Chechnya Wants Control of Oil Resources

Another PW article (my tr.):

Chechen government demands to gain control of oil resources

By Liza Osmayeva

GROZNY, Chechnya (April 26, 2006) – In the near future Grozny plans to present an updated version of the agreement on power sharing between the federal centre and the Chechen Republic. Within the framework of the document that is being prepared, the Chechen government intends to gain unprecedented economic privileges for the republic, including a transfer to local authorities of control over oil resources.

The Chechen side believes that the income from oil sales must be spent on the restoration of the republic. But they consider that in order for this to be possible Chechnya must be given the right to the independent use of natural resources, including oil production. It should be noted that this question has already been raised by the Chechen side on several occasions. In particular, it was something on which the now deceased Moscow-backed Chechen President Akhmat Kadyrov insisted.

Under his leadership, the first draft of an agreement on power sharing was prepared and presented for debate at the end of 2003. According to its provisions, the Chechen side would be allowed to control the income from oil. However, the assassination of Akhmat Kadyrov on May 9, 2004 prevented the realization of these plans.

In the middle of the last century the Chechen Republic was one of the main suppliers of petroleum products in the Soviet Union. In the 1970s Chechnya gave the country more than 20m tons of oil per year. Three oil refineries operated on the republic’s territory, and their power made it possible to process up to 30m tons of crude per year. However, in the course of the first military campaign in Chechnya these enterprises were completely destroyed, and the remaining equipment misappropriated. As a result Chechnya was left without the possibility of independent oil refining, and all crude oil obtained here is exported beyond the republic’s borders.

In the opinion of specialists, the chemical composition of Chechen oil makes it one of the best in Russia and even in the world. At present up to a hundred wells are exploited on the territory of the Chechen Republic. In the last two years, oil production has increased to 2m tons per year. But this is not yet the limit, specialists believe. With a competent approach to the output and development of the existing strata, it can be increased several times. Since no geological study has been undertaken in the Chechen Republic during the last twenty years, it is rather difficult to talk of new reserves of hydrocarbon raw material. Today’s predicted reserves are assessed at 83.2m tons, oil industry workers say.

At present oil production in Chechnya is undertaken by the joint stock company Grozneftegaz, which is a daughter enterprise of the Rosneft oil company. The licence rights for production rest with Rosneft. Rosneft also owns 51 per cent of Grozneftegaz’s shares. The remaining 49 per cent belongs to the Chechen government.

"This means that the entire profit from the sale of Chechen oil belongs to the monopoly company, while Grozneft is in this case merely a hired employee paid for services as an operator. This state of affairs cannot suit Chechnya, as the republic’s budget only receives 8-10 per cent of the general profit on the oil. The republic’s government insists that a minimum of half the oil income should go into the Chechen budget," one of Chechnya’s independent experts told PW’s correspondent.

According to him, several solutions for this are being proposed. "The first, in my view very radical one, is to transfer the license rights for oil production to Grozneft. The second is more of a compromise - to conclude a joint operation agreement between Grozneft and Rosneft." In this case, the republic’s income from each ton of the oil sold would be 535 rubles. Even with the present volumes of oil output that are entering the republic’s budget of republic it will amount to several billion rubles per year. In a situation where almost the entire republic is lying in ruins, I think this would significantly help in its restoration. But again, it’s not certain that these funds will be used for what they’re intended for," he thinks.

"However that may be, it’s at present unlikely that the people at Rosneft will listen to the proposals of Grozny. Considering the fact that over the long term it’s planned to export Chechen oil in its pure form, without mixing it, let’s say, with Bashkir or Tatar oil, which is of considerably lower quality, Rosneft’s income may grow by several million dollars a year. It would be foolish to reject a profit of that size," the expert noted.

At the same time, the problem of the illegal production and embezzlement of oil and petroleum products remains no less urgent for Chechnya’s oil complex. In the last year the law-enforcement agencies have been able to achieve definite results in the struggle with this phenomenon. However, in spite of the efforts that have been made, the law-enforcers have not so far succeeded in putting a complete stop to the misappropriation and primitive processing of petroleum products.

According to the law-enforcement agencies, 600k tons of oil are misappropriated each year on the territory of the republic. The real scale of this illegal business is hard to judge, but according to preliminary data, in the past year alone more than 700k tons of petroleum products were misappropriated.

The situation is further aggravated by the fact that some representatives of the republic’s power structures and law-enforcement agencies have been drawn into this shady business. "As far as I know, several dozen centres of illegal oil production are operating in the Zavodskoy district of Grozny alone. Members of the local power structures are involved in protecting them. I’ve heard that the owners of such ‘wells’ pay the law-enforcers from 500 to 1000 rubles a month", says Mayrbek R., a law-enforcement official.