Oil and the economy of russia from the late tsarist to the post soviet period

Besides providing much rich detail on the changing nature of the oil industry, the book also puts forward important conclusions, including the fact that in the late nineteenth century pr

This book examines the development of the Russian economy from tsarist times

to the present through the lens of the oil industry It considers the role of the state, business-state relations, foreign participation, enterprise performance and technology Besides providing much rich detail on the changing nature of the oil industry, the book also puts forward important conclusions, including the fact that in the late nineteenth century private enterprise rather than the state was the principal driver of economic development, and that after the collapse of the Soviet Union incumbent managers were more effective in running their companies than financier entrants, whose main concern was short-term gain

Nat Moser has over 20 years’ experience analysing the Russian oil sector from an

academic and investment perspective He completed his doctorate at the University

of Manchester, and post-doctoral research at University College London and has advised some of the largest foreign equity investors into the sector He is currently

a director of two companies working in the field of oil and gas exploration and production

Oil and the Economy of Russia

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118 Russia’s Economy in an Epoch of Turbulence

Crises and Lessons

Vladimir Mau

119 Oil and the Economy of Russia

From the Late-Tsarist to the Post-Soviet Period

Nat Moser

120 The South Caucasus

Security, Energy and Europeanization

Edited by Meliha B Altunisik and Oktay F Tanrisever

Oil and the Economy of Russia

From the Late-Tsarist to the Post-Soviet Period

Nat Moser

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Series: BASEES/Routledge series on Russian and East European studies; 119 | Includes bibliographical references and index Identifiers: LCCN 2017032257| ISBN 9781138242876 (hardback) | ISBN 9781315277509 (ebook)

Subjects: LCSH: Petroleum industry and trade–Russia–History | Petroleum industry and trade–Soviet Union–History | Petroleum industry and trade–Russia (Federation)–History | Industrial policy–Russia (Federation)–History | Petroleum industry and trade–Russia (Federation)–Management.

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The oil industry: main features and characteristics 1

Conceptual terminology 5

Structure, methodology and sources 7

Late-tsarist economy overview 11

Late-tsarist oil industry overview 13

Role of the state 16

Foreign participation 29

Monopolies, cartels and business-state relations 33

Technology 40

Soviet economy overview 51

Soviet oil industry overview 55

Enterprise management 60

Inefficiency of resource use 66

Technology 70

Post-Soviet economy overview 87

Post-Soviet oil industry overview 94

The state and the oil industry 99

3.4 Geographical distribution of Soviet oil production in 1938 57

3.7 Geographical distribution of Soviet oil production in 1950 59 3.8 Geographical distribution of Soviet oil production in 1980 59

4.5 Russian international reserves 1992–2016 93 4.6 Foreign direct investment into Russia 1992–2015 93

4.9 Russian oil production by company 1992–1999 115 4.10 Change in production between 1992 and 1999

4.11 Russian oil production by company 1999–2004 117 4.12 Change in production between 1999 and 2004

4.13 Russian oil production by company 1992–2004 120 4.14 Change in production between 1992 and 2004

4.2 Oil and gas industry leaders with connections

A.2 Russian state treasury income from the oil

A.6 Geographical distribution of Soviet oil production in 1938 140 A.7 Geographical distribution of Soviet oil production in 1950 140 A.8 Geographical distribution of Soviet oil production in 1980 141 A.9 Post-Soviet Russian oil industry chronology 1991–2016 141 A.10 Russian oil industry ownership structure in 1999 144 A.11 Russian oil industry and the loans-for-shares

A.13 Russian crude oil and condensate production

A.14 Russian crude oil and condensate production

Abbreviations and acronyms

AAR Alfa-Access-Renova

bbl barrel

boe barrel of oil equivalent

capex capital expenditure

GARF State Archive of the Russian Federation

GKI State Committee for the Management of State PropertyGKZ State Commission on Mineral Reserves

Gosplan State Planning Committee

IOCs International oil companies

MoNR Ministry of Natural Resources

OGPU/KGB/FSB State security service

PSA Production-sharing agreement

Rosnedra Federal Agency for Subsoil Use

Rosprirodnazor Federal Service for the Supervision of Natural ResourcesRSFSR Russian Soviet Federative Socialist Republic

T-VO Partnership

TsGIAL Central State Historical Archive, Leningrad

UK United Kingdom of Great Britain and Northern Ireland

USSR Union of Soviet Socialist Republics or Soviet Union

Note on measurement

Figures measuring oil production and refined products in this book are in metric tons I use the English spelling “tons,” rather than the French “tonnes.” In late-

tsarist Russia, oil was measured in puds (1 metric ton = 61 puds), and I have

converted these figures into metric tons In the Soviet Union, oil was measured

in metric tons, and this practice has continued in post-Soviet Russia In the West, oil is measured in barrels (1 metric ton = 7.3 barrels), and some of the figures in this study comparing Russian and international oil companies are in barrels The figures in metric tons in this book should not to be confused with British long tons and US short tons which are based on imperial weights, and are somewhat more and less, respectively, than metric tons

This book examines the development of the Russian economy from the late-tsarist

to the post-Soviet period through the lens of the oil industry As well as explaining Russia’s past, the findings are important for understanding the country’s future path of economic development

The book is based upon my engagement with the Russian oil industry over the last 20 years through both academic and business work Underpinning it is the academic work I did for my MPhil thesis at Oxford University in 1995–1996,

my PhD at Manchester University in 2005–2009, and my post-doc at University College London in 2012–2013 My business work – which relates to investment

in the oil and gas sector – gave me the opportunity to live in Moscow in 1997–

2004, and be a frequent visitor up until 2014, where I met many senior oil pany managers and executives It also enabled me to travel extensively in the oil regions of the Former Soviet Union including the major oil-field towns in West Siberia and the Volga-Urals, and some of the smaller ones in central Ukraine, and

com-to talk there with drillers, geologists, geophysicists and engineers

At the heart of this book are two dozen or so of interviews with oil industry participants conducted since 1995, and extensive oil industry data that I collected throughout the period The book also benefits from a rich secondary literature – in both Russian and English, and relevant archival research I undertook in Moscow

In hindsight, I was fortunate to be researching the sector, interviewing try participants, collecting data, and travelling across Russia at a time when the country was open to the West, and attracting substantial investment from it The deterioration in relations between Russia and the West since 2014 has underlined

indus-to me that embarking on this project indus-today, rather than 20 years ago, would be more difficult The wave of Western investment into the Russian oil industry that occurred from the early 1990s opened doors for me to see at first-hand, and even

be a participant in, certain important events

Over the years, a lot of people have assisted me with the work that went into this book My greatest thanks go to my mother Caroline, my father Brian, my wife Olya, my brother Titus, my father-in-law Alexander Ivlev, my step-father Peter Sollis, my PhD supervisor Peter Gatrell, my MPhil supervisor Chris Davis, and

my colleague at UCL Pete Duncan I am also very grateful to: Rudiger Ahrend, Dmitri Avdeev, Theo Balderston, Thomas Blake, Olga Boltenko, Mark Bond,

Constantine Brancovan, Alexander Burgansky, Euan Craik, William Flemming, Nellie Galiauv, Till Geiger, Chris Gerry, Thane Gustafson, Nigel Gould -Davies, Liam Halligan, Nick Halliwell, Peter Halloran, Mike Haywood, Russell Harvey, Jim Henderson, David Hoffman, Elena Krasnitskaya, Nick Latta, Oleg Maximov, Ivan Mazalov, Tav Morgan, Vadim Murzak, Roland Nash, Patrick Newman, Alexander Nazarov, Peter Oppenheimer, Slavo Radosevic, Elisabeth Schimpfossl, Robert Skidelsky, Peter Sowden, Rab Speirs, Marat Terterov, Sergei Tischenko, Gardner Thompson, Vakhtang Vardanyan and Mike Winn Finally, I’d like to thank all my interviewees, and the UK Economic and Social Research Council for funding both my PhD and post-doc Any mistakes in this book are the responsibil-ity of myself alone.

Russia1 has been a major force in the global oil industry since the 1870s – just a decade after the industry first developed in the US – and it has been the largest oil producer in the world at various points since, including the 1900s and 1980s, rivalled only by the US, and more recently Saudi Arabia.2

Within Russia, the oil industry became an important economic sector in the late nineteenth century, and has retained that position ever since It provides a direct support to the domestic economy through cheap fuel, and is a vital source of gov-ernment revenue and export earnings The industry played a significant part in the development of large-scale modern enterprise in the country, and is central to rela-tions between business and the state, with oil magnates ranking amongst the coun-try’s most powerful businessmen in both the late-tsarist and post-Soviet periods.This book looks at the development of the Russian economy since the 1860s, and the main debates about this, through the perspective of the oil sector These debates relate to several overlapping themes: the role of the state; business-state relations; foreign participation; enterprise performance; and technology The book also identifies some of the major continuities and discontinuities within these themes in different periods of Russian history, and provides an international context through a comparison with developments in the oil industry in the US – another geographically large and resource-rich country In addition – though with some gaps – the book provides a study of the development of the oil industry in Russia right from its inception through to the present day

In this introduction, I consider the features and characteristics of the oil try, and assess how relevant the sector is for making general conclusions about industrial development in Russia or elsewhere I then explain the main conceptual terminology that I use in the book – important for understanding long-run eco-nomic development in Russia Lastly, I outline the structure of the book and the individual chapters, and briefly discuss the methodology and sources

indus-The oil industry: main features and characteristics

An introduction to the oil industry

Oil consists of hydrocarbon molecules It is generally accepted that most oil deposits were formed from decomposed plankton and algae The deeper and

1 Introduction

longer the burial of this organic material, the lighter and less viscous (thick) the oil Oil reservoirs are mostly found in sedimentary rock such as sandstone with the hydrocarbons occupying the tiny pores and fractures within the rock Oil is found

in several different geological layers beneath the surface of the earth, with the deepest reserves located at a depth of, in some cases, more than 5km.3 The main geological layers in Russia where oil has been found are the Permian, Jurassic and Devonian which range from a few hundred metres to around 3km in depth.Oil-based products have been present in history for many centuries with uses ranging from healing ointments to combustible weapons of war There are many reported instances of oil seeps around the world where black, tar-like oil oozed from sedimentary rocks exposed at the surface, and this was gathered by local people However, it was not until the second-half of the nineteenth century that something more closely resembling a modern “industry” began to develop This occurred simultaneously in the US and Russia, and in Galicia and Romania – and was based upon the collection of crude oil and its “cooking” or basic refining to extract kerosene, which was then used in cheaply manufactured lamps Initially, production was from bailing the seepage from shallow wells dug in the ground After the introduction of drilling – first in the US in 1859 – larger underground reservoirs began to be exploited.4

Advances in oil-burning boilers in the 1860s and 1870s resulted in increased demand for fuel oil, until then a low-grade by-product (residual) of refining, for use in locomotives, steamboats and metallurgical furnaces.5 At the start of the twentieth century, the growing popularity of the automobile powered by an inter-nal combustion engine resulted in increasing demand for gasoline (petrol), a mid-grade product of refining The advent of automobiles proved fortuitous for the industry because it came at just the time that the spread of electricity reduced the demand for kerosene for lighting, thus giving the industry an important new source of demand.6 Although, today we are looking at the possibility of electric battery-powered cars replacing those powered by gasoline and diesel

The importance of technology is a recurring theme for the oil industry Throughout its history, technological advances have played a crucial role in changing the nature of the industry through opening up new opportunities, and changing the economics of existing practices In exploration and production, the introduction of drilling in the late nineteenth century allowed the exploitation of underground reservoirs, while in the twentieth century, advances in geophysical analysis and reservoir management techniques enabled more accurate drilling, and

a greater proportion of oil to be extracted from a reservoir Since the beginning

of this century, the combination of hydraulic fracturing and horizontal drilling has allowed oil to be extracted from shale, and this has completely reinvigorated the US oil industry.7 Developments in refining were crucial in creating products with mass markets which range from “light” products such as jet fuel, through mid-grade products such as gasoline, to “heavy” fuel oil, and in maximising the yield of such products from a given barrel of crude oil Transportation innova-tions including rail tankcars, pipelines and marine tankers allowed the profitable exploitation of oil reserves hundreds or even thousands of miles from their point

of consumption Finally, technical developments in other industries played an important role, with, for instance, improvements in the strength of drill pipe sup-plied by the steel industry vital for deep drilling.

Economic characteristics of the oil industry

Oil exploration and production is an extraction industry with similarities to ing industries such as coal or gold mining Geology is the starting point for the success or failure of an enterprise It determines whether reserves are present, the appropriate scale of production of those reserves, and the rate of depletion The challenge for oil producers is to apply the most appropriate methods and technology to extract the resources in the most efficient manner This includes correct interpretation of the geology – which since the twentieth century has relied heavily on the use of seismics (tracking and analysing sound waves which are

min-“shot” through the ground) – and effective reservoir management, through the depth, spacing and angle (from vertical to horizontal) of drilling Upstream capital requirements vary considerably The cost today ranges from a few million pounds for conducting seismics and drilling one or two onshore wells, in West Siberia or Texas for instance, to billions of pounds for the construction of offshore extrac-tion infrastructure in regions such as the North Sea or the Gulf of Mexico Due

to this range, the degree of concentration of upstream ownership is often not that great, with small independent producers developing lesser deposits and larger multinationals producing from more substantial fields

Another characteristic of the upstream oil industry relates to the natural tion over time of an oil field Thus, as the economist Harold Hotelling observed in the 1930s, orthodox economic theory of the firm is not appropriate given that “the indefinite maintenance of a steady rate of production is a physical impossibility.”8

deple-The transportation of oil from the point of extraction to the point of refining

is accomplished by pipeline, marine vessel or rail All three involve large capital expenses and long lead times, and provide opportunities for operators to ben-efit from economies of scale Pipeline and rail transportation networks also often exhibit the characteristics of “natural monopoly” industries Such an industry is one where it is cheaper for one undertaking to supply services than two or more, since the latter would involve replication of plant and networks – fixed costs which are largely insensitive to variations in output Thus, when competition is present in a natural monopoly industry, the result is welfare losses to consumers that are manifested in higher prices and lower quality Alternatively, however, when a single unregulated firm dominates, there is a danger of monopoly profits and prices, and limited coverage.9

Oil refining is a heavy processing industry with similar characteristics to industries such as steel or aluminium which turn inputs (crude oil, iron, alloy, etc.) into semi-finished or finished commodities Oil refineries must adapt both to the type of crude oil available (known as “feedstock”) which may, for instance, have a high or low sulphur content and to the type of market (e.g automobiles or industry) Sophisticated refineries which have a high yield of the more valuable

light products are very expensive to construct, costing billions of pounds Thus, barriers to entry are higher in refining, and the ownership structure more concen-trated, than in exploration and production As with transportation, oil refining has significant opportunities for exploiting economies of scale.

In addition to refining, another important aspect of the downstream segment

of the oil industry is the distribution and sale of refined oil products This part

of the industry can vary from centralised state distribution to sale through small decentralised private outlets In the West, the large vertically integrated oil majors have tended to own a large proportion of distribution outlets The gasoline retail business sometimes also exhibits monopoly characteristics – with a single seller controlling prices within a certain area – or oligopoly characteristics – when sev-eral sellers collude to keep prices high

The integrated business model of the majors such as ExxonMobil and Royal Dutch Shell – from production through refining to distribution – allows them to benefit from better and more stable margins than dedicated producers, refiners

or distributors Retail prices of refined products are less prone to fluctuation than crude prices, allowing the majors to reduce the impact of falling crude prices on their revenue.10 Essentially the downstream provides a helpful “cushion” in a low oil price environment, while in a high oil price environment profit margins on the upstream business are lucrative The overall point is that the oil industry is a cyclical business, and an integrated company with upstream and downstream is financially much more robust in the cycle

Along with other energy industries such as nuclear, gas and coal, an tant characteristic of the oil industry is a tendency for greater state intervention than elsewhere in the economy This has been noted by several economists In the 1980s, Dieter Helm, John Kay and David Thompson identified three main reasons why government played a greater role in energy than in other sectors

impor-of the economy: first, that energy is a particularly important commodity whose production affects all other sectors of the economy to a greater degree than most other commodities; second, that the time-scales associated with decisions about energy are exceptionally long, and governments are better able to cope with the resulting uncertainty over future returns than the private sector; and third, that many areas of energy supply are natural monopolies which neces-sitates government regulation or even outright ownership.11 More recently, Paul Stevens, reinforcing this work, observed that the energy sector has cer-tain characteristics which “emphasize market failures,” and therefore requires

“greater government intervention.” He identified that the production and sumption of energy generates very significant externalities, most obviously in the field of environmental concerns, but also with respect to energy’s strategic importance.12

con-Overall, the oil industry can be seen to be useful for generalising about trial development in Russia and elsewhere, though with two qualifications First, the industry has much more relevance for other heavy industries – which also have characteristics such as high capital expenses, long lead times and economies

indus-of scale – than light industries The relevance indus-of the oil industry to other heavy

industries is borne out by the fact that it was itself, according to A D Chandler,

at the vanguard of the creation of “modern large-scale industrial enterprises” in the second-half of the nineteenth century with “salaried managers, a vertically integrated structure, and companies exploiting economies of scale and scope in production and distribution.”13 Second, due to its strategic importance and certain natural monopoly characteristics, even when generalising about heavy industry, the tendency for greater state intervention in the oil sector than elsewhere needs

to be taken account of, especially when examining the issue of the role of the state

Paul Gregory and Robert Stuart focus on four general attributes which they identify as key in differentiating economic systems: ownership (private or non-private); information and coordination mechanisms (market or plan); levels of decision-making authority and responsibility (centralised or decentralised); and, finally, incentive arrangements (moral or material) Other criteria to distinguish between economic systems include the scale of production and the level of inte-gration into the international economy Using their four criteria, Gregory and Stuart generate a three-fold classification of economic systems, namely capital-ism, market socialism, and planned socialism Two related concepts are “reform,” which is the process of changing (improving) an existing system, and “transition,” which is the movement from one economic system to another, for instance, from planned socialism to capitalism.15

Institutions and transaction costs

The concept of transaction costs is important for understanding the way in which the “institutional arrangements” of economic systems function Analysis based upon this concept is part of the new institutional economics school, of which the leading figure is Douglass C North

North views “institutions” as “the rules of the game in a society,” and sations” as “players in the game,” and the interaction between institutions and organisations “shaping the direction of institutional change.” Under capitalism, according to North, property rights, the law and share ownership are examples of

“organi-“formal” institutions, while conventions, attitudes to the law, and codes of duct are examples of “informal” institutions Meanwhile, governments, firms, law courts, banks and trade unions are organisations.16

con-North finds that institutions affect the performance of an economy by their effect on the costs of production and exchange Together with the technology employed, institutions determine the transformation and transaction costs that make up total costs Transformation costs are those associated with bringing together land, labour and capital in the production process, while transaction costs consist of “the costs of measuring the valuable attributes of what is being exchanged, and the costs of protecting rights and policing and enforcing agree-ments.” North identifies the costliness of information as the key to the costs of transacting An unreliable judicial system, government red-tape and corruption are all examples of things that would create an unfair “playing-field” for busi-ness and, thus, increase transaction costs.17 The higher transaction costs are, the slower will be the rate of economic development North emphasises that “imper-sonal exchange with third-party enforcement has been a critical underpinning of successful modern economies.” By this he means that in advanced economies, business is conducted through official contracts which firms can rely on the gov-ernment to, when necessary, enforce.18

Applying this institutional terminology to the oil industry, formal institutions can be seen to be the licensing regime, the procedures for issuing licences, laws

on company ownership, and contracts between production and service nies, while informal institutions are conventions, attitudes and codes of conduct amongst government officials, and company executives and employees

compa-Principal-agent relations

The concept of principal-agent relations, which is part of organisational ics, is important for understanding the “institutional arrangements” in an economy.According to organisational economics, individuals participate in organised behaviour, pursuing self-interest, subject to bounded rationality Self-interest is defined as “the pursuit of personal objectives, including material gain, satisfaction from a job well done, enjoyment of leisure and of challenges, and the exercise of responsibility.” Subject to bounded rationality means that individuals “act under the constraints imposed by their intellectual capacities.”19 These characteristics lead to two major classes of organisational problems The first, technical-admin-istrative problems, derive from individuals who are limited in their ability to make decisions because of, for example, incomplete information The second, agency-managerial problems, derive from individuals who, while pursuing self-interest, may pursue objectives differing from those established for the organisation.20

econom-To cope with agency-managerial problems, an organisation must establish rules concerned with setting up subgroups within the organisation, assigning tasks, coordinating activities, monitoring activities, and describing the nature of incentive arrangements These rules, along with such external factors as cultural and historical influences, largely determine the nature of the organisation and lead

to basic and important distinctions among economic systems.21

Except in the case of very simple organisations (such as an owner-operated company with no employees), a hierarchy is present Superiors (principals)

establish objectives and issue orders to subordinates (agents) who are supposed

to carry out assigned tasks to achieve organisational objectives When both the principal and the agent are motivated towards the same goal, or when the perfor-mance of the agent can be easily monitored, conflicts between the principal and the agent are unlikely to arise However, when parties have different goals and when monitoring is difficult, conflicts between principal and agent – referred

to as an agency problem – are likely, and these have implications for economic development.22

Growth

Gregory and Stuart identify two types of economic growth: extensive – which is derived from the expansion of inputs of land, labour and capital – and intensive – which occurs as a result of productivity improvements generated from sources such as organisational and technological change, and qualitative improvements in inputs The Western experience shows that the process of economic development involves a transition from extensive growth to intensive growth, and long-run growth must come from efficiency improvements because inputs cannot continue

to expand indefinitely at a rapid pace Meanwhile, “dynamic efficiency” is the ability of an economic system to enhance its capacity to produce goods and ser-vices over time without an increase in capital and labour inputs.23

Technology

Ronald Amann defines “technology” as the ranges of equipment, mechanisms and processes which transform raw materials into products or services The extent to which technology is effective is determined by the quality, output, novelty and profitability of the final product In a broader sense he also states that technol-ogy also includes the skills of the workforce.24 Robert Millward’s study of the development of private and public enterprise in Western Europe is notable for highlighting the role of technology as opposed to ideology in driving changes in economic organisation since the early nineteenth century.25 As noted above, this

is also the case in the oil industry

Structure, methodology and sources

Structure

This book is structured chronologically Chapters 2, 3 and 4 consider the oil industry during successive periods in Russian history between 1861 and 2017: Chapter 2 looks at the late-tsarist economy, 1861–1917; Chapter 3 at the Soviet economy, 1917–1991; and Chapter 4 at the post-Soviet economy, 1992–2017.Chapter 2 begins with an overview of developments in the Russian economy, and in the oil industry in the late-tsarist period Separate sections then consider the role of the state in industrial leadership, business-state relations including the

presence of monopolies and/or cartels, the role played by foreign participation, and the level of technology in industry.

Chapter 3 begins with overviews of the Soviet planned economic system – both

in theory and how it functioned in practice – and of the main developments in the oil industry during the period The issues of enterprise management, efficiency

of resource use, and technological development are then examined in detail in separate sections

Chapter 4 begins with an overview of developments both in the Russian omy and in the oil industry in the post-Soviet period The roles of big business, the state and foreign participation in the oil industry are then considered separately

econ-A further section examines enterprise performance in post-Soviet Russia through the perspective of the oil industry

Chapter 5, the conclusion, reviews the book’s findings, highlights some of the similarities and differences between the different periods, makes several compari-sons with the oil industry in the US, and presents some broader conclusions about long-run economic development in Russia and what we can expect going forward

Methodology and sources

The research methodology used in this book consisted of both qualitative and quantitative approaches Qualitative approaches included analysis of primary and secondary sources, and interviews Quantitative approaches involved the analysis

of data on the production, ownership, financial indicators and geographical bution of the Russian oil industry

distri-In terms of primary sources, I examined documents in the State Archive of the Russian Federation (GARF), in Moscow, about the Soviet oil industry From Russian libraries – including Russian State (formerly Lenin), State Polytechnic and Moscow State University – as well as the inter-library loan service at the John Ryland’s Library at Manchester University, I was able to locate important texts in Russian about the late-tsarist and Soviet oil industry written by direct participants (these are discussed in the literature review and listed in the bibliography, along with the secondary sources) Academic research that I undertook in Moscow in

1995 for my MPhil thesis, followed by my business work there in 1997–2004, enabled me to collect a considerable number of relevant primary documents on the post-Soviet oil industry including laws, government reports on the restructur-ing of the sector, company and brokerage reports and company financial accounts Some of the research I undertook as part of my work during that time was also directly relevant for this study (listed in the bibliography under primary sources)

In terms of interviews, I conducted a total of 26, 5 in 1995 in Moscow – when

I was researching first phase privatisation of the sector for my MPhil – and 21

in 2006–2009 for my PhD These were mostly in Moscow, though several were also in West Siberia, the Urals and London (all are listed) The interviewees were mostly a mix of Russian and foreign expatriate oilmen working for integrated oil companies, exploration and production companies, and oil-field service com-panies Many of the interviewees had decades of experience working in the oil

industry in Russia Both the Russians and expatriates were able to make useful comparisons between the post-1945 part of the Soviet period and post-Soviet peri-ods Most of the expatriates arrived in Russia towards the end of the Soviet period

in the late 1980s and in the early 1990s when several joint ventures between Russian oil production associations and foreign companies were established.With twelve of the interviewees, I adopted a “semi-structured” rather than a structured or questionnaire-style approach This meant that once I had introduced the topic for discussion, I let the interviewee take the lead in deciding how he wanted to answer, and where possible only asked follow-up questions for clarifi-cation By restricting my input, my intention was to reduce the bias that I would lead the interviewee in his answers With the other interviewees, I used more tra-ditional structured questions Interviewees were reluctant to be tape-recorded so I took notes during interviews, which I wrote-up shortly afterwards

3 C F Conaway, The Petroleum Industry – A Nontechnical Guide (Tulsa, OK: PennWell

Publishing Company, 1999), pp 19–39.

4 D Yergin, The Prize (New York, NY: Touchstone, 1991), pp 19–34; Conaway,

Petroleum Industry, pp xi–xvi, 43.

5 C Marvin, The Region of the Eternal Fire: An Account of a Journey to the Petroleum

Region of the Caspian in 1883 (London: W H Allen, 1884), pp 242–276.

6 Conaway, Petroleum Industry, pp xv–xvi.

7 US oil production increased from 6.8 million barrels per day in 2008 to 12.7 million

barrels per day in 2015, BP, Statistical Review of World Energy 2016, www.bp.com.

8 H Hotelling, “The Economics of Exhaustible Resources,” The Journal of Political

Economy, Vol 39, No 2 (April, 1931), p 139.

9 R Millward, “The Political Economy of Urban Utilities in Britain 1840–1950,” in

M Daunton (ed.), The Cambridge Urban History of Britain: Vol III (Cambridge,

UK: Cambridge University Press, 2000), pp 318–320; M Chick, “Nationalization,

Privatization and Regulation,” in M W Kirby and M B Rose (eds.), Business

Enterprise in Modern Britain, (London: Routledge, 1994), pp 316–317.

10 The classic study of the evolution of the international oil companies is A Sampson,

The Seven Sisters – The Great Oil Companies and the World They Made (London:

Hodder and Stoughton, 1975).

11 D Helm, J Kay and D Thompson, “Energy Policy and the Role of the State in the

Market for Energy,” Fiscal Studies, Vol 9, No 1 (February 1988), pp 42–47.

12 P Stevens (ed.), “Introduction,” The Economics of Energy, Volume I (Cheltenham:

Edward Elgar, 2000) pp x–xi.

13 A D Chandler, Jr., Scale and Scope: The Dynamics of Industrial Capitalism

(Cambridge, MA: Harvard University Press, 1990), pp 92–105.

14 P R Gregory and R C Stuart, Comparative Economic Systems, 6th edn (Boston,

MA: Houghton Mifflin, 1999), pp 3, 15.

15 Gregory and Stuart, Comparative, pp 3, 24, 79.

16 D C North, Institutions, Institutional Change and Economic Performance

(Cambridge, UK: Cambridge University Press, 1991), pp 3–7.

17 North, Institutions, pp 5–6, 27.

18 North, Institutions, p 35.

19 A Ben-Ner, J M Montias and E Neuberger, “Basic Issues in Organizations: A

Comparative Perspective,” Journal of Comparative Economics, Vol 17 (1993), p

22 Gregory and Stuart, Comparative, pp 16–18.

23 Gregory and Stuart, Comparative, pp 43–44; P R Gregory and R C Stuart, Russian

and Soviet Economic Performance and Structure, 7th edn (New York, NY: Addison,

Wesley Longman, 2001), pp 209–219.

24 R Amann chapter on “Some Approaches to the Comparative Assessment of Soviet Technology: Its Level and Rate of Development,” in R Amann, J Cooper and R W

Davies (eds.) The Technological Level of Soviet Industry (New Haven, CT; London:

Yale University Press, 1977), p 2.

25 R Millward, Private and Public Enterprise in Europe – Energy, Telecommunications

and Transport, 1830–1990 (Cambridge, UK: Cambridge University Press, 2005), p

297.

This chapter examines the Russian economy and oil industry during the late-tsarist era which is typically dated from 1861 – the year when serfdom officially ended

in Russia – until the Revolution in 1917 During this period, Russia had a orientated economic system – albeit one in which an autocratic state played a significant role – and was experiencing rapid industrialisation, and attracting sub-stantial foreign investment This was also a period when the Russian Empire was expanding, at a considerable rate, East – into Manchuria, and to the South East – into Central Asia, a process halted only by war with Japan in 1905

market-Late-tsarist economy overview

Russia remained primarily an agrarian country on the eve of the Revolution in

1917 Economic growth was slow in the immediate post-emancipation period, but from around 1880 it accelerated significantly From 1880 until the outbreak

of the First World War, national income grew at an average rate of 3.3% per annum.1 Industrial production grew at a rapid 5.7% per annum during the period 1885–1913, and at its peak at an even faster rate of 9% per annum during the years 1894–1899,2 when Russia’s rate of industrial growth was likely the highest in the world.3 In terms of composition of total industrial output, light industries cater-ing for the mass consumer market were the most important constituent both in terms of employment and output value in the period right up until the First World War,4 with two broad categories of textiles and foodstuffs together accounting for around one-half of gross industrial output in 1913, twice as much as mining, metallurgy and engineering combined.5 However, heavy industry was at the heart

of the spurt of growth from the 1880s, in particular those industries associated with railway construction

Table 2.1, below, which contains key industrial and economic indicators for the major powers, shows how the Russian rail network expanded from the smallest among the major powers – 2,200km in 1861 – to the second-largest – 70,200km

in 1913.6 An important proponent of railways was Sergei Witte, Russia’s Minister

of Finance between 1892 and 1903 Railroad construction had considerable ward and forward linkages, notably stimulating the iron, steel, coal mining and engineering industries, and facilitating the marketing of agricultural produce and

back-2 The late-tsarist oil industry,

1861–1917

Table 2.1

Rail lines (1,000km)

Crude steel (1,000 metric tons)

Pig iron (1,000 metric tons)

Coal (million metric tons)

Raw cotton (1,000 metres)

Grain (1,000 metric tons)

National income (1913 rubles millions)

National income (per capita rubles)

oil products As well as rail lines, Russia also experienced a rapid expansion in output of steel, iron, coal and cotton, in which its rate of growth was faster than the UK, France and Germany.7

Through various inducements, especially the state acting as a guarantor of bonds, Witte successfully attracted foreign investment in the railroad companies and associated heavy industries His conservative monetary policy, though criti-cised domestically for placing too great a burden on the peasantry via consump-tion taxes, helped to stabilise the ruble exchange rate, and enabled Russia to join the international gold standard in 1897 As well as industrialisation, Russia’s growing integration into the world economy both in terms of commodity and financial flows was a major element of the period

Table 2.1 also shows how in terms of total national income Russia overtook France and narrowed the gap on the United Kingdom in the period 1861–1913 However, the Russian population grew during this period from 74 million to 171 million, a faster rate than elsewhere, and as a result on a per capita basis the coun-try’s performance was less impressive; indeed, in terms of national income per capita, it actually fell further behind the other major powers during the period.8

Late-tsarist oil industry overview

The oil industry was one of the fastest growing industries in the late-tsarist period Based in Baku (in present-day Azerbaijan), on the southern periphery of the Russian Empire, it transformed itself during this period from a small, primi-tive, localised business into a modern large-scale industry employing advanced technology, and with country-wide transportation and storage infrastructure By the turn of the century, Russia was exporting oil around the globe and competing with the US as the world’s largest oil producer Many of the wealthiest industri-alists in tsarist times made their fortunes in the oil industry including Kokorev and Gubonin; the Armenians Mirzoyev, Mantashev and Lianozov; and the Azeris Tagiyev, Nagiyev and Asadullayev The industry also attracted substantial for-eign investment notably from the Swedish Nobel family – whose oil company Nobel Brothers would become the most important in Russia – and the French branch of the Rothschilds The city of Baku grew in population, from around 15,000 people in the mid-1870s to 214,600 in 1913, making it the largest city in Transcaucasia,9 and in splendour, with palatial residences of oil magnates lining the banks of the Caspian by the turn of the century

The vast majority of tsarist oil production came from the Apsheron (or

“Abseron”) Peninsula, an outgrowth of the Caucasus Mountains projecting into the land-locked Caspian Sea near Baku Russia had conquered the Baku khan-ate from Persia earlier in the century, and this was confirmed by the Treaty of Gulistan in 1813 At this time a primitive industry had already grown up based

on bailing oil seepages from shallow wells dug in the ground, and then selling the unrefined crude locally for rudimentary heating and lighting, and as a medicine against rheumatism and scurvy The industry initially developed near the settle-ments of Balakhany and Sabunchy just north of Baku, and then spread to Romany

to the north-east and Bibi Eibat to the south.10

The Russian state exercised direct control over the oil industry until 1872 when,

in a major policy change, it auctioned off producing plots and adjacent areas to private owners The sale proved a catalyst for a rapid growth of production as the new owners started to drill rather than just dig wells Production increased from

a few thousand tons a year to a peak of almost 12 million tons in 1901, by which time Russia was the world’s largest oil producer, and producing more than half of the world’s crude oil output.11 This can be seen in Figure 2.1, below (and in Table A.1 in the appendix)

The refining industry expanded in tandem with the increase in production, especially after a broadening in demand for oil products from kerosene, used for lighting, to fuel oil, used for shipping and railways, from the 1880s Russian refined products quickly displaced US imports in the 1870s, and were exported in considerable quantities

Advances in transportation infrastructure were the final element in the formation of the industry These included the construction of pipelines which con-nected producing fields with refineries, the introduction of maritime oil tankers for passage across the Caspian Sea, and the use of tankcars for conveying oil

trans-on Russia’s railroads A network of oil storage and distributitrans-on facilities across Russia was also built

The number of workers on the Baku oil fields increased from 14,000 in 1898

to 24,000 in 1902.12 By 1913, the total workforce in and around the city of Baku numbered 108,000–110,000;13 this figure included refinery workers and those engaged in manufacturing, maintaining and repairing equipment used in the

Figure 2.1 Russian oil production 1863–1917 (thousand tons)

Sources: 1863–1871: V I Ragozin, Neft’ i neftianaia promyshlennost’ (St Petersburg:

Obshestvennaya Polza, 1884), p 24.1872–1892: S L and L L Pershke, Russkaia neftianaia

promyshlennost’: ee razvitie i sovremennoe polozhenie v statisticheskikh dannykh (Tiflis: K P

Kozlovskovo, 1913), pp 15, 29, 36.1893–1917: L B Kafengaus, Evolutsiia promeyshlennovo

proizvodstva Rosii (Moscow: Epifaniya, 1994), pp 28, 362–363.

industry In terms of nationality, most of the skilled workers, office employees, and administrators were Armenians and Russians, while Azerbaijanis (Azeris) and Daghestanis formed the bulk of the drillers and field workers.14

A combination of civil unrest and a decline in output from existing fields resulted in lower production after 1901 In 1902–1905 labour disturbances com-bined with fighting between Azeris and Armenians to cause output to fall to 7.5 million tons The year of worst disruption was 1905 when interethnic bloodletting reached “frenzied” proportions, oil properties were “fired” and managers’ and owners’ residences attacked.15 In this year alone output fell by 31%

Another negative trend after 1900 was that production from the fields at Balakhany began to decline, and though newer fields were developed elsewhere

on the Apsheron Peninsula, deeper drilling was required to find oil Outside of Baku, production later developed at Sviatoy, the Holy Island in the Caspian Sea, Chatma near Tiflis (Georgia), Cheleken (present-day Turkmenistan), Grozny and Maikop (North Caucasus), in the Kuban region (near Novorossiysk), Fergana (Central Asia) and at Emba (Ural River, in present-day Kazakhstan) However, output was modest in comparison with Baku, and total Russian production, although managing to recover from the 1905 dip, fluctuated around the 9–10 mil-lion ton level until 1917 This can also be seen in Figure 2.1, above

Figure 2.2, below, compares Russian oil production with that of the US Russian output significantly lagged the US until the late 1880s, surpassed it briefly from

1898 until 1901, then fell behind again after 1902 US production expanded matically during the first two decades of the twentieth century and reached over

Figure 2.2 US and Russian oil production 1870–1916 (thousand tons)

Sources: USA: US Dept of Commerce [Bureau of the Census], Historical Statistics of the USA from

Colonial Times to 1957 (Washington D.C., 1960), p 360 [Series M133–137].Russia: 1870–1871:

Ragozin, p 241.1872–1892: Pershke, pp 15, 29, 36.1893–1917: Kafengaus, pp 28, 362–363.

41 million tons of production in 1916, more than four times the Russian level, and

a level of output that Russia – in the form of the Soviet Union – would not match until 1951

Role of the state

The most important debate concerning the economy of late-tsarist Russia relates

to the role of the state The different views of this role range from the positive,

of the state as a force for leading industrial development, to the negative, of the state as a hindrance to corporate activity and therefore growth In this section I consider these views through developments in three different areas of government policy in the oil industry: the ownership and licensing regime; the fiscal or taxa-tion regime; and the construction and management of the Baku-Batumi rail and pipeline export route

Alexander Gerschenkron is at the forefront of the view of the leading role of the state in industrialisation in late-tsarist Russia In the 1950s, as part of his the-ory of “economic backwardness,” he identified the “main lever” of rapid indus-trialisation from the mid-1880s as a considerable expansion of state-sponsored railroad building In his view the government generated a high rate of growth in the economy through “devices” such as preferential orders to domestic producers

of railroad materials, high prices, subsidies, credits and profit guarantees to new industrial enterprises According to Gerschenkron, government action substituted for “missing prerequisites” of autonomous market demand, accumulated private capital, enterprising and honest businessmen, and skilled labour, and government fiscal policies – the source of capital for industry – successfully shifted income from consumption to investment.16 As Gerschenkron said:

The scarcity of capital in Russia was such that no banking system could ceivably succeed in attracting sufficient funds to finance a large-scale indus-trialization; the standards of honesty in business were so disastrously low, the general distrust of the public so great, that no bank could have hoped to attract even such small capital funds as were available, and no bank could have successfully engaged in long-term credit policies in an economy where fraudulent bankruptcy had been almost elevated to the rank of a general busi-ness practice.17

con-The influence of Gerschenkron’s work can be seen right up to the present day Thus, in a recent book, Nicholas Spulber identified the expanding railroad system

as the key driver for industrialisation during this period.18 However, in the 1970s Olga Crisp questioned Gerschenkron’s state-led view of industrialisation, and concluded that it overstated the role of the state in industrial development She

found that cottage (kustar) and small-scale manufacturing industry developed as

“an autonomous growth stream,” particularly in textiles and processed foodstuffs such as sugar, and that this market-inspired industrialisation had its roots well before the 1880s.19 In a strong challenge to Gerschenkron, Olga Crisp declared:

It would be absurd to assume that the neat pattern of interrelated policies in the budgetary, tariff, railways and monetary spheres which emerged in the mid-1890s, was from the start devised consciously with industrialisation in view It is truer to say that just as elsewhere private individuals and firms in pursuing the aims of maximising profits effected an industrial revolution, so the Russian government in pursuing general financial and political aims had created conditions within which industrialisation could proceed more rapidly and within which certain industries for the products of which there was great demand in connection with railway construction could be induced.20

Her conclusions were supported by research by John McKay, Paul Gregory and Peter Gatrell McKay identified that the state spent only a small proportion of its budget directly on developing the industrial sector – the largest constituent on railroad construction was less than 5%, and with the exception of the rail network – of which the government owned two-thirds in 1901 – almost all of Russian industry remained in private hands For McKay, the government role in the 1890s was important but largely one of “public relations, propaganda and radiation of enthusiasm.”21 Paul Gregory found that budgetary data did not show significant industrial subsidies, and that tariffs and indirect taxes were levied strictly for rev-enue purposes and played no role in industrial policy.22 Peter Gatrell concluded that government policy was but one of a series of influences that shaped economic development.23

In the early 1990s, Thomas Owen took the argument further with two works examining the institutions of Russian capitalism, with an emphasis on corporate law He found that in the late-tsarist period a bureaucratic, corrupt and arbitrary state rather than stimulating industrial development actually proved an impedi-ment to it Owen stressed that companies in Russia unlike in Great Britain or the

US still operated at this time under a permissive rather than a declaratory system

As a result, all sorts of corporate actions which would be routine in the West such as incorporation, increasing capital, floating bonds, or entering a new line of business required bureaucratic approval sometimes even directly from the Tsar

As well as having to deal with complicated and time-consuming procedures and onerous regulation at both the provincial and central level, companies also faced unpredictable and arbitrary state actions.24 His analysis corresponded closely to the theoretical analysis by Douglass North (as discussed in chapter one) on an uncertain and unpredictable regulatory regime that results in high transactions costs, which in turn limits business activity and economic development

The state and the oil industry – defining the “state”

There was no specific oil or energy ministry in the tsarist era, with the Russian state exercising its authority over the oil industry in Baku through several differ-ent St Petersburg-based ministries These were the Ministries of Finance, State Property, and Trade and Industry At a local level in Baku, the Governor-General

of the Caucasus and his staff were responsible for implementing orders from the

ministries, whilst the Mining Administration, which was part of the Ministry of Trade and Industry, also had several of its own local officials in the region They were responsible for closely monitoring the industry They gathered information about works and production processes, collected statistical data, and enforced safety rules aimed at preventing explosions and fires.25 When policy initiatives

by the ministries resulted in a change in the law, approval was required by either the Council of State, an assembly of elder statesmen and bureaucrats appointed

by the Tsar, or the Senate, the country’s highest court of law and interpreter of its laws Both the Council of State and the Senate reported directly to the Tsar himself.26

The ownership and licensing regime – from monopoly to privatisation

In the period 1821–1872 the Russian state alternated between a tax-farming tem of leasing production of oil to a single monopolist (1821–1834 and 1850–1872) and direct management of the industry (1834–1850).27 Writing in 1884,

sys-in the first major survey of the sys-industry, the Russian oil refsys-iner Victor Ragozsys-in found that the annual income from the combined oil and salt businesses generated between 80,000 and 162,000 rubles per annum for the treasury (disaggregated figures were apparently not available) in the period 1821–1872 He estimated that three-quarters of this was accounted for by oil, and one-quarter by salt His figures also showed that income fluctuated but did not grow long term over the period, and that there was not a great difference between the tax-farming and direct management approach by the state in terms of income generation (the fig-ures are shown in Table A.2 in the appendix) Modest levels of production during this period – between 1,000 and 5,000 tons per annum until the 1860s – reinforce the picture of a small and rather stagnant industry.28 Ragozin was very critical of the lack of development of the industry during this period in comparison with the

US, and the modest proceeds that it consequently generated As he said:

For almost 50 years the development of the oil industry was postponed by government undertakings and hesitations … and meanwhile time was pass-ing by, when at the same time America penetrated international markets.29

Ragozin’s conclusions were supported by a statistical study of the industry by the Russian brothers S and L Pershke published in 1913 They calculated that the average income that the state received from tax-farmers’ rent in the period 1821–

1872 was 125,000 rubles per year, and the average income from direct tion by the state was somewhat less at 98,000 rubles per year.30

exploita-The tax-farming system that predominated for most of the period from 1821

until 1872 was known in Russian as otkup The single lease to a producer was a four-year renewable contract Between 1854 and 1863 the otkupchina monopolist

was Ter-Gukasov, and from 1863 until 1872 I M Mirzoyev,31 both Armenians

In 1867 Dmitrii Mendeleev, the famous Russian chemist, following a visit to the Paris International Exhibition of that year where it is possible he viewed an early

oil drilling system, criticised the otkup system in the oil industry According to

Mendeleev:

Tax-farmers do not have any incentive to establish large-scale businesses

as their rent has a short-term character They are not interested in ing capital in exploration and test drilling: they do not want to dig nine wells to find the tenth successful one that will cover their expenses Perhaps this tenth one will only be found when the term of their rent is over, or is

invest-so close that the tax-farmer would not enjoy to the full the results of his entrepreneurship.32

Two Russian businessmen V A Kokorev and P I Gubonin, who had constructed one of the first refineries in the region at Surakhany in 1858, were also criti-cal of the tax-farming system, though in their case it related to a more specific grievance that they were unable to purchase sufficient reasonably priced crude from Mirzoyev for their refinery.33 Their lobbying combined with Mendeleev’s criticism in persuading the state to establish a body to review government policy towards the industry.34 Thus, in 1867 a Special Commission under Duke N M Leihtenbergskiy was set up within the Ministry of Finance in St Petersburg, and

in Tiflis a Commission chaired by I A Steinman, the Chief of Mining in the Caucasus region.35 Following a period of investigation and analysis the Tiflis Commission recommended a radical change in approach by the state in order to

stimulate the industry It proposed the abolition of the otkup system, that the state

should sell long-term leases for oil-bearing lands in small plots of 1–5 desyatin (1 desyatin = 2.7 acres/1.1 hectares) to private individuals, and that oil production should be free of any tax.36 Its strong belief in the virtues of private enterprise was clearly shown by the words of Steinman, its chairman:

By cancelling tax farming the government will create new opportunities for private industry The government duties should include only removing all the obstacles out of the way of the development of any industry The rest depends

on the abilities of private owners and their enterprising skills.37

The Tiflis Commission’s recommendations were then reviewed by the Ministry

of Finance’s Special Commission in St Petersburg Perhaps not surprisingly given their revenue collection priority, the Ministry of Finance did not accept that the excise tax should be abolished, and instead proposed that it should be reduced It also increased the size of the oil plots to be auctioned off, to 10 desyatin However, the main proposal – to abolish the tax-farming system and auction off oil plots to private entrepreneurs – was retained.38

In order to carry out the proposals, an agency attached to the Mining Administration in Tiflis was established to gather information about the oil depos-its, their geographical position, and the number, size and output of wells already dug, and to propose a division of deposits into groups suitable for separate enter-prises The necessary data were collected by a mining engineer called Gilev in

Table 2.2

# of wells on plot

Existing production on plot (tons)

Listed auction price(rubles)

Actual sale price(rubles)

Excess paid over list price (rubles)

Auction winner(individual or company)

1871 and published by the Mining Administration Based on this information the deposits were divided into 48 plots of 10 desyatin each.39

On 1 February 1872, a list of rules and regulations of the forthcoming tenders was published A number of these are particularly notable for suggesting that the auctions would be conducted on an open, fair and rational basis: that the auctions would be open to different classes of Russians as well as foreigners; that two plots closer than 2 versts (roughly 2km) could not be acquired by the same leaseholder; that the method of oil production depended only on the wishes of the industrialist with the proviso that it was in accordance with the Mining Administration’s safety provisions, and that the work began within two years of rent commencing; and that if leasehold fees were not paid on time, fines would be applied, and eventu-ally the lease itself would be forfeited by the industrialist.40 Furthermore, the main basis for calculating both the price of a plot and its rent was to be the size of exist-ing production,41 a logical approach also by today’s standards

A series of auctions held on 7, 14, 21 and 28 December 1872 followed in which all 48 of the plots were sold off Ragozin’s account indicates that the auctions for each plot were conducted consecutively and based on sealed bids The results can

be seen in Table 2.2, above Ragozin described the results of the auctions as a siderable success He calculated that the Treasury generated an income six times greater than the listed prices – 2.98 million rubles against 552,000 rubles.42 The proceeds equated to approximately 30 years of what the state had been receiving

con-in annual tax con-income

Ragozin also described fierce competition between Kokorev and Gubonin on the one side and Mirzoyev on the other for the four major oil producing lots (lots

#1–4 in Table 2.2) Mirzoyev was apparently taken by surprise by the size of Kokorev and Gubonin’s bids for the first two lots, for which he offered much more modest sums, to the extent that by the third lot he faced the possibility of being left without a guaranteed supply of crude for his own refineries and distri-bution network As a result, he put in a very high bid of 925,000 rubles for lot

#3 (nearly double the listed price of 552,000 rubles for all 48 plots), comfortably ahead of Kokorev and Gubonin’s bid of 600,000 rubles, to finally secure a pro-duction plot.43

From the results of the auctions in Table 2.2, it is possible to calculate that the two groups – Kokorev and Gubonin on the one hand and Mirzoyev on the other – accounted for 86% of the income generated by the sales and purchased 91%

of existing production Kokorev and Gubonin though paid much less in terms of rubles per ton of oil production than Mirzoyev, paying 65 rubles per ton against

163 rubles per ton by Mirzoyev Exactly how we can account for this is unclear

It could be due to shrewd calculation by Kokorev and Gubonin, luck, or possibly something underhand such as access to information about the other participants’ bids Overall, the sale of producing fields raised 97 rubles per ton of production, more than five times the list price of 18 rubles per ton

Outside of the main producing plots, the distribution of tender winners was much more diversified, with 16 other groups or individuals securing plots The largest of these included the businessmen Benkendorf and Muromtsev,

Ter-Akopov, and Tagiyev and Sarkisov Although they paid much more modest sums than Kokorev and Gubonin, and Mirzoyev, they still paid well in excess of the listed auction prices.

From the available evidence, the 1872 auctions appear to have been conducted

in an open, transparent and fair manner Their success in terms of raising revenue for the government is notable

The sale of fields to private owners in 1872 proved the stimulus for a formation of the method of oil extraction As Mendeleev had desired, the auction winners rapidly began drilling – rather than digging – for oil, and in July 1873 the first of many oil gushers was struck The successful driller in question was the Khalify Company,44 which Table 2.2 shows had acquired plot #14 the year before for 140,000 rubles Both producing and non-producing plots proved excellent investments for the auction winners of December 1872 Figure 2.3, below, shows the dramatic increase in production after the sale of the fields, from 25,000 tons

trans-in 1872 to 550,000 trans-in 1880, a more than twenty-fold trans-increase trans-in just eight years.Output continued to grow at a rapid rate until 1901 (see Figure 2.1, above, and Table A.1 in the appendix), after which it was disrupted by the 1905 revolution that Russia as a whole experienced A reluctance by the government to auction off licences to new reserves to producers resulted in the industry failing to repeat the rapid rates of growth achieved in the 1872–1901 period once the disruption had died down Recent research by the Russian historians A Igolkin and Yu Gorzhaltsan found that between 1896 and 1900 the government held four more sets of auctions of oil licences and, as a result, the size of land on which oil production was taking place nearly doubled to 967 desyatin.45 The next set of auctions took place in 1903 but the results were not approved by the Senate, the country’s highest court of law, apparently because it decided that the participa-tion of the Rothschilds would endanger the interests of the Russian oil industry

Figure 2.3 Russian oil production 1863–1880 (thousand tons)

Sources: 1863–1871: Ragozin, p 241.1872–1880: Pershke, pp 15, 29, 36.