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History of Oil In Russia

Although commercial oil production only began in the second half of the nineteenth century, for centuries oil was gathered by peoples who lived in parts of the world where it seeped to the surface. In Russia, the first written mention of the gathering of oil appeared in the sixteenth century. Travelers described how tribes living along the banks of the river Ukhta in the far northern Timan Pechora region gathered oil from the surface of the river and used it as a medicine and a lubricant. Oil gathered from the Ukhta river was delivered to Moscow for the first time in 1597.

In 1702, Tsar Peter the First ordered the setting up of Russia's first regular newspaper, Vedomosti. The paper's first issue carried a story about the discovery of oil on the surface of the river Sok in central Russia, while later issues carried similar stories about oil seeps elsewhere in Russia. In 1745, Feodor Pryadunov received permission to begin gathering oil seeping from the bed of the river Ukhta. Pryadunov also built a primitive refinery, delivering some of the products to Moscow and St Petersburg.

Oil seeps had also been reported in the North Caucasus by various travelers who passing through the region. Local people even gathered the oil using buckets to haul it up from wells up to one and a half metres deep. In 1823, the Dubinin brothers opened a refinery in Mozdok to process oil gathered from the nearby Voznesensk oilfield.

Oil and gas seeps were recorded in Baku on the Western shores of the Caspian Sea by an Arab traveler and historian as early as the tenth century. Marco Polo later wrote how people in Baku used oil for medicinal purposes and to administer blessings. By the fourteenth century, oil gathered in Baku was already being exported to other countries of the Middle East. The first oil well in the world was drilled at Bibi-Aybat near Baku in 1846, more than a decade before the drilling of the first well in the US. This event marked the birth of the modern-day oil industry.

The Birth Of The Industry

The Baku region harbored many large fields which were very relatively easy to exploit, but transporting the oil to market was difficult and expensive. The Nobel brothers and the Rothschild family played a major role in the development of the oil industry in Baku, which was at that time part of the Russian Empire. The industry grew rapidly, and by the turn of the century Russia accounted for over 30% of world oil production. Shell Transport & Trading, which later became part of Royal Dutch/Shell, began life by ferrying oil produced by the Rothschilds to Western Europe.

In the second half of the nineteenth century, Russia also began to discover oil fields in other parts of the country. In 1864, a well drilled in Krasnodar Krai produced the first gusher. Four years later, the first oil well was drilled on the banks of the river Ukhta, while 1876 saw the start of commercial production on the Cheleken peninsula in present-day Turkmenistan. The rapid development of oil production was accompanied by the construction of various plants for processing crude oil, with a lubricants plant opening in 1879 near Yaroslavl and a similar facility opening the same year in Nizhny Novgorod.

Oil production suffered as a result of the Russian revolution in 1917, and the situation worsened with nationalization of the oil fields by the Communists in 1920. The Nobels sold a significant part of their Russian holdings to Standard Oil of New Jersey, which was later to become Exxon. Standard Oil protested the decision to nationalize the oil fields and refused to cooperate with the new Soviet government. But other companies, including Vacuum and Standard Oil of New York, which was later to become Mobil, invested in Russia. The continued inflow of Western funds helped Russian oil production to recover, and by 1923 oil exports had climbed back to their pre-revolutionary levels.

The Rise Of The Soviet Oil Industry

The Caspian and North Caucasus remained the center of the Soviet oil industry until the Second World War, with rising production feeding the country's rapid drive to industrialize. Securing control over oil production in Baku was a centrepiece of German strategy during the war, and for a time the Soviet Union found itself cut off from access to its oil. Caspian oil production once again began to pick up after the end of the war, and reached a new record high of some 850,000 b/d in 1951. Baku remained the centre of the industry and nearly two-thirds of Soviet oil field equipment was manufactured in the area.

But at the same time, Soviet planners began to accelerate development of the Volga-Urals region, which had been under development since the 1930s. Fields in the region were often close to existing transportation infrastructure, and the geology was not particularly complex. By 1950, the new fields accounted for 45% of Soviet oil production. The massive investments in the region paid off, allowing for a big hike in Soviet oil production. The extra barrels went to feed a wave of new refineries which were brought on stream in the period between the 1930s and the 1950s. The Omsk refinery was opened in 1955, and later grew to become one of the largest refineries in the world.

The growth in production also allowed the Soviet Union to begin ramping up exports of oil. Moscow was keen to maximize hard currency earnings from oil exports, and priced aggressively in order to boost its market share. By the early 1960s, the Soviet Union had replaced Venezuela as the second largest oil producer in the world. The arrival of lots of cheap Soviet barrels on the market forced many Western oil companies to cut their posted prices for Middle Eastern oil, thus reducing royalty revenues for governments of the Middle East. This reduction in revenues was one of the driving forces behind the formation of the Organization of Petroleum Exporting Countries (OPEC).

Production from the Volga Urals region peaked at close to 4.5 million b/d in 1975 but later dropped back to less than a third of that level. Just as the Soviet Union was thinking about how it could sustain production from maturing fields in the Volga Urals, the first major discoveries in Western Siberia were announced. The early years of the 1960s saw a series of discoveries in the region, culminating with the discovery of the super-giant Samotlor field in 1965, home to recoverable reserves estimated at some 14 billion barrels.

The West Siberian basin presents a hostile environment in which to produce oil, with the territory ranging from permafrost around the Arctic circle to extensive peat bogs in the south. But in spite of the difficulties, the Soviet Union was able to ramp up production from the region at an astounding rate. Growth in West Siberian production underpinned an increase in total Soviet production from 7.6 million b/d in 1971 to 9.9 million b/d by 1975. By the middle of the 1970s, West Siberian production was filling the gap being left by the decline in Volga Urals output.

The Decline Of The Soviet Oil Industry

But in achieving phenomenal production from fields in Western Siberia, the Soviet oil industry had also sown the seeds of its own decline. West Siberian fields were relatively cheap to develop and offered huge economies of scale, and Soviet planners gave priority to maximizing short-term rather than long-term recovery. Production associations tended to overproduce existing fields to meet production quotas without regard for proper reservoir management practices, drilling too many wells and injecting too much water. There were also no incentives to improve efficiency and scant investment in new technology. The problems soon began to manifest themselves in the form of falling well productivity, low reservoir pressure and rising water cut.

By the middle of the 1970s, Moscow was already aware that a production decline was just around the corner. The first decline hit in 1977, caused by chronic under-investment in exploration in Western Siberia, but authorities managed to reverse the decline by boosting spending on drilling. The second fall happened in the period between 1982 and 1986. This time too, Moscow managed to head off a crisis by injecting more cash.

In 1988, the Soviet Union hit a new record of some 11.4 million b/d. At this point, it was the largest producer in the world, with output significantly higher than in either the US or Saudi Arabia. It was also this year that output from Western Siberia peaked at 8.3 million b/d. But by that point, a sustained decline in production was inevitable - thanks to poor reservoir management techniques, the Soviet Union only managed to lift production marginally during the first part of the 1990s, despite a dramatic increase in capital expenditure. When it came, the collapse in production was as dramatic as the rise had been -- Russian production fell continuously for a decade and ended up at almost half its original level.

The slide was aided by the economic crisis which engulfed the region in the wake of the collapse of the Soviet Union. The collapse of the economy resulted in a big drop in the domestic consumption of oil, but export capacity restraints meant that companies were forced to continue selling a large portion of their output on the domestic market, often to insolvent customers. The companies' financial difficulties forced a complete halt to all new exploration and drilling activity, and even work-overs of existing wells, a situation which worsened the collapse in production.

Future Development

Russian oil production finally halted its slide in 1997. An independent analysis suggests that Western Siberia could still harbor over 150 billion barrels of reserves, three times the volume produced to date. But the picture is clouded by the poor condition of the reservoirs at fields already under development, and by the fact that West Siberian fields typically consist of a larger number of oil-bearing layers than fields in other regions, thus complicating recovery.

Other provinces also offer significant potential. The Timan-Pechora basin stetches from the Urals in the east to the Barents Sea in the north. The region suffers from a harsh climate, and a large part of the reserves are thought to consist of heavy oil. Nevertheless, remaining discovered reserves are estimated at around nine billion barrels, implying significant potential. East Siberia's remaining reserves are put at three billion barrels, but undiscovered reserves could be several times larger. The region's main drawback is its distance from markets and the lack of transport infrastructure. Reserves offshore Sakhalin island are also thought to be significant, but development to date has been held back by high costs.


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