducted 135 exploratory drills in 2001, including 13 outside Russia’s traditional production area (not to mention all the drills conducted in Afrika etc.). Instead, Khodorkovsky sent the majority of the profits to his offshore company and did not drill for new fields.
I cannot comment on Lukoil or Surgut, I’ve never worked with them. But I have dealt with Rosneft, and as I have described, their management in mentality and practice, plus their work practices, are stuck in the Soviet Union. I have also been told by engineers who worked in Yukos that it was a pretty good company to work for and had adopted good western management practices, which contrasts greatly from what I have seen and heard about Rosneft.
Rosneft was a severly depressed company in the 90’s. In essence, it was the “leftover of Rosneftegaz” of what could not belong to any other VIOC. It’s only stake was a 35% share in Purganskneftegaz; Rosneft was not profitable at all. So no shit that the company was in a bad state, it was not real a VIOC at all. After the “renatiolanisation” drive, Rosneft ended up with Yukos and indeed profited from this but it was hard not to profit. In essence, Rosneft would have profited from every company because the company itself was not really a company but more like an empty shell.
Incidentally: the Russian oil industry has set two production records in the past 6 months so that would neutralize all the claims that private ownership is a good thing because either: 1. Rosneft has continued the “good” “Western-Style management” of Yukos, or 2: management is not that important, oil companies were succesful anyways or 3. There is more to the Rosneft management than meets the eye and it looks like that another style of management is just as succesful (like I already stated with the Lukoil and the Surgut case). I am not sure about which one I would take, probably not the second one))).
Well could be but the Russian oil companies stuck with the re-developing of old oil fields. Come on, in the first few years after 1998 the oil business was so profitable in Russia, Yukos could have easily developed new oil fields. Lukoil for example, conducted 135 exploratory drills in 2001, including 13 outside Russia’s traditional production area (not to mention all the drills conducted in Afrika etc.).
Right, but the only person I have come across to date who measures and oil company’s success solely by the degree to which it drills new fields is you.
So no shit that the company was in a bad state, it was not real a VIOC at all. After the “renatiolanisation” drive, Rosneft ended up with Yukos and indeed profited from this but it was hard not to profit. In essence, Rosneft would have profited from every company because the company itself was not really a company but more like an empty shell.
What’s your point? That Rosneft was always shit?
Incidentally: the Russian oil industry has set two production records in the past 6 months so that would neutralize all the claims that private ownership is a good thing because either: 1. Rosneft has continued the “good” “Western-Style management” of Yukos, or 2: management is not that important, oil companies were succesful anyways or 3. There is more to the Rosneft management than meets the eye and it looks like that another style of management is just as succesful (like I already stated with the Lukoil and the Surgut case). I am not sure about which one I would take, probably not the second one))).
Sorry, what’s the basis for your case that Rosneft is a well-run oil company? That Russia has set production records? But two paragraphs ago, it was the number of new fields which were developed that was the criteria for judging oil companies. Some consistency would be nice.
Consistency? I did not write a paper on judging the oil companies I am writing a paper on the development of the oil industry, I just noticed these differences. Furthermore, I am using a theoritical approach which is (arguably) maybe not the most ideal approach to a weblog. You see, at an university (at least, a Dutch one) one studies different theories and perspectives on a subject. Problem is that you are a man of practice and I am (at least for now) a man of the theory. Hence the difference in approaches.
Indeed, one cannot judge the Russian oil industry only on the basis of new fields, or only by production or only by measuring profit. By the way: number of new fields and production are closely related in many ways, long term strategy etc. Some reading from your side would be nice.
d not write a paper on judging the oil companies I am writing a paper on the development of the oil industry, I just noticed these differences.
Right, but I am not referring to your paper, I’m referring to your comments on here. Your statement that Yukos was somehow not good because it invested in western technology to increase production from existing fields is rather odd given that it is standard practice in the oil business. And you haven’t given me the criteria by which you feel Rosneft is any good.
Problem is that you are a man of practice and I am (at least for now) a man of the theory. Hence the difference in approaches.
So what normally happens when the theory does not match the practice?
Regarding the Russian oil industry, I can recommend one blog, the author seems to be very knowledgeable, and writes excellent articles.
http://akteon.livejournal.com/97723.html
http://akteon.livejournal.com/97984.html
These are not the only ones, I especially liked the one about the pricing on the petroleum market.
Tim, a point of interest, have you learned Russian during your stay?
Excellent one Kovane, at a glance, there are some points in there which I make as well.
Yes, but not to complete fluency. I can socialise fine, and I can spend all weekend with Russians who speak no English and have no problems being part of the conversation. But I make a lot of mistakes and my vocabulary isn’t so good once the subject matter gets deeper. And my reading and writing skills aren’t up to much.
I figured I’d better start a new thread, but this is in response to Tim’s last discussion of PSA’s. I’ll get you the other link; it was extremely interesting, but it’s bookmarked on my home computer. I don’t have it here and can’t find it. Meanwhile, here’s another that discusses why PSA’s are not the way to go for Iraq (warning, fairly large PDF file, if you have a slow connection). The section to which I’m referring is pages 13-15, which also discusses why Russia backed away from PSA’s after trying them earlier on. The rest of the document is informative as well. It’s from the perspective that large corporations are ripping off Iraq, so you can take some of it with a grain of salt, I suppose. Some sources figure you only need to say “large corporation” to make the target audience bare its teeth, and to some extent they’re right. I’m not anti-business as long as it’s conducted responsibly and fairly. The author’s bio says he is a recognized expert in Iraqi oil policy.
I don’t think the article makes a particularly convincing case. For a start, it’s published by War on Want (a left-wing anti-business lobby group) and the New Economics Foundation (whose economic knowledge has been found in the past to be somewhat wanting). They seem to be saying that PSAs would be bad for Iraq because none of their neighbours use them:
It is difficult to overstate how radical a departure
PSAs would be from normal practice, both in Iraq
and in other comparable countries of the region.
Which neglects the fact that Iraq is (or was) effectively a war zone with enormous risks not to be found elsewhere in the Gulf. They then say:
In Iraq’s neighbours Kuwait, Iran and Saudi Arabia,
foreign control over oil development is ruled out
by constitution or by national law.
As if this is inherently good in itself (I’ve worked for the Kuwait Oil Company, and I disagree). Then:
Together with the United Arab Emirates, Venezuela
and Russia, seven countries hold 72% of the
world’s oil reserves. These latter three all have
some foreign involvement through concession
agreements, although both Venezuela and Russia
are currently drawing back from it, following
unsuccessful expansions in foreign investment in
the 1990s.
Whereas the system in place in the UAE is no different from that of Saudi or Kuwait (you’d have thought the authors would know that), and they claim the foreign investment in Venezuela was unsuccesful without saying why. Presumably they take the opinion of Hugo Chavez as truth without further consideration, ignoring the collapse of the Venezuelan oil business that has occurred since he kicked the foreigners out.
Russia signed three PSAs in
the mid 1990s; however, PSAs have been the
subject of extreme controversy ever since, due to
the poor deal the state has obtained from them,
and it now looks unlikely that any more will be
signed.
Again, they don’t say why they are a poor deal, and accept the Russian view (which I described in my own article) as uncontrovertible fact.
Countries with reserves the size of Iraq’s do not
use PSAs because they do not need to and are
able to run their oil industries on far more
beneficial terms.
Here they might as well have said: “They don’t need PSAs because, erm, they don’t.” They never actually explain what this other system is.
But if you look at what has happened since, Iraq has abandoned PSAs and its projects are bogged down in political infighting. The first round of auctions failed to attract the full complement of bidders, and only BP and one of the Chinese outfits were prepared to accept the conditions. And the second round saw a few other companies win projects, few of which have got anywhere. The two Shell projects are on permanent stop-start as various opposition politicians declare should they be elected the contracts would be pulled, meaning Shell won’t really start any serious work (I know this because my ex-boss, and close pal, is one of the project managers on these jobs). And when you look at Russia’s development since they decided against PSAs you realise that the only major project they’ve done anything with is Shtokman. On that, one Russian contracts engineer who I work with recently transferred from their Moscow office to where I now work, and tells me that “never, ever, will he work on that project again” due to the inability of the Russian majority to make a decision and stick to it, even on the smallest issue. And last week I met a senior manager of my company (which is involved in Shtokman in a big way) say they are absolutely exasperated with the project because as soon as something has been agreed, it is reversed before it can even be actioned. He put it as “one step forward, two steps back”. Much as though the Russians disliked the PSA projects, they represent by far the most modern and successful projects in Russia to date, and even if 100% of the profits got exported to Bermuda and the Bahamas, the colossal amount of money that has been spent locally during the construction phase alone has transformed the lives of tens of thousands of Russians in a manner the Russian government could never hope to do.
I don’t think PSAs should be the route in Russia now, but in my experience, the route whereby national oil companies hold a monopoly serves only to stunt development. I’ve worked with the national oil companies in Kuwait, Qatar, UAE, and Russia and they are generally inefficient, massively bureaucratic, have a poor safety and environmental record, and are subject to cornyism, political meddling, poor cash flow, and overstafffing. This appears to be the case in every national oil company with the sole exception of Statoil of Norway. If the Russians don’t want PSAs, fine. But unless they want to keep their oil and gas in the ground for eternity, they’d be wise to develop in another way. And the most sensible way is licensing blocks and taxation of production.
Here’s the link to the piece I was talking about, from 2002. The author is not an energy professional, he’s a PHD in political science; but he appears to be quite respected, and his energy data comes from the U.S. Department of Energy. The article suggests the possibility of massive profits, which I’ve seen quoted in other sources as anywhere from $700 Billion to better than a Trillion. That kind of money is a powerful motivator for war, and the significance of Vice-President Cheney’s pre-war meetings with oil company executives, once the die was cast, escaped few. Maybe the Iraqis thought the U.S. was going to rip them off because so many in the U.S. gleefully and publicly announced their intent to do so, and kept moving facile, greedy collaborators like Ahmed Chalabi around in the provisional government, after he said right out that he intended to do what he could to see a monopoly granted to American oil companies. Let’s remember that Hussein, odious though he might have been, did business chiefly with France and Russia, and all that did an abrupt volte-face once America invaded. The proposed PSA’s would have been for outrageous lengths of time, easily enough to have either sucked the place dry or consolidated control on favourable terms forever. There seems little doubt that their infrastructure badly needed modernization, and of course foreign companies must get something for their trouble, but ordinary Iraqis perceived the American oil giants planned to steal them blind, and there seems no reason to believe that was not an accurate assessment.
I don’t want to get too far off course in Iraq, because we were talking about Russia. Perhaps a good reason PSA’s are impractical for Russia right now is that oil companies can’t afford to throw money around bettering the lives of tens of thousands of Russians in a way the government never could, to use your phrasing. After all, the British government has just imposed the most sweeping austerity measures since the Great War, and the U.S. risks going into economic default (although corporate profits have seen their most rapid 18-month rise since the 1920’s). Perhaps that money might be better spent at home, helping out tens of thousands of British and Americans in ways their governments evidently can’t. But another reason might be that Russians aren’t Iraqis – in fact, they might be the opposite extreme. I can see nationalization not working because the state keeps all the profits: however, that is challenged by the reality of Putin’s having raised real wages quite a few times during his presidential term, although wages in Russia remain far behind the U.K and the USA. I can see PSA’s not working because Russians are suspicious of the west, and may just see skullduggery where there is only sincerity. Attributing sincerity to an oilman is a stretch, I know, but it’s just possible.
The ideal would be an arrangement whereby a western company or companies would modify Russian practices – with their cooperation – in management and environmental consciousness so that their extraction techniques would be more efficient and effective and their administration/organization were transparent and fair. The company or companies would take a nice, but fair, profit for their trouble.
It seems to me the problem is one of trust: investors expect to be offered conditions whereby they can’t make any money, and the hosts expect to be robbed blind if they aren’t watchful. Fiascoes like the U.S. effort in Iraq contribute nothing to the solution, because it seems clear they did intend to rob the Iraqis blind. Perhaps they did a disservice to oil development companies everywhere.
The proposed PSA’s would have been for outrageous lengths of time, easily enough to have either sucked the place dry or consolidated control on favourable terms forever.
There is no evidence whatsoever that this would have been the case. No details of the PSAs ever emerged.
ordinary Iraqis perceived the American oil giants planned to steal them blind, and there seems no reason to believe that was not an accurate assessment.
On the contrary, there is no reason whatsoever to believe that it was. As I said, no details of the proposed PSAs ever emerged (probably because the discussions never advanced that far), which leaves us looking to precedent to make a judgement. Where do you think American oil companies have robbed people blind elsewhere?
Perhaps a good reason PSA’s are impractical for Russia right now is that oil companies can’t afford to throw money around bettering the lives of tens of thousands of Russians in a way the government never could, to use your phrasing.
On the contrary, the western companies are cashed up to the max, and represent the few entities in the world with money to spare (BP excepted). No, they would not spend the money bettering the lives of Russians, I think you misunderstood my use of the phrase. They would spend the money on oil and gas development, the benefits to the locals would be incidental.
After all, the British government has just imposed the most sweeping austerity measures since the Great War, and the U.S. risks going into economic default
But western oil companies don’t rely on government money to fund their projects.
Perhaps that money might be better spent at home, helping out tens of thousands of British and Americans in ways their governments evidently can’t.
You think oil companies should be funding social programmes in the US and UK instead of investing in places like Russia? Seriously?
I can see nationalization not working because the state keeps all the profits:
Yes, and the Russian government (and a lot of Russian companies) has proven it would rather have 100% of a nothing rather than 50% of something. This is a primary reason why Russia remains a lot poorer than it should. Yes, Russians have prospered under Putin, but they should be a lot wealthier than they are.
I can see PSA’s not working because Russians are suspicious of the west, and may just see skullduggery where there is only sincerity.
Actually, it is proven that PSAs don’t work in Russia because the Russian government has time and again proven to engage in skullduggery and use the power of the state to force changes to the contracts as and when it suits them. They’ve made the oil companies look like models of sincerity, which takes some doing.
Fiascoes like the U.S. effort in Iraq contribute nothing to the solution, because it seems clear they did intend to rob the Iraqis blind.
What is this based on, exactly? Until Exxon won a contract last year, no American oil company had any involvement in Iraq, and Exxon have not yet started operations in the country. The only oilfield service provider I can think of which robbed anyone blind was a department of Halliburton which was not its oilfield services arm, and they robbed the American taxpayer blind.
“What is this based on, exactly? Until Exxon won a contract last year, no American oil company had any involvement in Iraq…” According to the reference, the Big Five in oil are Exxon Mobil, BP Amoco, Royal Dutch Shell, Chevron Texaco and Total. The reference says, “Predecessors of these firms controlled nearly all of the Iraq Petroleum Company from the discovery of oil in the late 1920s until nationalization in 1972.” Is this incorrect? Were none of these predecessor firms American, or American majority-owned? The reference also says, “The US-UK companies, keen to regain their former dominance in Iraq…”
As far as oil companies robbing people blind, continuing to receive subsidies worth millions (I can only speak for the U.S. here) while reaping record profits, and using lobbyists to fight for those subsidies’ continuance when they were plainly not needed seems exemplary. Maybe the oil companies needed that money to keep on getting bigger, but at what point are companies like Exxon-Mobil going to be big enough? While we’re on that subject, why does the price of gas stay so high when the price of oil is dropping? I’ve never understood that one, because as soon as oil goes up, the franchise holders almost stumble in their eagerness to change the prices on their signs upwards. Just asking.
The reference says, “Predecessors of these firms controlled nearly all of the Iraq Petroleum Company from the discovery of oil in the late 1920s until nationalization in 1972.” Is this incorrect?
I don’t know. But 1972 was almost 40 years ago, and things in Iraq have changed markedly since then.
As far as oil companies robbing people blind, continuing to receive subsidies worth millions
I suspect you are equating tax breaks with subsidies here. But even supposing they are the same, how does this apply outisde the US?
I’ve never understood that one, because as soon as oil goes up, the franchise holders almost stumble in their eagerness to change the prices on their signs upwards. Just asking.
Don’t get me wrong, the oil companies will fleece you blind and I’d be the first one to try. But that doesn’t mean they always get to fleece you blind.
“I suspect you are equating tax breaks with subsidies here. But even supposing they are the same, how does this apply outside the US? ” It likely doesn’t, but it is the American oil giants Exxon-Mobil and Chevron-Texaco I’m talking about, since the draft oil laws and oil policy which heavily favoured PSA’s were written for the U.S. government, which also controlled everything that happened in Iraq, and whose oil companies had smacked their lips for years at the prospect of getting their hands on Iraq’s oil. That confluence of factors might be totally innocent, but it sounds suspicious, especially based on the gangster unscrupulousness of the Bush government. One of the references I quoted mentioned that era was the first time in history that the president, vice-president and secretary of state were all former energy-company execs, and that the sole other exception had been Bush’s father. Might mean nothing, I suppose; but looking back, it doesn’t seem so.
It likely doesn’t, but it is the American oil giants Exxon-Mobil and Chevron-Texaco I’m talking about, since the draft oil laws and oil policy which heavily favoured PSA’s were written for the U.S. government, which also controlled everything that happened in Iraq, and whose oil companies had smacked their lips for years at the prospect of getting their hands on Iraq’s oil.
This would carry a lot more weight were any American oil companies working in Iraq. If the PSAs were written to favour American companies, it certainly didn’t turn out that way suggesting, perhaps, that the US didn’t have as much say in what went on in Iraq as people might think.
I don’t want you to take this the wrong way Mark, but the nature of some of your comments on the oil business is pretty similar to that of the western press when they write about Russia, which you dislike so much. I don’t think this is intentional, but you seem to accept a certain narrative – one common in the media – without question, a narrative which to somebody who is involved in the oil business is obviously pretty inaccurate. This is pretty much what the media does with Russia and, as I said earlier, every other subject they comment on. You’d not be the first Russia-focussed blog to do this, but in seeking to correct media distortions and nonsense on Russia you seem to reinforce them elsewhere.
Well, maybe you’re right. I don’t know anything except what I read about the oil business, because I have no practical experience at all. I support green initiatives to decrease the use of hydrocarbons, and maybe eventually eliminate them unless we can find a way to make the practice less environmentally destructive, but I’m certainly not going to try putting leaves in my tank, or start riding a horse to work. Actually, I ride a bicycle to work daily, because we only have one car and my wife works farther away than I do, but you see what I mean. I don’t mean to be a hypocrite about it, but the fantastic profits that accrue to the oil industry and the massive political clout they wield would make anyone suspicious. Surely you’ll allow that businesses which see enormous profits, especially at the executive level, sometimes become a little careless about the damage they cause, and a little prone to use lobbying to ram through something that might not be in the interests of the locals. Of those two, I can find numerous examples. One involving the oil business is extraction and sale for profit of cost oil long after the costs have been repaid, simply by fudging the figures for the host inspectors or simply refusing to tell them.
You’re right that Halliburton, strictly speaking, is not an oil company, although it is closely aligned with the industry; and you’re also correct that it has become the corporate whipping boy in the media, which it richly deserves. I’m sure I saw proposed lease terms of 25 years for Iraqi PSA’s, and I’ll try to find it, but I can’t remember now where I saw it. Anyway, perhaps big corporations do a lot of good, but if that’s the case they should work harder at getting the message out, because such examples are rare.
Russia definitely needs to work on its reception to investment, or make a decision to go forward without it, because examples abound of companies – some of them Canadian – who have invested in a big project only to have it nationalized at the last second and lose everything they put into it. There’s the skeleton of a shopping mall outside Vladiviostok that was never completed because the American backer pulled out in frustration. A Canadian mining company whose name escapes me at the moment had the nationalization game run on them and lost all their investment. I know it happens. I’m hopeful that the drive for reform this time means what they say it means, and that it will be successful.
I also realize Canada is one of the worst offenders where environmental messes are concerned, in the form of the tar sands. The ponds around it have to be some of the most toxic fluid on the planet, and the Athabaska and Peace rivers are essentially dead. Anyway, I appreciate your perspective; all I can do is provide what references say, and I don’t expect oil-industry publications to say oil companies are just in it for the money; why would they? If I’m not an oilman, and I’m not, I have nothing to go on but journalism, and I try to stick to reports rather than sensationalist news releases.
“and even if 100% of the profits got exported to Bermuda and the Bahamas, the colossal amount of money that has been spent locally during the construction phase alone has transformed the lives of tens of thousands of Russians in a manner the Russian government could never hope to do.”
Whoa, Tim, you’re not completely honest here. In case of any other business, I would agree with you completely. For example, Volkswagen, building the plant near Kaluga is certainly a great asset to the Russian economy, even if they funneling all profits straight back to Germany. Otherwise, more foreign-produced cars would be sold in Russia, so it’s basically a choice between nothing and something, as you correctly noted. But oil business is vastly different in this respect, being extraction of an exhaustible resource. Let’s go through some basic economics. All the cost of an oil company is the incomes of local businesses and people, am I right? And the rate of profit in the oil industry can’t be very small, otherwise it would be hardly possible for oil companies to send you to such hospitable places as Sakhalin and Nigeria. You’re accusing state companies of inefficiency, overstaffing and cronyism and I can attest to your every word; nobody argues that Exxon or any other supermajor can extract oil with less costs. Rosneft and SurgutNefteGaz may be not the pinnacles of business acumen, they certainly have a hard time coming up with investments to develop new projects, but they proved to be capable of doing so and were profitable in the long run. And given the the inclination of foreign companies to hire foreign specialists and their cost efficiency you can’t argue that it would be more beneficial for locals to let them do all drilling.
On the other hand, the only way to fruitfully cooperate with the supermajors is very precise taxation of oil production, you proposed that yourself. I can’t deny that the Russian oil industry needs the expertise of top companies
Let’s go through some basic economics.
Okay. The Sakhalin II project came in at $24bn. That was the cost for construction. Russian content regulations were pretty strong, and every aspect of the project that I saw employed mostly Russians and mostly Russian contractors. Then there was the renting of apartments offices, and yards, logistics, customs fees, regulatory approval payments, frequenting of restaurants, bars, etc. use of travel agents, translation companies, etc. etc. I don’t know what the split of costs was between onshore and offshore, but even if we say it was 50:50 it leaves $12bn being spent in Russia on goods and services provided by locals. Personally, I think it was probably a 70:30 split in favour of local content, which would mean about $16bn spent locally. Then add that to the Sakhalin I project which came in around $7bn, and we’re looking at about $20bn being invested over about 4-5 years. To take one example, we built an accommodation block for $40m, every rouble of which was spent locally. Is there anywhere in Russia (outside of Moscow) which has seen $20bn of investment in such a period, and raised the living conditions of an entire region?
Then look at the next 25 years of operations, which employs about 80% Russians and about the same percentage of local contracting companies. The Russians are not paid the same as the expats, but they are on about 3 times the national average and in long-term employment, getting vital training as they go (or at least they were until Gazprom took over Sakh II; Exxon at Sakh I still treats them pretty well). I’m not sure what the operating costs which get spent locally, but it is probably in the region of $100m per year on Sakh II, more in a shutdown year. This is all money being earned by Russians, either directly or through their companies.
So even if evey rouble of the profits was smuggled out to Bermuda or the Bahamas, the construction and operating costs would already represent an enormous financial benefit to Russia – and this with the advantage of it going (mostly) into the hands of Russians and not into the federal government (although the local government takes a juicy cut). Large though the profits of an oil company (or any company) are, they are never larger than the operating costs which is why it is not always sensible to fret about where the profits are going. What is being spent on operating is far more important. But in any case, Russia is getting a chunk of the profits from the Sakh I & II projects, and they would have done even if Gazprom hadn’t taken over. Whatever the rights and wrongs of the Sakhalin PSAs, ordinary Russians have done exceptionally well out of them (and in Sakhalin they already refer to 2003-2008 as a Golden Era).
But as I said before, the Russians have a habit (in which they are not alone) of preferring 100% of nothing rather than 50% of something. So having set up their oil and gas industry to recoup 100% of profits for themselves, they’ve ended up with paltry investment and subsequently much lower profits. They could easily have been in the middle of 2-3 Sakhalin II sized development projects by now, instead they’ve stuck all eggs in the Shtokman basket which is going nowhere, coupled with a lot of fluff about Yamal. Try as I might, I can’t see how ordinary Russians are benefitting from this compared to how they did on the Sakhalin PSAs.
You’re accusing state companies of inefficiency, overstaffing and cronyism and I can attest to your every word; nobody argues that Exxon or any other supermajor can extract oil with less costs.
Actually, everyone does. One of the benchmarks oil companies use is the average extraction cost per barrel across all their operations, or broken down by region. Exxon always comes out on top, followed by BP. Shell comes 3rd or 4th, with Total nearby. The national oil companies are miles more expensive. I’m not sure this data is in the public domain, I think I saw it in The Economist back in 2005. But it’s pretty easy to find in the oil companies because they use it to benchmark themselves against their peers. In fact, when I worked for KOC one of their key objectives was to get their extraction costs down to the level of a western major, and this was in a place where oil can be extracted by sticking your finger in the ground. National oil companies, with the exception of Statoil, are far more expensive to run than the western supermajors. (Not that they are not hopelessly inefficient, overstaffed, and chock-full of cronyism, but not to the extent of the nationals and they are free from political interference from the mother country).
And given the the inclination of foreign companies to hire foreign specialists and their cost efficiency you can’t argue that it would be more beneficial for locals to let them do all drilling.
Yes I can. Parker Drilling holds the Sakh I drilling contract, KCA Deutag the Sakh II drilling contract. Their workforce is heavily Russian and subcontractors almost all Russian, and they conduct their operations safely and efficiently. I haven’t had much experience with the Rosneft drillers, but the derricks I saw in North Sakhalin were sitting in lakes of spilled crude with BOPs which belonged in a museum and the only drill crew I met had a foreman with missing fingers. So I think a rather convincing argument could be made that Russians are far better off with foreign companies conducting their drilling operations.
“National oil companies, with the exception of Statoil, are far more expensive to run than the western supermajors.”
Hmm, isn’t that exactly what I said here: “nobody argues that Exxon or any other supermajor can extract oil with less costs”? Either you misunderstood me, or my knowledge of English isn’t near as good as I thought.
In the above post, you write at length about the benefit of Sakhalin II to locals, thanks for the interesting information. But that wasn’t my argument: of course any investment project leaves tons of money in the pockets of local employees (and hence local business, the multiplier effect), regardless of who carry it out, BP or Rosneft. What I implied is that an oil project is more beneficial to the country if executed by an ineffective national company than by foreign supermajor. Don’t you agree?
Hmm, isn’t that exactly what I said here: “nobody argues that Exxon or any other supermajor can extract oil with less costs”? Either you misunderstood me, or my knowledge of English isn’t near as good as I thought.
Your English is great: my understanding isn’t. My apologies.
What I implied is that an oil project is more beneficial to the country if executed by an ineffective national company than by foreign supermajor. Don’t you agree?
Not at all. The complete opposite, in fact. An ineffective national oil company usually does more harm than good. PEMEX and Saudi Aramco are goood examples of this. The most effective method of oil and gas developmeent is licensed blocks and taxing production, with the government staying well away except for running the auction, collecting the taxes, and implementing the regulatory system.
I believe kovane’s point (he can correct me if I misinterpreted) was that, regardless of side benefits accruing to local citizens from foreign-owned projects (and Tim certainly does make a good point about all the hotels and restaurants and bars, etc., sounds like everyone is having a great time there, good for them!); but anyhow, it is the job of the Russian FEDERAL government to stick up for its own interests, namely FEDERAL revenues, which it can decide where and when to apply country-wide, and not have foreigners making those decisions for them. And the federal govt no doubt feels it can get more money long-term out of a nationalized project, even if some of the management and production methods might be less efficient or less advanced than those of a foreign-run project, and even if some unfortunate employees lose a few fingers in the process. I would also add that the federal government probably fears the POLITICAL clout that foreign companies might start to exert on the government, via lobbying, bribes, etc. So best to keep the foreigners under tight control. That has always been the Russian way, since the times of Peter the Great!
Tim certainly does make a good point about all the hotels and restaurants and bars, etc., sounds like everyone is having a great time there, good for them!)
We did have a great time. 🙂
And the federal govt no doubt feels it can get more money long-term out of a nationalized project
Without a doubt. What the Russians (and everyone else) is doing is not irrational, but I do think it is mistaken.
I would also add that the federal government probably fears the POLITICAL clout that foreign companies might start to exert on the government, via lobbying, bribes, etc.
From what I have seen thus far in the oil business, it is always the government who wields the clout over the oil companies and demands the bribes, not the other way around with the oil companies offering the money. But that’s only what I have seen, and my experience is limited. Certainly it was that way in the Middle East, Russia, and Nigeria. But I believe in Azerbaijan, the government is effectively a department of BP, and BP dominates everything. I don’t consider this to be a healthy state of affairs.
About PSA, they can be good or bad according to their actual content, they’re not inherently good or bad. The only inherent bad point of PSA I can think of, is when a country wants to develop his own oil/gas extraction industry. Assigning all fields to foreign companies will left the local ones without much to do, missing the chance to develop. Russians aren’t so wrong to be suspicious on PSA, look at the recent attempt by Exxon Neftegas to raise the operating costs by 120% and cut production figures. The attempt failed when rumors about a possible replacement of the operator began to circulate.
Re. Shtokman, to my knowledge it has been put on hold due to diminishing gas prices. It doesn’t make sense to spend a lot of money to produce more gas that will make gas even cheaper.
Russians aren’t so wrong to be suspicious on PSA, look at the recent attempt by Exxon Neftegas to raise the operating costs by 120% and cut production figures. The attempt failed when rumors about a possible replacement of the operator began to circulate.
I assume you mean the episode in January 2008 when Rosneft declared it couldn’t afford to meet its part of the budget and the Russian government refused to sign off the operating budget unless Exxon made up the difference. Exxon demobilised the construction crew of the Odoptu OPF and prepared to abandon the expansion, whereupon Rosneft magically found the money and paid its share.
Actually, it might have been January 2009.
No, I refer to a more recent episode started in Aug. 2010. Exxon Neftegas presented a long-term operation program, cost estimates for the full development of the field until 2055. A significant reduction in production is envisaged and at the same time spending rose from the planned volume of $42.8 billion to $95.3 billion. This is a growth of 120 percent …compared to the costs envisaged in a feasibility study provided for the signing of the Production Sharing Agreement. link.
Then rumors began about Exxon Neftegas replacement as Sakhalin 1 operator and “magically” Exxon Neftegas backtracked link.
Unlike you I don’t work in the oil/gas extraction industry, but to me raising the expected costs by 120% while revising down the production, and backtracking so soon looks like a botched attempt at cheating. Or maybe it’s a common thing for Western oil company to make such egregious mis-estimation on expenses.
Unlike you I don’t work in the oil/gas extraction industry, but to me raising the expected costs by 120% while revising down the production, and backtracking so soon looks like a botched attempt at cheating.
Not to me it doesn’t. It doesn’t surprise me in the least that costs are rocketing beyond what was expected when the PSA was signed in the mid-90s. The Sakhalin II construction went from an $8bn estimated cost to $24bn final cost, a 300% increase (partly due to ever-changing regulatory compliance). And production has fallen by more than expected at Sakh I, that happens sometimes. I imagine Exxon backtracked because it is still a profitable project for them, and serves to prove for the millionth time that it is governments who can force the hand of oil companies, not the other way around.
But if you want to talk about cheating, that adequately describes the Russian government’s decision to strip ENL of the right to export gas under the terms of the PSA in order to maintain Gazprom’s monopoly. That probably didn’t do much for the consortium’s financial planning.
I hope the verbal combat doesn’t discourage either party in the exchange, because this is an eye-opening discussion, extremely interesting.
Not at all, this is a great discussion. It is not every day that we get an actual oil industry specialist explaining things to those of us (most of us, probably) who work in other specialties and have no clue how the oil business actually works. I am happy Tim is taking the time to educate us, but also a little surprised that his company allows him to participate in blogs. I do sense, from Tim’s comments, that he is politically on the conservative side and is pro-business and believes government should stay out of the way (maybe a neo-con?) That doesn’t invalidate anything he says; but he should keep in mind that other people (especially Russians) have a different political philosophy and don’t automatically assume that government is bad thing. Well, at least Tim is in favor of government regulation, so that means he isn’t a complete Randite! (I mean Ayn Rand, of course.)
I am happy Tim is taking the time to educate us, but also a little surprised that his company allows him to participate in blogs.
I get away with it by writing only about stuff in the general sense and using information which is already in the public domain. Some anecdotes I use from my experience, but that I usually skimp on the details or refer to an event which happened some time ago when I was working elsewhere. But I have to be careful, and when I was in Sakhalin I refrained from publishing some posts criticial of Russia’s oil and gas policies in case somebody took exception to it. And I probably include more details in blog comments than I do on my own blog, because whereas my employer might glance through my blog, they are unlikely to be trawling through comments.
I do sense, from Tim’s comments, that he is politically on the conservative side and is pro-business and believes government should stay out of the way (maybe a neo-con?)
Pretty much. A government is vital for providing law and order, a judicial system for contract disputes, upholding property rights, and implementing robust HSE legislation. And they also have a duty to maximise the benefit their country’s citizens receive from their natural resources. And I am pro-business, but I dislike the manner in which excessive regulation has enabled huge corporations to dominate at the expense of small and medium-sized businesses (huge corporations often being the only ones who can afford compliance).
But yes, I am generally a free-marketeer, economically conservative, and would prefer the governments to be a lot smaller and keep their noses out most of the areas they now poke it into. But socially, I am very liberal. People should generally be allowed to do what they like provided it doesn’t harm others, and that includes taking drugs.
It doesn’t surprise me in the least…
In fact it’s not surprising at all. It is a common scheme private companies use to steal money from governments, not just in PSA. First they win a tender from the government, offering the lowest project cost, then they start the project and after a while “realize” that more money is needed for the project to go on. At this point there are two possible outcomes:
1) the government bows to the request, so after a while the company asks for more money and so on. The project is never realized and costs skyrocket.
2) The goverment refuses and threats to kick out the company without paying any further money and taking back any money has already been given. Or, as you put it, “prove for the millionth time that it is governments who can force the hand of oil companies”. The project goes on and costs don’t raise.
But if you want to talk about cheating, that adequately describes the Russian government’s decision to strip ENL of the right to export gas under the terms of the PSA in order to maintain Gazprom’s monopoly.
Basically, you rightly call government cheating “cheating”, but company cheating isn’t cheating to you. How do you call it, a “bussiness model”?
It isn’t cheating if the cost increases can be justified. I have not seen any evidence that the increases Exxon referred to were part of a scheme to cheat the government and not genuine cost increases. From my experience on the Sakhalin projects, ever-changing, vague, and contradictory regulations were responsible for many of the cost increases, and it is therefore only fair that these should be recovered.
But yes, I agree: what you describe does happen in the oil business and many of the cost increases are the result of the oil company having no desire to control its expenditure. The Kashagan project is a good example of that and, to be fair, a lot of the Sakhalin II project was like that as well.
Actually, that this happens is a good enough argument as any for the government not to be involved in the development projects. Let the oil companies buy the license and fund the projects themselves, it would at least give them an incentive to control the costs and wouldn’t cost the government a penny.
Exxon Neftegas wasn’t able to justify the cost increase, and in fact it backtracked. As for the changing regulations, they have nothing to do with cost increases. The expenses proposed by ENL refer to future costs (up to 2055), not the past one
Exxon’s evaluation is based on the industry inflation indicators provided by the CERA agency and gives no clear-cut idea on the causes for cost increases, the paper said.
An ExxonMobil spokesman declined to comment on the project’s details, which could make Sakhalin-1 the most expensive project in the Russian oil sector, the paper said.
link.
In other words, give a private company the opportunity to take a free ride with government owned money and you get a bankrupt country and a crappy company.
Fair enough.
<emRe. Shtokman, to my knowledge it has been put on hold due to diminishing gas prices. It doesn’t make sense to spend a lot of money to produce more gas that will make gas even cheaper.
Yes, usually the lack of progress on Russia’s oil and gas projects is said to be a deliberate strategy based on the economics of the gas price. I guess those offering the excuse hope, probably correctly, that most people don’t realise that the development of mega-projects in the oil and gas business are not based on the price of gas at the FEED stage.
To my knowledge, it hasn’t been put on hold at all. But the Russians have decided the Norwegians don’t know as much about offshore arctic oilfield development as they do and have instructed them to explore a different technical solution, one which is not recommended and has never been attemped before. This new solution will delay the project by at least a year, cost twice as much, and come with numerous additional safety concerns. That’s not to say it is not do-able, but no explanation has been offered as to why this new solution is being promoted and why it has been introduced so late in the day. Gazprom is merely saying “We’re in charge, do as we say”, but I don’t think it takes much imagination to suspect there are vested interests behind this new move.
That’s the major obstacle right now. Others include every single decision or attempt to move forward as being suspected by the Russian partners as treasonous, resulting in round after round of pointless clarifications and second guessing by people who have been promoted on something other than merit. Then there’s the issue of some favoured Russian company popping up out of nowhere declaring it can do the job far cheaper, even though it doesn’t have the facilities to do half the job, resulting in yet more delays as the various partners try to convince the wary Russians that they really have executed projects before and do actually, as much as anyone, know what they are doing.
Funnily enough, the above pretty much describes the management of the Nizhnekammsk refinery project, which ground to a halt with a decimated work scope sometime in 2008, a year after it kicked off with great fanfare.
Where do you come up with the idea that oil companies are big meritocracies? The wave of mergers in US petroleum industry had the effect of stamping any of that out. There are positives and negatives to having state oil companies and private ones (for state the positive is on the state budget, and thus the government is able to pump money into the rest of the economy). Since none of the promises of the free market liberals were kept, it is easy to see why the reaction was to build a bigger state companies.
Where do you come up with the idea that oil companies are big meritocracies?
I don’t. But they are more so than the state owned and operated companies.
Shtokman has been officially put on hold on February by Gazprom (which has a 51% share on the project), Statoil and Total (that together have the remaining 49%). Whatever the reason, either the inability to go on with the project as you claim, or a contraction of gas demand as Gazprom, Statoil and Total have officially stated, I find that it is a sound decision. Due to the financial crisis European gas markets contracted, while the USA seems to be happy with shale gas, and there is no sign things will improve in the near future.
But the Russians have decided the Norwegians don’t know as much about offshore arctic oilfield development as they do and have instructed them to explore a different technical solution, one which is not recommended and has never been attemped before.
If I understand you correctly “them” are the Norwegians. So, you are saying:
1) the Russians suppose to know more about offshore arctic oilfield than the Norwegians;
2) the Russians ask the Norwegians for a different technical solution.
But the logical consequence of 1) would be
2a) the Russians have no need to ask anything to Norwegians and develop a different technical solution.
“But the Russians don’t like the solution proposed by the Norwegians, so they asked them to explore a different technical solution, one which is not recommended and has never been attemped before” sounds more logical.
I don’t think it takes much imagination to suspect there are vested interests behind this new move.
As retired Italian politician Andreotti once said “To think maliciously is a sin, but most of the time it gives you the right guess”. The problem I see with your way of reasoning is that you “think maliciously” only about governments and government related companies, never about private companies.
Shtokman has been officially put on hold on February by Gazprom (which has a 51% share on the project), Statoil and Total (that together have the remaining 49%).
What is your source for this? From what I can gather, the partners are analysing bid documents and various FEED activities are still underway.
Due to the financial crisis European gas markets contracted, while the USA seems to be happy with shale gas, and there is no sign things will improve in the near future.
Right, but putting projects on hold during the FEED stage due to the prices at the time is not inherently sensible. If the project is not viable long term, then it should have been canned prior to FEED. I was speaking with a Russian contracts engineer last night who until 2 months ago was working for the Shtokman Development Company, and he was of the opinion that the Russians have decided they do not want an LNG capability and are going to concentrate on meeting their pipeline committments. I won’t comment on whether this is a good idea or not, but it would be sensible to decide a strategy and make clear decisions to achieve them. This is not happening with Shtokman.
If I understand you correctly “them” are the Norwegians. So, you are saying:
1) the Russians suppose to know more about offshore arctic oilfield than the Norwegians;
2) the Russians ask the Norwegians for a different technical solution.
No, the Russians brought the Norwegians on board because of their expertise in offshore artic oil and gas developments. The Norwegians advised on a certain solution, which is now being second-guessed. Again, I won’t comment on whether the Russian solution is a better one or not, but the decision to change the concept came very late in the day and the reasons for it are not clear.
The problem I see with your way of reasoning is that you “think maliciously” only about governments and government related companies, never about private companies.
This is an inaccurate description of my reasoning. I do have criticisms of private companies, including oil companies. But in the context of this discussion, my experience would point to some vested interest being behind what is a rather opaque decision. From what the Russian contracts engineer was saying, I am ready to believe it will be used as a mechanism to cancel the project, citing excessive costs, as the Russians change their entire development strategy.
Perhaps “put on hold” isn’t the correct term and I should have used another one. Here is what Reuters reported
Feb 5 (Reuters) – Gazprom (GAZP.MM), Russia’s state-run gas export monopoly, said on Friday it had agreed with joint venture partners Statoil (STL.OL) and Total (TOTF.PA) to delay their Shtokman gas project until 2016. [ID:nLDE6141NX]
Gazprom said the postponement was a result of major changes in global gas markets.
link.
About the second point, do you mean that the second solution is developed by the Russians?
That decision may be opaque, but to me it looks like the Russian government is trying to develop his domestic oil industry. Assigning the fields that are difficult to develop without favoring the national companies (both public and private), these fields would be assigned to foreign companies, and the Russian ones won’t get any expertise. Obviously, a lot of mistakes will be made in the process.
About the second point, do you mean that the second solution is developed by the Russians?
No, Statoil and Total have effectively been instructed to pursue a solution that Gazprom has envisaged.
Continuing with the discussion of PSA’s, here’s a reference that suggests this type of arrangement is not appropriate for Iraq because the PSA model is designed for countries with uncertain prospects, high development and operating expenses and small potential reservoirs – none of which is true for Iraq, or anywhere else in the Middle East, comes to that. The author further suggests Iraq stands to lose between $74 Billion and $194 Billion – conservatively estimated and factoring only for known fields – over the lifetime of the contracts, said here to be 40 years although the author appears uncertain. Another drawback, from the author’s viewpoint, is that PSA’s customarily are exempt from any new laws that follow, so that another administration cannot reverse them.
I understand, and agree, that a company must protect its profits, and nationalization after all the heavy lifting has been done would be unfair to the company. Even if the cons listed here are all inaccurate, the site provides a good explanation of PSA’s versus PSC’s; the author is an oil-industry professional on the finance side. Toward the end, he offers some other options for Iraq – using oil futures as collateral to borrow money, offering lucrative but fair short-term contracts such as risk service contracts, and so on. It’s an interesting site, and I hope at least some of it is accurate because it’s easy to understand. It also provides better reasoning than “Iraq doesn’t need PSA’s because….ummm….because they don’t need them”.
He points out that PSA’s, although the preference of the oil industry, are only used in about 12% of production, and I’ve seen that same figure quoted elsewhere. The reasons given are that those cases more closely fit the profile – high development costs, small potential reserves, etc…
This site suggests the PSA’s would have been for up to 30 years, based on the draft oil submitted following BearingPoint’s report, written before the invasion. It draws heavily on Muttit’s work, which you’ve already largely condemned, so you might not take it very seriously, and it is admittedly a traditionally liberal site. However, I wanted to provide some substantiation for the period that would have been covered by PSA’s had the draft become law – which, of course, it did not. This site also suggests the company would have been able to recoup 60 to 70 percent of revenue, while 40 is the customary standard. An oil-industry professional defended the higher figure based on the dangerous environment of operating in Iraq: based on the time the article was written, this would seem to have some merit.
Finally, here is the draft oil policy for Iraq, as written by the Future of Iraq Project for the U.S. government. It seems odd that the Iraqi government did not see it first, although that might not have mattered since it was a hand-picked-by-the-U.S. government at the time anyway. That notwithstanding, the policy does seem quite bullish on PSA’s for Iraq, starting on pg. 26. It specifically mentions that in joint-venture projects, the private company will be the majority shareholder. Interestingly, pg. 27 includes a section entitled “Lessons from the Russian Experience”, which tends to support some of your assertions, Tim. It also mentions, however, that in some ventures the state received returns of only 3 cents on the dollar. If it explained why, I missed it. It also would have been interesting to see all the pages that were redacted for proprietary content.
Continuing with the discussion of PSA’s, here’s a reference that suggests this type of arrangement is not appropriate for Iraq because the PSA model is designed for countries with uncertain prospects, high development and operating expenses and small potential reservoirs – none of which is true for Iraq,
Iraq doesn’t have high operating expenses and uncertain prospects?!! The security situation is dire, and the opposition parties are threatening to veto any contracts signed by the incumbents.
Another drawback, from the author’s viewpoint, is that PSA’s customarily are exempt from any new laws that follow, so that another administration cannot reverse them.
Well, yes. Contracts generally only work when they cannot be rewritten as and when it suits either party.
This site suggests the PSA’s would have been for up to 30 years, based on the draft oil submitted following BearingPoint’s report, written before the invasion.
Every oil and gas project has a life-cycle of 25 years, which represents the maximium any engineering company or operating company is prepared to guarantee the equipment for. Usually, this gets extended to 40-50 years, but 25 years is the norm for any project and the maximum period which is considered in the project planning. So most PSAs will consider a project life of 25 years, more than that would be unusual. However, 25 years would be expected.
The reasons given are that those cases more closely fit the profile – high development costs, small potential reserves, etc…
This was not true with Russia, and it would not be true with Iraq. In the case of both, the risks are high, despite the enormous reserves. Russia presented high political risk (and still does), Iraq presents a security risk..
“Iraq doesn’t have high operating expenses and uncertain prospects?!! The security situation is dire…” I suspect we could go ’round the mulberry bush forever on this one, because it’s kind of a chicken-and-egg thing in the context that the dire security situation is an artificiality; an atypical environment directly attributable to the American invasion. Were it not for that, PSA’s (according to the previously-discussed criteria) would not be applicable, and were not the contracts previously used with Russia and France. The conditions at the time the article was written are not the normal operating conditions in Iraq, and the PSA proposal assumed no such environment – it was written with a business-friendly postwar state in mind. I realize a company has to go with what the conditions actually are and not what might or might not be typical, but the draft oil policy assumed the environment would be peaceful and that could get on with it soonish.
“Well, yes. Contracts generally only work when they cannot be rewritten as and when it suits either party”. You know what I mean. Paul “Jerry” Bremer (what the hell is it with his name, anyway? I mean, if you’re going to give someone a nickname, isn’t it normal for it to be something like “Stretch” or “Tex”? Why give him a nickname that’s simply another common patronym?) was running Iraq, and the government consisted of hand-picked expats, some of whom (Ahmed Chalabi) would do anything for a buck or had already promised juicy contracts to American oil companies before the war even started. A contract signed between that government and oil companies could hardly be expected to be in the interests of the Iraqi people. In fact, the voucher program proposed was almost a carbon-copy of the scheme that Yeltsin’s government used to sell off Russia’s assets for a fraction of their value, and resulted in Khodorkovsky’s control of Yukos.
“Every oil and gas project has a life-cycle of 25 years…” I didn’t know that. It seemed to me that would be long enough to completely empty a reservoir, but I suppose not, considering how long the Saudi wells have been operating. I further suppose – but don’t know – that it would be counterproductive to empty the reservoir as quickly as possible. Anyway, no further disagreement from me on that point.
I’ve already addressed the last point; the security environment in Iraq is atypical, resulting from the invasion and a cascade of errors following the initial days of the occupation. What you say is quite probably true now, but was in no way envisioned by the principals who prepared the report and recommended PSA’s. I’ll stipulate to oil companies not necessarily being in business simply to steal, although I remain deeply suspicious of American oil monopolies’ motives for reasons I’ve already explained. The risks might be high, but the potential for profit was and is almost incomprehensible. I didn’t really understand the financial estimation in “The Heart of the Crisis”: if they say they could bring a barrel to market for less than $2.00, does that mean the remainder (at $70.00 a barrel!!!) would be all profit, or are there other expenses?
As far as Russia goes, our original subject, I just don’t know enough – certainly not enough to argue with someone who’s worked there, since I was on vacation every minute I spent there except my original visit, which was business after a fashion but not competitive.
What you say is quite probably true now, but was in no way envisioned by the principals who prepared the report and recommended PSA’s.
Yes, you have a point here. I have no idea why anyone would think PSAs would be suitable for a Saddam Hussein controlled Iraq. I missed that point earlier.
’ll stipulate to oil companies not necessarily being in business simply to steal, although I remain deeply suspicious of American oil monopolies’ motives for reasons I’ve already explained.
What American oil monopoly? I know Exxon, Chevron, and Conoco cooperate on projects as much as the rest of them, but I don’t know what monopoly you refer to.
I guess I misunderstood the meaning of “monopoly” as it applies here. I don’t want to get to the point of saying I’m suspicious of Chevron and Exxon just because they’re huge and obscenely rich, but for my knowledge level of the oil business that’s about what it amounts to. It just seems to me any company that is self-evidently good for the country in which it’s based, on a broad front, shouldn’t need to hire lobbyists to push its business interests and manipulate the laws in its favour (such as being permitted to drill in state parklands, that sort of thing) – and again, I’m only talking about American oil companies here; I don’t know much about BP beyond the recent spill, and nothing at all about Total or Royal Dutch Shell.
There’s been at least one instance in which Russia hired the Norwegians (if memory serves) and left the operation totally to their best judgment, although it had nothing to do with oil exploration – the raising of Kursk.
Oops; I checked – it was the Dutch, Mammoet/Smit, which is actually an international company anyway, though based in the Netherlands. But the principle holds. I’d bet Russia had the capability to do it or could have developed it fairly quickly, but this was seen as a better alternative.
It just seems to me any company that is self-evidently good for the country in which it’s based, on a broad front, shouldn’t need to hire lobbyists to push its business interests and manipulate the laws in its favour (such as being permitted to drill in state parklands, that sort of thing)
It’s a bit more complex than that. They are not inherently good in all aspects, just as they are not inherently bad in some aspects. The same can be said of governments. Oil companies need to be regulated and their behaviour can be pretty outrageous, and they will use methods both fair and foul to better their own interests, but most of the criticism against them doesn’t hold water. Like Russia, there is much to criticise anyway without making stuff up, which is what often happens (e.g. the claims that they were influential in the decision to invade Iraq).
So oil companies should not be trusted, but then again nor can governments. And government oil companies especially cannot be trusted. But when performance and net good is considered, IMO the private oil companies are much better than the state-owned ones on almost every measure.
I’d never heard that Russia was influential in the decision to invade Iraq – that’s a new one, and I recall America was quite put out with them for arguing less haste in rushing to a decision and thereby preventing (along with the much-despised France) them from getting UNSC backing. I remember the ridiculous allegation that Saddam was hiding in the Russian Embassy in Baghdad, shortly after that city’s falling to the Americans – something floated by the Lebanese Parliamentary speaker and based solely on the “suspicious” visit of Condoleezza Rice to Moscow, followed by the Russian Ambassador’s return to Baghdad. This was supposed to be some kind of “deal” between Moscow and Washington. Well, if that’s the last time somebody who practices politics for a living tells an outrageous falsehood that is seized upon by the press, we’ll all be lucky.
I don’t think we’re as far apart as we were when we started, and for my part I have learned a great deal – thanks for that.
I’d never heard that Russia was influential in the decision to invade Iraq
Ah no, I meant the oil companies were blamed, not Russia. I did not write very clearly.
Ah. Well, on the face of it that seems crazy, because Russia and France already had a strong presence in Iraq, and an invasion – assuming it was successful, which was not really in doubt – would only have increased competition.
I have to say something about international companies which are “based” in the Netherlands. Most of these companies only have a postbox in my country because our tax regime is highly favourable towards business. Most of the international companies are not here at all (not physically). A year ago the American government put The Netherlands on a blacklist as “tax paradises” like the Kayman Islands or a few of the English islands. The Dutch government got quite pissed and in the end the US apologized and removed us. It is true though. U2 has a “company” as well in Holland but it is an empty shell, used by Bono to circumvent high taxes in America and the UK.
Another observation: Russian companies increasingly find their way to our country (registering a company here takes a day) but stay in Russia. In this way, they fall under the Dutch law and not under Russian law (in a number of aspects). Next, The Netherlands is one of the main investors in Russia but it is actually Russian money reinvested by offshore companies by Russian oligarchs.
And indeed, it was Mammoet/Smit which did the Kursk thingy. Our PM (Balkenende) immediately offered his support and the Dutch government paid for the whole operation after which the Russian government paid ours back ofcourse. This whole affair was one of the few PR drama’s for Putin btw, he refused to return from his holidays
Very interesting, Nils. The stuff I learn on this blog – my business is by nature not competitive, but a couple of years going on like this and I might learn enough to be dangerous in business. I thought hiring an outside contractor looked good on Russia, it hurts their image to be secretive and overly nationalistic, although of course there’s no need to go overboard and sell everything for a song. Oddly enough, when a country like Russia behaves stupidly or does something against the national interest, it often translates to increased popularity in the west; Russia was seldom so popular with the western press as it was during the Yeltsin years, when it did itself financial damage that took years to recoup, and the primary thieves remain popular in the west as ‘free-thinking liberals”.
The Japanese look upon business as a sort of warfare, and so it is; companies constantly strive to better their own terms, and that advantage often must translate to a disadvantage for someone. Countries that offered up their resources for stripping would most assuredly see them stripped, and get little sympathy afterward if they cried that they’d gotten a bad deal. You have to look after yourself, others would say. Indeed. But, as Tim has pointed out and well substantiated, National models are among the most inefficient, graft-ridden developmental vehicles ever conceived. There must be a happy medium, in which international development is encouraged and rewarded, but not to the extent the country is held up as a trusting patsy, to be mocked and disinherited.
It seemed to me that would be long enough to completely empty a reservoir, but I suppose not, considering how long the Saudi wells have been operating.
They don’t actually empty the reservoirs, they extract only a percentage, and this gets called a recovery rate. I’m not entirely sure what it typically is (I try to avoid anything upstream of the drill floor, my own area of work is engineering and construction), but I think it’s about 20-30% (but can be higher). Beyond that, the oil becomes too expensive to extract and they move onto the next field. The recovery rate can be increased with techniques such as gas lift and water injection, and will vary from reservoir to reservoir.
But as technology improves, fields which were once depleted can become economically viable again. A few decades ago, recovery rates were 10-20%, but with new techniques and better reservoir management more can be squeezed out. This is what Yukos did with the old Soviet fields. They had been very badly managed by the Soviets because they wanted to increase production at the expense of the reservoir integrity, so they overinjected water. They also didn’t have the most modern techniques available, so Yukos got hold of these and increased production from underperforming fields. Pretty sensible, if you ask me.
Anyway, what you find in the North Sea is the supermajors, which tend to have large overheads, pull out of a field once the production rate starts to fall, and smaller outfits take them over to squeeze the remaining available hydorcarbons out. The life of a reservoir can vary, but 25 years is not uncommon. And the idea is to get as much product out whilst retaining the integrity of the reservoir. No western major would contemplate sacrificing the reservoir integrity for short-term production gains, that is a huge no-no in the business (mainly because it will destroy the financial basis of the project, which investors and shareholders don’t like). But nationalised companies don’t have such restrictions and politicians can simply order their company to increase production regardless of the effect on the reservoir integrity. I’m not saying they all do this, but some do, and the temptation to boost government revenues has been proven to be a strong one.
I didn’t really understand the financial estimation in “The Heart of the Crisis”: if they say they could bring a barrel to market for less than $2.00, does that mean the remainder (at $70.00 a barrel!!!) would be all profit, or are there other expenses?
It would be $68 profit. But the risk in an oil and gas development is the enormous up-front capital cost, which usually runs into the billions. There are very few entities outside the western majors who can fund these sort of developments (national oil companies are notorious for having terrible cash flow problems, leaving them unable to finance their own projects) which allows them to cherry-pick the very attractive projects. Some people might call this exploitation, but if they are the only companies who can splash $10bn on a new facility, why should they not make a killing once its paid for? Oil and gas companies are in business to make money, they’re not charities. And if governments don’t like the thought of western companies making huge profits then they have the option of not allowing them to, which usually results in the development not going ahead. I suppose one could argue that the western majors should execute these developments anyway and not demand such huge profits, but they are the ones taking the risk and I don’t see why they should be obliged to accept less than the market rate any more than Audi should be obliged to sell me an R8 at a price I do not find obscene.
Your belief in a free market is admirable and can only be equaled by that of “The Economist”. And comparing oil and R8 is such an apt rhetorical device. Never mind that without R8, the worst case scenario is that my mistress will leave me for Bernie Ecclestone, and without oil, a world-wide famine is an inevitable reality. And the world economy is called “an oil-based economy” for nothing, it’s just more poetic this way. Besides, the oil market clearly has all the indications of perfect competition: no participant is big enough to influence the price, zero entry and exit barriers, etc. You described how big oil companies have billions to invest into new projects, but they surely can’t find a measly couple of hundred millions to buy local officials inside out, the word “bribery” itself is unknown to them. All in all, the market deemed oil companies worthy and our goal is to preserve this one of the last remaining corners of perfect competition and immaculate business ethics.
Tim, maybe it’s time to go easy a little on the never-erring market sermon?
Tim, maybe it’s time to go easy a little on the never-erring market sermon?
Why, when the constant refrain from almost every country is one of resource nationalism, despite the evidence that the free-market approach to oil and gas development produces better results on almost every measure? It’s hardly like there is an overabundance of free-market advocacy regarding the oil business.
“despite the evidence that the free-market approach to oil and gas development produces better results on almost every measure”
Better results for whom? The Big Five? I never doubted that.
“It’s hardly like there is an overabundance of free-market advocacy regarding the oil business”
Gee, I wonder why it is so. Here’s a bold thought: maybe it’s because history gave a lesson or two regarding that.
Quote: “According to consulting firm PFC Energy, only 7% of the world’s estimated oil and gas reserves are in countries that allow private international companies free rein. Fully 65% are in the hands of state-owned companies such as Saudi Aramco, with the rest in countries such as Russia and Venezuela, where access by Western companies is difficult.”
There would be more advocates for the free market if they hadn’t screwed everything up in the former Soviet Union so badly. The world – particularly China and Iran – were watching closely.
Free markets need the rule of law, property rights, and an independent judiciary to succeed. None of these was present in Russia.
Free markets have none of those things. Anyway, it was the neoliberals who pushed the new Russian constitution when they should not have (at a heavy cost of human lives).
No, free markets don’t have those things. But countries need them in order for a free market to work.
I should add that none of those things existed because the liberals acted to dissolve the state completely. The ideas behind nation-building have changed radically after the Cold War (see Iraq) since West Germany was built with the aid of Nazis responsible for some of its most infamous policies (like Lebensraum).
Very good point, cartman. The United States has approached “nation-building” in a completely different way, depending on the target. The famous “double standard”. Germany and Japan after WWII were treated as respected adversaries that needed to be re-built (albeit under U.S. military occupation; to this day, Germany is not really a sovereign country where its military is concerned). Why? Because they were capitalist countries, and U.S. was already planning its great crusade against communism. American approach to former Soviet Union and Iraq was not so much one of “nation-building” as it was pure colonialism: “socialist” countries only worthy of subduing and looting of resources. Putin regime’s re-nationalization of Russian mineral resources was key to restoring political sovereignty of Russian state. Tim can argue, and might even be correct, that private companies could do the job better (I mean, the actual job of extracting oil), but that’s not the point. Politically and fiscally, the only option at the time was re-nationalization. Otherwise, Russia would have turned into something like Iraq: American colony in which citizens are tortured and murdered, and women raped at will of occupiers.
This is a new one: Russia has no choice but to grant monopoly offshore developments to Rosneft and gazrpom in order to prevent Russian women from being raped by Americans.
Okay, I agree with that as far as it goes, but I’d argue a great deal of the risk is taken out of it now – modern survey equipment will give you a pretty good idea if there’s oil there, if there’s enough to make it worth the cost of development, a pretty good guess of its quality based on the surrounding geology and the most likely method of getting at it. A lot of the risk now is political, and that’s largely because it’s a finite resource and there are few second chances.
You’d be surprised at how many appraisal wells turn out dry. You never really know what’s down there until you drill, and you’re never quite sure if it will be a good producer until you start production. The technology has made it easier for sure, but the exploration risks are still there.
Oh, and I never said the market was perfect. You added that all on your own. I’m merely saying that despite its imperfections, it is the best system we have available.
Tim , I truly enjoyed reading your comments . Perhaps, you may want to consider the following :
..”..the best system available..”
Do you think the apparent comparative sucess of “capitalism” would have been obvious or at all possible if there were NO human resource (local or in other countries) available for it to exploit?
BTW , your previous (cit)
“..I mean the management practices seem to be left over from the Soviet Union. People get promoted on seniority or connections, not competenece. Nobody other than a few senior people can make any kind of decision on a facility, i.e. there is no delegation of authority. Those who should make decisions either don’t or take a year to do so. They are more interested in generating piles of paper than progressing, although perhaps they equate one with the other.” I would have added “no relation between the work done and payment received”.
All this, especially the latter, is such a precise description of what I observe practically everywhere living and working in a very capitalistic system for ~ 15 years already, that an question now bogs me : “Since there is an obvious abundance of physical goods (i.e. not just paper money) available for consumption, who produces them? And how much are they paid comparatively to those (i.e. us) who consume? Is it how it should be? Why had Russia failed to do the same with eg. available population of its “near-abroad? Not enough of “capitalistic” (or Darwinian) mentality, I guess ?”
Cheers
PS. Mark – wonderful original post- what a gem of a topic you found 🙂 And amazingly interesting discussion .. (I hope I am not spoiling 🙂
Do you think the apparent comparative sucess of “capitalism” would have been obvious or at all possible if there were NO human resource (local or in other countries) available for it to exploit?
Yes.
.well – thanks. I am sure you saw the point, though.
Cheers
Hello, Igor, nice to hear from you again. Yes, this has been a great discussion, hasn’t it? I agree with your point about cronyism, favoritism, inefficiency, etc. Like most people, I work for a living, and this is what I observe too. Capitalist companies are no different from socialist companies in this respect. My (capitalist) company just spent a huge amount of $$$ on software they will never use, because some idiot suggested it to the boss. It’s just the nature of human society. What can you do? You just laugh at the irony, and then hunker down to work and try to do the best you can.
Thanks, I am here by accident today 🙂 It IS a great discussion, indeed. An interesting difference with Socialism is that there & then, there always was a “way” to have things done without necessity to make someone (or everyone) personally (materially) interested. The word “irony” in your reply above was precisely choosen (imho) 🙂
Cheers
Welcome back, Igor!! I am glad to learn the rumours of your death were greatly exaggerated.
Better results for whom? The Big Five? I never doubted that.
No, for the citizens of the countries where the reserves are.
Gee, I wonder why it is so. Here’s a bold thought: maybe it’s because history gave a lesson or two regarding that.
Not really. Resource nationalism is not smart by virtue of it being popular.
Quote: “According to consulting firm PFC Energy, only 7% of the world’s estimated oil and gas reserves are in countries that allow private international companies free rein. Fully 65% are in the hands of state-owned companies such as Saudi Aramco, with the rest in countries such as Russia and Venezuela, where access by Western companies is difficult.
Yes: Saudi Arabia, Russia, Mexico, Kuwait, and Venezuela follow the nationalised model. Then you have the Norwegian, Dutch, British, Australian, and American model of licensing blocks and taxing production (with the slight exception of the Norwegians, who also have their own national company). Just a cursory glance at these places and their governments gives you a pretty good idea which model represents the better deal for a country’s citizens.
“Dutch, British, Australian, and American”
BP p.l.c. (United Kingdom) (BP)
Chevron Corporation (United States) (CVX)
ConocoPhillips (United States) (COP)
ExxonMobil (United States) (XOM)
Royal Dutch Shell plc (Netherlands/United Kingdom) (RDS)
Total S.A. (France) (TOT)
Yes, does it have something to do with the fact that these countries basically own the supermajors? I’m pretty sure that everything is working out for them just fine.
<emYes, does it have something to do with the fact that these countries basically own the supermajors?
No, the countries don’t own the companies: the shareholders do, which can be anyone and are usually a bewildering array of nationalities.
But in any case, I’m not sure what your point is. Are you saying that a country which “owns” a supermajor does well by virtue of their “owning” a supermajor? How does Total operating in the US Mexican Gulf make everything great for the average Frenchman?
The Norwegian model sounds reasonable to me. I would not hold up the American model as anything to strive for. Vast majority of American citizens do not receive any perks from their country’s great wealth in oil and gas resources. Employees of the oil companies, obviously, they get good paychecks and bonuses. But the average American sees nothing. Maybe Americans do need their own national oil company, which would help fund perks (like education and health insurance, for example) to the average American. Just a suggestion, but I doubt they will listen, as American people have an innate horror for anything “socialistic”, even if it would benefit them and their children! P.S. Tim: I am glad to hear you are libertarian and would allow people to take drugs, etc. Not that I take drugs myself, heck no! But I cannot tolerate people who tell others what they may or may not do in their own personal lives.
Vast majority of American citizens do not receive any perks from their country’s great wealth in oil and gas resources. Employees of the oil companies, obviously, they get good paychecks and bonuses. But the average American sees nothing.
I’m not sure this is true. I am fairly sure that most pension funds will have a large amount of oil company stocks, especially in the latter years of somebody’s pension plan. Oil company stock represents somewhat of a safe haven, it doesn’t grow much but it is not likely to fall (well blowouts in the GoM notwithstanding). There are few stocks of this nature, and they serve a useful purpose. And the oil companies also pay a lot of tax (despite their receiving tax breaks), plus the government received the licensing fees. And in Alaska, every citizen receives a dividend from the state from the oil revenues.
Maybe Americans do need their own national oil company, which would help fund perks (like education and health insurance, for example) to the average American.
I fear what would happen in practice is the money would end up spent on pork-barrel policies. National oil companies tend to end up as cash-cows for the government, subject to the political meddling I mentinoed earlier, and run for the purpose of funding government activities instead of as an oil company. This is what has happened to PEMEX, with disastrous results.
Russia’s heavy SOVIET debt was paid off in this manner, which was strangling the country and putting millions into destitution. I don’t believe this is pork. Norway and UK took very different approaches to their North Sea resources. Which country is financially healthy and which one is bursting apart at the seams?
The disparity between the economic health of Norway and the UK is not a factor of the ownership of their oil and gas projects. The most obvious cause is that Norway has a population of 5m versus 60m of the UK.
And I don’t believe the Norwegian approach was very different to that of the UK. The Norwegians also license blocks for development by private companies, much the same as the UK. The main difference is that the Norwegians chose to establish their own companies, but they did not grant them monopoly rights. I’m not convinced that a British national oil company would have produced particularly great results, especially when one considers the underperformance of most other British nationalised industries in the 1970s and 1980s.
No, for the citizens of the countries where the reserves are.
In 1998 Russia defaulted. In 2006 Russia paid back all debts to Western creditors.
” How does Total operating in the US Mexican Gulf make everything great for the average Frenchman?”
Oh, come on. While Total is an international company, it certainly pays a lot of taxes in France and is inclinened to employ Frenchmen. Besides, I don’t remember France having any oil, so it’s an absolute win-win for them: Total earns money by drilling oil elsewhere and provide energy security. The same applies to all the other supermajors.
“the shareholders do, which can be anyone and are usually a bewildering array of nationalities.”
So you’re saying that, for example, BP has no ties with the UK and US establishment? Link
While Total is an international company, it certainly pays a lot of taxes in France and is inclinened to employ Frenchmen. Besides, I don’t remember France having any oil, so it’s an absolute win-win for them: Total earns money by drilling oil elsewhere and provide energy security. The same applies to all the other supermajors.
I’m not disputing that France benefits to some degree from Total being French. I’m disputing your assertion that, because certain countries happen to have supermajors headquartered in them, “everything is working out for them just fine”.
So you’re saying that, for example, BP has no ties with the UK and US establishment?
No. I am disputing that it is owned by any government.
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“This is a new one: Russia has no choice but to grant monopoly offshore developments to Rosneft and gazrpom in order to prevent Russian women from being raped by Americans.”
Would make a hell of a election slogan though: “Let’s nationalize oil or our women will be raped by Americans”. 🙂
I can see the poster now, featuring a vulnerable-looking Natalia Vodianova wearing a torn T-Shirt and a roughneck’s hardhat. However, I think this is stretching Yalensis’ point a little. He suggests that if the oil industry were not nationalized, Russia would become a client state like present-day Iraq. The rape part is an unfortunate distraction from the main point, and I wouldn’t recommend starting up a chastity-belt company in anticipation of increased Russian demand.
I’m no longer convinced that’s true, and feel a little less biased against multinational oil companies than I did before, but I’d agree the state had and has to maintain control over its non-renewable natural resources. Nobody has much pity for you afterward if you allow yourself to be taken advantage of. Russia is not the helpless wreck it was in 1998, and is in a much better position to drive the hardest bargain it can without frightening investors away. Where there’s room for improvement is in sticking to the bargain once it’s made.
“a vulnerable-looking Natalia Vodianova”
No, no, no! She married some British money-bag, and thus prostituted herself to the West. Very poor choice for the poster, Natalia Ragozina, on the other hand, is perfect: her image splendidly goes with the old tradition of Soviet posters. A woman with a strong personality is appealing for more decisive actions.
yalensis often makes correct and insightful remarks, but sometimes expresses them in such an impassionate way that leaves them vulnerable for ridicule. And I agree with you on the interpretation.
Well, okay – but Ragozina doesn’t even live in Russia any more; she lives in and fights out of Germany. But she’d look more appropriate in a hardhat, I agree. The image I was trying to conjure with the poster was of a woman who appeared to be in actual danger of being raped by Americans. This would arouse the protective instincts of her countrymen.
Show me the guy who’s going to try and rape Ragozina. If he managed to make it through the fist blizzard to the threshold of success, he’d likely have begun to ask himself if there might not be an easier way.
Okay, okay, maybe I did go over the top a bit, but I had just recently been reading about American atrocities when they invaded Iraq, the way they humiliated Arab civilians, Abu Ghraib, etc., treated the whole country as if it belonged to them, the usual colonialist bullshit. I was just thinking to myself, “That could have been Russia under Berezovsky/Khodorkovsky’s rule…” Okay, maybe it is time for me to “get over” my post-traumatic syndrome regarding the 90’s. Agree with Mark that Russia is strong enough now to make intelligent choices about mineral extractions without getting ripped off or colonized. Also agree with kovane the anti-colonialist theme would make good campaign slogan, in time of urgent need (like, if NATO invaded). Altlhough, instead of tiny vulnerable-looking chick, I would show a powerful dangerous woman like Natalia Rogozina with boxing gloves on. Just so Americans know not to mess with Russia.
Oops, I posted my last comment out of sequence, before reading kovane’s comment – he also recommended Ragozina. Great minds think alike! I don’t mind if Ragozina lives in Germany. A woman of her calibre can live anywhere she pleases!
My angle is mature political manipulation to achieve maximum effect across a broad spectrum of public sympathy and reaction. You two are just working out adolescent stiffie fantasies.
Well, actually I was joking, but thanks for the diagnosis.
Me too.
That’s an interesting “angle” you have, Mark .. IMHO, on a
dangerous slope too. And here.
AFAIK, statistically only 15-20 % of the population are capable of stealing – oops! – was going to say ” running a business” (about the same % that is capable of shooting to kill, btw). So you “want” to enforce compliance of the remaining ~85% for the benefit of ~ 15% .
On the previous discussion issue, imho, it probably, does not matter who will develop the oil in Russia – with the existing system the population will loose (or “benefit”) about the same in both cases , since even Russian capitalists are there not because they want to benefit the Russians/country & because people with the same (businessman) moral code (& goals) are in the government structures (and which is worse – the law enforcement – see Tim’s item 3. about bribe-free governance)..
Where I agree with you is that, it seems, that recent Russian government was more or less capable of defending the “national” (state) interests (for whatever reasons of their own). What remains is for them to learn to share the results of this “defence” with the population.
BTW, wishing someone is dead , damages the karma irreversibly. Starts from aura, though. (of course, I am joking too).
Have a nice x-mass, guys – is has been an incredibly interesting discussion – I’m glad I was able to read it. Hope to read Nil’s account of the original topic in the future and, maybe, Tim’ s passionate arguments as a separate publication too..
Cheers
For clarity sake: in the above post, Berezovsky and Gusinsky are each described as “Russian-Jewish businessman.” Offhand and without checking (could be wrong), Berezovsky is a convert to Christianity, while some of the other aforementioned oligarchs (besides Berezovsky and Gusinsky) are of Jewish background.
Stop! Attention! (Former?) oligarch Boris Nemtsov just told me that Russia is about to collapse (for the 20th time). http://www.cdi.org/russia/johnson/russia-moscow-nationalist-riots-dec-481a.cfm
Nemtsov is not an oligarch, and never was. He is a politician, and during the Yeltsin era he was deputy prime minister. He resigned after the 1998 Russian default. If I remember correctly, just before the default he appeared on TV to reassure the public that everything was OK and there was no danger for people’s savings in the banks. A short time later these savings disappeared in the default.
He has not any credibility toward the Russians, he’s simply an “home Russian” for the Western press.
You have to hand it to Nemtsov – he never misses an opportunity. Anytime there’s a protest or an incident, he can be counted on to tell the world solemnly that this is symptomatic of the rot in Russia. Maybe he’s right, to an extent, because no place is perfect, and I could say the same about a protest in Portugal or Sweden or right here. The difference is, Nemtsov wants you to believe that a change in leadership is all it will take to fix it. I doubt ordinary Russians believe him. Some westerners probably do, because those are the same patsies who fall for the same lie in their own countries, every time.
That depends. I have to look up the stats but in 2008 he made millions of euros. He was made PM by the oligarchs so even if he isn’t one, he sure as hell profited from being PM, thanks to them.
You can find this post on Nemtsov money by Leoš Tomíček quite interesting. It’s the old “Do what I say, not what I do”.
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