Key decree to bolster Russias oil 'have nots'

A potentially critical decree affecting Russia's oil industry is to be signed this month by President Boris Yeltsin.

Following an internal fight at high levels of the central government, the decree was hammered out at the recommendation of Prime Minister Viktor Chernomyrdin. He had help from a bloc of increasingly powerful regional governers joining forces with allies in the state Duma, or lower house of Russia's parliament.

The decree will require that fundamental changes in oil and industry practices will be put into effect in a number of remote, net oil importing regions that can produce oil beyond current levels.

Decree's provisions

The decree reportedly will include these provisions:

Regional authorities will have the right to supersede previous government actions that may have given monopoly rights to private or quasiprivate production associations such as Lukoil to develop underutilized or undeveloped oil reserves.
The limited number of regional authorities designated by the decree may choose to work with any Russian production association. The authorities may even in certain cases invite one or more foreign partners to help develop oil reserves.
The Russian federal budget will include at least 80 billion rubles for fiscal 1996 that these regions may use to secure equipment and technology to ensure development of oil fields.

In addition, the decree will require a second phase to the program. This calls for added federal funding to be made available to oil hungry and cash starved regional economies for processing crude produced as a result of the program's first phase. The main focus, in both phases, will be on small scale production and processing at multiple sites in each region.

As for the source of upstream and downstream equipment, the decree will place an emphasis on ensuring that regional authorities use Russian made technology and processes wherever feasible.

Decree's significance

The point of these provisions is to make available as soon as possible increased volumes of crude oil and refined products to oil "have nots" among the 89 regions and republics of the Russian federation.

For various reasons, Kaliningrad oblast on the Baltic Sea coast has been included in the decree. It is a hardship case meant to receive the special support stipulated in the new program. Among those reasons, Kaliningrad oblast:

Is Russia's westernmost region. It is an enclave.
Has only gas pipeline links to the rest of Russia but no oil pipeline links.
Has almost 300 oil wells, more than half of them idle.

Kaliningrad oblast's government often has been at odds with Lukoil, which took over control last year of the region's moribund oil production association Kalmoreneftegas. While there has been much talk about working over wells and developing a new oil terminal (OGJ, July 31, p., 40), Lukoil has invested virtually no funds in the region despite its moderate onshore and substantial offshore oil potential.

As a result, Kaliningrad oblast is producing only 20,000 b/d of oil. All of it moves by rail car to Lithuania's Mazekai refinery, which Lukoil controls.

Less than half the equivalent crude production is returned in the form of refined products to Kaliningrad for allocation by regional Gov. Yuri Matochkin.

With the decree in hand, Matoch-kin's freedom of movement is widened considerably.

He is expected to purchase oil production equipment from at least one Russian firm and order a few minirefineries from another.

Matochkin's near term goal is to quickly organize the production and processing of an added 2,000 b/d of oil in the oblast. Longer term, the goal is to fully exploit all of Kaliningrad's oil potential.

What is perhaps most significant about Kaliningrad's approachand it will be true in some of the other regions designated by the decreeis that Lukoil is not included in the scenario.

Given the political and economic clout of Lukoil in Russia and on Russia's behalf inside Azerbaijan and Kazakhstan, this is no small setback.