Money Smells Oil

Building new or maintaining old refineries is considered to be a crime in Russia

If a country's economy is based on the export of its natural resources, such a country will never become a developed state.  Brazil or Argentine had very good chances to become economic giants. However, this did not happen and it is not going to happen in the nearest future. Despite Putin's appeals to develop the processing industry, statements from governmental officials about the reduction of the oil share in the national GDP, Russia is still living at the expense of its crude exports. If crude is not in demand on the foreign market, Russia might stop existing as a state very easily.

High-ranking officials prefer to negotiate the increase of the Russian natural wealth with foreign partners, though. They also negotiate investments to further increase of crude and gas extraction, as if there is nothing else that Russia can sell. It is obvious that the extraction and the export of Russia's natural resources is the only thing that interests the Western world. 

During his visit to the USA, Vladimir Putin was negotiating the export of the Russian gas and investments in the Russian gas industry. On a visit to China, Russian Prime Minister Mikhail Kasyanov tried to pacify irritated Chinese officials regarding the unsettled pipeline project from Russia's Angarsk to China's Daqin. In the meantime, the Russian government approved the plan of construction of the pipeline from West Siberia to Murmansk. This means that Russia is to export crude to the USA. China's and Japan's interests have been virtually sacrificed for the sake of the "great" US-Russia friendship.

It seems that Russia has the opportunity to inundate the world with its crude. The merged company YukosSibneft ranks fourth in the world in terms of crude export volume. Lukoil is in the eighth position on the list. But it does not show any influence on their capitalization - i.e. the market cost of all assets. British Petroleum and TNK (Tyumen Oil Company) established an oil company, which has already taken the third place in the group of world leaders. Foreign experts valued the deal at $15 billion, although BP had acquired TNK's assets for $3.75 billion of BP's stocks and $3 billion in cash.

Sibneft is not the only oil company of interest in Russia. However, Mikhail Khodorkovsky had to spend only $3 billion to purchase it. The joint capitalization of Yukos and Sibneft was worth $37.5 billion on the day the deal was struck. A short time later, the company's capitalization was evaluated at $45 billion - this number is expected to increase. However, it is rather a humble capitalization in comparison to its international peers. 

It seems to be curious, but reserves and the level of the crude extraction is not very important for the capitalization of Western oil companies (Russian oil companies seem to be tiny in comparison). That is probably why ExxonMobil enjoys the $250 billion capitalization, although this company is behind YukosSibneft from the point of view of crude extraction and reserves. 

The website of ChevronTexaco, one of the largest companies of the world, has published information about crude and gas extraction only once (the information was published as an appendix to an annual report). Information concerning new products, technological changes in the processing of crude, petroleum and petrochemical products is the most important information for Chevron's shareholders.

There is nothing strange about this. Exxon, Chevron and other oil leaders produce larger volumes of petroleum products from a single ton of crude. The products considerably exceed the value added crude. In other words, every barrel of oil brings more profit to Western companies than it does to Russian companies. Western companies aim to produce oil products of which the final product that can be sold to customers. The volume of oil reserves and their location is not important to them. They perceive someone else's crude as their own - sooner or later the crude finds itself in their tankers. 

Russian oil companies do their best to extract as much crude as possible and then sell it to foreign companies. The latter earn a very good profit from the Russian crude. For Western companies, the crude extraction is a way to enable their processing capacities and petrochemical enterprises. The products of the first processing are 1.5 times as expensive as the crude, even at high current oil prices. The wholesale cost of petroleum products increases even more during the further processing of the crude.

This brings up a question: why don't Russian companies increase their own processing capacities to export petrol, kerosene, mazut and other petroleum products? Russian oil companies are at risk of staying small and cheap on the world market. Sooner or later, world oil giants will acquire Russian oil companies and their potential reserves at cheap prices.

Judging upon the postulates of the market economy, the capitalization issue is a private problem of shareholders only. However, the share of oil and gas enterprises makes up more than 50 percent of the Russian GDP. The losses and the insufficient income of Gazprom, for instance, directly affect the national economy, its ratings and the balance of payment. Finally, the social situation in Russia, the stability of the political system, the electorate's intentions depend on the amount of petrodollars.

Developing the processing and the export of the final product, Russian oil companies could increase their own capitalization and budgetary revenues. For example, 1,000 euros that consumers pay for a ton of petrol at filling stations in Western Europe, contain more than 500 euros of taxes and excises. Russia exports crude - it receives 100 to 300 euros per ton depending on the price of the raw material. However, Russian companies continue competing with each other in the area of extraction and export of crude. They use the profit to acquire processing capacities in the countries of the former Soviet Union and Eastern Europe, although the capacities of Russian refineries are at a capacity level of 40-60 percent. The petrol and other petroleum products manufactured abroad are sold abroad too, at foreign high prices. European petroleum products are then delivered to Russia at those prices as well.

Needless to mention that the income received from selling the final product manufactured from the Russian crude does not return to Russia. YukosSibneft's CEO Mikhail Khodorkovsky is the pioneer and the ideologist of these schemes. His position on the issue is known rather well. Khodorkovsky believes that building new refineries or maintaining old ones in Russia is equal to perpetrating a crime. Yet, it is unclear, what the object of the crime is.