Oil Dispute in Russia’s North Makes Federal Government Use Dirty Technologies

Dirty business has become the daily practice for Russian major companies

Russia is a country, where big and strong people can always take things away from smaller and weaker people. This can be done absolutely legally. The major goal of the Russian law is to legally guarantee the interests of big and strong people. If the law does not help for this or that reason, high-ranking political officials come into the picture to settle this or that problem. Of course, small people can also be fast and aggressive. They can have their own protectors in governmental structures. Yet, one may not doubt that small people will have to yield sooner or later, because big people have more protectors to use. The only thing that small people can do is to enhance their reputation in order to make their capitulation honorable and profitable.

Penza region Senator at the moment, notorious deputy Finance Minister in the past, Andrey Vavilov, announced that Severnaya Neft (Northern Oil) company was going to change its owner. As he said, there had been an agreement achieved regarding the transaction. Before Andrey Vavilov took his position in the Federation Council as the Senator of the Penza region, he was employed at that company as the chairman of the board of directors.

The story of the company Severnaya Neft, and the licence that it won for the development of the oil and gas deposit Val Gamburtseva, is surrounded with continuing scandals. There were attempts made to withdraw the licence, criminal proceedings were instituted against the company. Russian media outlets were certain in July that there would be another company to develop the mentioned deposit. Severnaya Neft won the competition for the development of that deposit in March of 2001. Russia’s two major oil companies LUKOIL and Sibneft appealed against that victory. This resulted in a very long dispute at various courts. State services got involved in the case too. Even the Russian Federation Ministry for Nature demanded that the licences should be withdrawn from Severnaya Neft. However, the system of oil and gas usage in Russia is based on the fact that a licence is issued by a federal body and a local government. That is why, the position of the country’s largest oil companies and federal ministries ran against the strong counteraction on the part of local authorities. The head of the Nenetsky autonomous region, (on the territory of which Val Gamburtseva oil deposit is situated), as well as local law-makers refused to withdraw the licence from the company Severnaya Neft.

Thus, there was a certain oil and gas usage crisis formed last summer. Dmitry Kozak, deputy head of the presidential administration touched upon the necessity to reform the oil and gas usage system. Dmitry Kozak suggested Russia’s regions should be deprived of the right to issue licences for the deposits that virtually are of the common federal property. Dmitry Kozak developed those ideas in the draft law “About Oil and Gas.” Mr. Kozak’s group of experts worked on those ideas and suggested the nationalization of not only crude and gas, but their products as well. If the new law had become real, all Russian extracting companies would have become the contractors of the state.

The obstinacy of the local government, as well as of the head of the regional administration, Vladimir Butov, caused an anger attack on the part of the federal authorities. Presidential envoy in the North-West of Russia, Viktor Cherkesov, threatened Vladimir Butov with a possibility of a criminal case that might be filed in that respect. In addition to that, the Internal Affairs Department of the Nenetsky autonomous region instituted criminal proceedings against their own governor on April 12th. The case was filed on the ground of the governor’s refusal to execute one of the many contradictory decisions of the court, and to withdraw the licence for the development of the Val Gamburtseva deposit from Severnaya Neft company. The Nenetsky regional police searched the office of the regional administration and withdrew all documents about Governor Vladimir Butov’s business trips, vacations and so on. Federal media outlets, including all central TV channels, reported that Vladimir Butov, the governor of the Nenetsky autonomous region, was put on federal wanted list (this message was refuted later). It left no doubts that the federal government stirred up such major companies as Sibneft and LUKOIL on the local administration of the Nenetsky autonomous region.

Such competition is absolutely not unusual for Russian companies. However, such methods of competition are categorized as dirty mafia business. Yet, this does not make LUKOIL’s and Sibneft’s foreign partners stop their businesses with them. Foreign businessmen get used to the “Russian kind of business” very quickly. This is another example to prove that foreign partners do not see anything wrong about it, when they deal with it. 

After this immense pressure, Governor Butov and local law-makers changed their position regarding the rights of the company Severnaya Neft to develop Val Gamburtsev deposit. They started showing pressure on the company instead. However, the company managed to get verdicts from several regional courts, in which it was said that the company’s licence was obtained legally. In other words, the company was allowed to keep on pumping oil from the mentioned deposit. The Russian Ministry for Nature charged the company with violating the ecology law, while the local legislative assembly suddenly recollected that Severnaya Neft forgot to pay social and ecology taxes to the regional budgets.

The district court of the city of Irkutsk banned the state monopoly Transneft from transporting the oil that was extracted by Severnaya Neft. This decision was made on December 28th, 2002. This was the last outburst of the competitive fight in the Russian spirit. This was also the result of the lawsuit, which was filed by a minor shareholder of the company LUKOIL. Severnaya Neft appealed against that decision, and the shareholder appealed the following cancellation of the award, which was good for him. It seemed that it was like a circle of court procedures, until Andrey Vavilov, the Senator of the Penza region, put an end to the dirty story.

Severnaya Neft has been developing rather fast during the recent four years, having increased its extraction from 600 thousand to 2.5 million tons a year. The company’s development and the successful management allowed to increase its capitalization considerably. Now the company can be sold at a very high profit. Andrey Vavilov said that it would be one of the first transactions in the new history of Russia. He added that there would be no offshore schemes used, and that the state would get all taxes. New owners will deal with the company’s problems now. Andrey Vavilov stated that the names of the new owners would be exposed after February 1. We wonder, if LUKOIL is a lucky buyer. They say that it is not. Let’s wait and see.

Kira Poznakhirko

Translated by Dmitry Sudakov

Author`s name Olga Savka