Soviet Efforts To Attract Foreign E and P Investment Through Joint Ventures
Authors: Gochenour D. Thomas 
Published: December 2007

Since 1987, Soviet efforts to attract Western E and P investment have been evolving through the framework provided by the 1987 Joint-Venture Law. While this law and the dozen or so regular acts, decrees, and amendments have sought to stimulate interest, they have failed to address significant failings in the Soviet Union's institutional organization of the industry. While we anticipate that institutional authority will continue to devolve away from the All-Union central control in Moscow to the republican authorities, many obstacles to investors still have not been addressed by the joint-venture laws. Among these are the export regime, fiscal regime (which we expect will get stiffer), and the rules for jointventure capitalization and valuation.

Introduction

In the past 2 years, many oil exploration companies around the world have been enchanted by the immensely attractive geological prospects for oil or gas in the Soviet Union. While it is the business of capital companies to take calculated risks, the chaos that currently afflicts the Soviet political, infrastructure, economic, legal, managerial, and contractual systems is enough to turn even the most entrepreneurial, gambler-at-heart oilman to stone. It is, of course, very difficult to address specifics about making E and P deals in the Soviet Union today; even as I write this, the situation remains in a state of rapid and radical change. Even recent visitors to the Soviet Union find that, when they return a month later, the circumstances have changed to the point where they have to doubt what they learned in previous meetings. While it is easy to focus on technical realities-log, seismic, reservoir indicators-the situation has deteriorated to such an extent that the people in the USSR in the best position to people in the USSR in the best position to know what is happening (even ministers and local operational managers) talk openly of the frustration, ambiguity, uncertainty, and confusing rate of change occurring today. While many studies have been done on the current sad state of the Soviet oil and gas production and its alarming decline, and production and its alarming decline, and while much of the industry is concerned about the ramifications of this decline on Soviet oil and gas exports and reliability, this paper focuses only on oil and gas exploration paper focuses only on oil and gas exploration and the attendant risks of investing today in the Soviet oil and gas industry. Three elements have to be examined: the current political dissolution of the Soviet Union, the political dissolution of the Soviet Union, the current legal and contractual system available to foreign investors, and the institutional organization of the industry within the USSR. This paper addresses only the last two topics.

Institutional Organization Breakdown of a Chaotic System

Organization Through Mid-1990. The Soviet oil and gas industry was structured in a way that was both highly centralized and highly fragmented. It was centralized in that all policies and all important operational determinations were made in Moscow. Regional and local operational arms had little autonomy or scope of independent operations. They worked as mere appendages of the central ministries (the so-called All-Union ministries or, in Russian, VNII Ministry) to which they reported. But the industry also was fragmented; its direction was divided between five ministries, and its ultimate authority and oversight were shared by three separate, supervisory organizations (see Fig.1). Soviet industry functions still are not integrated. The strict separation of the various functions within the Soviet oil industry has led to a situation where each ministry works to protect its own self-interest (as might have been anticipated) to the detriment of the other ministries. So, for example, the Ministry of Geology (Mingeo) hoards data and equipment that could be invaluable to the Ministry of Oil and Gas (Minoil or Minneftegaz). Exploration and prospecting for oil and gas, including seismic work and processing, were to be the exclusive province of the Ministry of Geology. But because the Ministry of Oil and Gas could not get its seismic work done, it duplicated many of those seismic capabilities for its own work. The Ministry of Oil/Gas Construction would grab high quality tubing and pipe steel whenever it could and withhold it jealously from the Ministry of Oil Refining. The continuity of work and the oversight needed to promote important projects over those of secondary importance have mostly been missing from the Soviet industry, primarily because of the fragmentation of authority. All exploration work has been the exclusive duty of the Ministry of Geology, which also is responsible for all hard mineral prospecting and mining except for coal. prospecting and mining except for coal. Since 1989, this ministry has been led by Grigoriy Gabrielyants, an Armenian academic petroleum geologist. This ministry is petroleum geologist. This ministry is charged with all prospecting work, including raw geological surveys, geochemical work, geophysical surveying, and seismic operations and processing. It also prepares prospects for drilling. prepares prospects for drilling.