Soviet Oil

THE Soviet Union, in its current plans for economic expansion and competitive coexistence, is determined to establish itself as a primary distributor in the international oil market. Comrade Evgenii B. Gurov, a director of Soyuzneftexport, the Soviet state agency charged with handling the sale of oil and oil products to foreign countries, made this fact clear to the second Arab Petroleum Congress at Beirut, Lebanon, last October.

Simultaneously Comrade Gurov sought to allay the anxieties of principal producing countries, notably those in the Arab East, that the projected Soviet sales expansion would take place at their expense. “We are confident,” he told the seven hundred delegates to the congress, “that the Arab countries need have no fear regarding their exports, not only to Western Europe but to other countries as well, particularly as world consumption of crude oil is continually increasing.”

The recent Russian initiatives in the international oil market reflect not only the aggressive foreign economic policies of the present Soviet leadership but also the steady expansion since 1953 of their petroleum industry.

The hinterland of Baku in the Azerbaidzhan Republic at the southwest corner of the Caspian Sea continued under the commissars in the interwar years to serve as the primary source of Russian oil, as it had under the czars, and accounted, as late as 1940, for over 70 per cent of Russia’s output. In the post-war years, Azerbaidzhan progressively receded in importance as the center of crude production shifted to the region stretching some eight hundred miles northward from the Caspian Sea between the Volga River and the Ural Mountains. The Volga-Ural zone, dubbed the “Second Baku” by Soviet oilmen, brought three fourths of Soviet crude to the surface in 1959. The Russians, moreover, have been pushing ahead with petroleum exploration in other parts of the U.S.S.R. and have already reported significant discoveries in Turkmenistan and Uzbekistan, which promise to become active crude lifters in the 1960s.

The Soviet government does not disclose the size of its proved petroleum reserves — that is, those recoverable by existing techniques. Informed estimates by non-Soviet experts range from four to eight billion tons. If the lower figure is correct, Soviet reserves nearly equal those of the United States. At the 1959 crude-lifting rate, the Soviet supplies, even as most conservatively calculated, would suffice for over thirty years, and ours for little more than twelve. If the higher Soviet figure is accepted, and this may not be entirely ruled out, Russia’s proved reserves are approaching those of the Persian Gulf desert principality of Kuwait, which boasts the world’s richest oil deposits.

The search for customers

Soviet export oil found its way, in the early postwar years, primarily to the satellites of Eastern Europe, and after 1949 to Communist China as well. The Soviet government, after Statin’s death, began deliberately to cultivate non-Communist oil purchasers, as part of the new economic policy. From two million tons in 1953, petroleum exports to countries outside the Soviet orbit rose to 9.5 million in 1958 (nearly two thirds going to Europe and the rest to Asia, Africa, and Latin America), 14.5 million in 1959 (almost four fifths to Europe), and an expected 20 million in 1960. Indeed, after 1957 the quantity sold to countries beyond the Soviet orbit started to surpass that reaching Russia’s Communist allies.

Most of the petroleum crude and products destined for non-Communist lands have been funneled through Black Sea ports into chartered tankers. The Soviet government was not under pressure in 1960 to build its own fleet, in view of the approximately four million tons of idle tankers begging for customers in mid-1960.

Far more serious was the need for internal transportation facilities to bridge the vast distances from the oil fields to Soviet and satellite refineries and to ports for shipments abroad. Now that plentiful sources of supply have been located and the outlook for future discoveries is bright, the growth of transportation facilities will control the rate of the oil industry’s expansion.

Little wonder that crude oil pipelines, under construction or projected for the early 1960s, radiate in almost all directions out of the Second Baku. A 2300-mile, 28-inch system, now under construction, will link the Tuimazy fields with Irkutsk on Siberia’s Lake Baikal. Another, more ambitious system, still largely in blueprint, will push into Western Europe, with one branch to feed Hungary and Czechoslovakia, and a second, Poland and East Germany, while a third will debouch at Klaipeda (Memel) on the Baltic Sea for exports to Scandinavia and Western Europe.

The Soviet Union will be capable of satisfying the needs of its oil-poor satellites and Chinese ally and of freeing mounting quantities for sale elsewhere. The choice clients are the industrialized countries of Western Europe and Japan, which have virtually no oil of their own.

The rival producers are the Middle East countries, which sit atop the most fabulous pools of liquid fossil fuel — no less than 50 per cent of the world’s proved reserves — but which in the foreseeable future will remain marginal consumers. On a much smaller scale, Venezuela, too, falls into this class.

The “majors”

Access to the lion’s share of the Middle East resources has been preempted by eight Western companies known in the trade as the “majors” —five American, one British, one Anglo-Dutch, and one French. The majors appeared on the scene first, took the initial risks, invested heavily in the search for oil, and made the discoveries. Three of the majors also own concessions embracing most of the producing areas in Venezuela.

The eight companies are integrated companies which engage in all phases of the industry from exploration and crude lifting to refining, distributing, and selling the finished products. In Western Europe the majors established a position of primacy, while in Asia and Africa, and to lesser degree in Latin America, they won protected markets by special arrangements entailing on their part the construction of refineries and of retail outlets, and the assurance to local consumers that the majors would deliver oil products in the requisite quantities and varieties.

The majors were thus able to adjust supply to demand and keep the price of crude relatively stable. That price was not determined by the cost at the wellhead in the Middle East, which ranged between ten and twenty-five cents a barrel, but was geared to that in the United States, which was many times higher. The handsome profits, shared equally, after 1950, with the Middle East host governments, attracted to the scene American, Italian, and Japanese “independents,” as oil companies which are not members of the major league are called.

In 1953 eight American independents struck oil in the Kuwait neutral zone, and in 1955 three of these joined six others to purchase a 5 per cent interest in the Iranian consortium, which took over a wellestablished enterprise. The American independents, finding the United States market virtually closed to Middle East crude and the international market largely cornered by the majors, started selling at cut prices. The majors were prone, initially, to absorb most of the discounts themselves, by permitting the Middle East governments to continue enjoying the scale of revenues, if not the annual increment, to which they had become accustomed.

In the hope of making up in quantity what they were losing in price, the companies tended to produce more crude. Moreover, majors and independents alike took part in the new scramble for Africa. Saharan oil, already reaching French and Franco-African outlets by 1960, poured more surplus into the international pool, as Libya was also bound to do as soon as its commercial production got under way.

Meanwhile, early in September, 1960, Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela, later joined by Qatar, formed the Organization of Petroleum Exporting Countries for purposes of imposing a prorationing system of their own on the majors. At the second Arab Petroleum Congress in October, the companies turned a deaf ear to the governments’ request for consultation on oil production and pricing. How little chance the O.P.E.C. scheme would have of bucking the realities becomes manifest after a closer look at the Soviet oil industry.

Soviet marketing practices

The oil industry in the U.S.S.R. must be seen for what it is — a government agency run as a state monopoly. This industry in 1960 hoisted from the subsoil 144 million metric tons of crude, of which it refined over 80 per cent and marketed the products. Clearly, then, the Soviet oil industry is already the largest integrated “company” of its kind in the world. More than that, it is operating quite independently of the other majors in competition for the same markets.

An economic enterprise of such magnitude, managed by a state so firmly committed to a fixed political doctrine and dealing in a commodity of such high political and strategic content, is bound to be influenced in its activities as much by political as by commercial considerations. Soviet oil politics dictates the closest vigilance by the non-Communist world, particularly by the United States and its transatlantic allies.

Not every Soviet petroleum transaction is necessarily politically motivated. Many deals may be concluded on purely commercial grounds. These must first be separated from those that may have varying degrees of political content before one can determine the character of the Russian threat to the Western oil industry, and even more to the Western strategic and political position in the underdeveloped countries of Latin America, Asia, and Africa.