OIL IS A TRIAL FOR US (by Yuri Shafranik, Chairman of the Council of the Union of Oil and Gas Industrialists)


20 years ago, Yuri Shafranik  was appointed the Minister of Fuel and Energy of the Russian Federation. He succeeded Viktor Chernomyrdin, who was appointed Prime Minister. Those were the years of drastic structural changes in Russian economy, including the fuel and energy complex (FEC). Those difficult times and current trends in the industry Yuri Shafranik Chairman of the Board of the Oil and Gas Producers of Russia described in an interview to the magazine "the FEC of Russia" .

- In Russsian version of the  Wikipedia one finds the following information: "... In August 1996 (Y.Shafranik) resigned from the post of the Minister of Fuel and Energy. His resignation was related to his particular position concerning state regulation of the fuel and energy complex, as well as the pace of privatization of Russian oil industry." Please, tell us about the time when you headed the Ministry of Fuel and Energy. If you had the possibility to return to the time, would you have changed your views?

- History does not know the subjunctive mood. It is no use to speculate now what could have been changed then. When one occupies one of the highest positions in the government, he is, by and large, not free, he is influenced by many factors. Of course, in those years there were a lot of misses and errors, of efforts not always well-targeted…

However, we must not forget what was going on in the country ... The Soviet Union collapsed, in politics – a mess. The Federal Treaty was signed with difficulties, in some republics they began to talk about independence and secession from the federation. However, destructive tendencies appeared much earlier. Namely since the adoption in 1987 of the Law on the State Enterprise, according to which the head of the enterprise was to be elected by  its employees, and - most importantly - any unit had the right to exit from the enterprise. Even in the oil industry oil and gas producing divisions started to exit from the management enterprises. Id est, disintegration had started in the most mobilized and well-structured domestic industry. Not to speak about construction trusts and other structures that were part of complexes that were not only proudly named  PRODUCTION ASSOCIATIONS, but really provided for the whole creative cycle, including design, field development , drilling, operation of facilities, equipment, etc. etc.

Anyway, we were able to stop the degradation of the industry and to ensure creation of  vertically integrated companies operating as we then formulated , "from well to petroleum station ."

(Unfortunately , our experience was not used in other industries. Therefore, for example, the famous giant Soviet industry plant " Uralmash" was divided into small cooperatives . And if before the partition it produced 300 drilling rigs a year, now the plant operating under the same name of the famous company produces a maximum of 30 rigs, i.e. 10 times less. )

So, under extremely difficult conditions, we managed to save the fuel and energy complex. Moreover, on the ruins of seven Soviet ministries we set up companies in the electric power, coal, oil and gas industries. And I am proud of the fact that by the end of the 90-ties, these companies started to work profitably: even the previously subsidized coal industry became profitable. Our team withstood enormous political pressure and managed to produce a large number of decrees, regulations and respective directives. They are relevant today and provide legal framework for the FEC.

This provides for Russian economy in many ways to meet international standards. Should other sectors of the economy have stepped upon this path - here I mean not privatization, but structural reform - the country would have had efficient and competitive industrial production today.

But the vector of political development at that time was directed almost entirely towards creation of a new class of owners, and neither I nor my team could change it. Top leadership of the country decided that by transferring companies to private ownership they would quickly create a class of owners capable of advancing national economy. They were convinced that by simply giving away state property one could easily get businessmen equal to those who start their enterprises from scratch. I was against that decision.

Therefore in all documents of the years 95-96, which I introduced as the head of the Ministry of Fuel and Energy, I insisted that the controlling stake in the company should have been left in  state ownership. That did not correspond to the dominant political course. Later the dishonest  loans for shares auctions started .

Wikipedia’s statement that Shafranik allegedly had made up his mind and left is incorrect. No,  my views just did not correspond to the political course conducted by the President and I did not join the new government. Of course, there were some other aspects as well. In rather evil articles of the time it was rightly said that Shafranik had been used by 100 %  and then he was not needed anymore.

However, I am extremely pleased that since the beginning of the 2000s, thanks to today's political leadership Russia again has started to accumulate. Of course I do not quite agree with some elements, but in general, the trend has become positive. It is very good that the  national oil company "Rosneft " is gaining strength. On the other hand, the scale of small and medium business development in the industry is insufficient. In 1996 small private firms produced 14 % of the total oil produced in the country. In those years, our team tried to create companies and retain them in state ownership as well as to provide total freedom of creation for new owners starting from scratch. In this regard the NOVATEK company should be noted that was started as small business and reached the world level. There should be many more of such examples. The emergence of new property had to be the sign of the time. I repeat, new businesses should be created  by labor, by efforts, by new funds of their owners but not through handing over of earlier created state enterprises. Unfortunately, this has not been achieved, and to this day it is a politico-economic problem of Russia .

As a result we do not see true proprietors growing up. Now if you ask me what to do to change this attitude I will not be able to describe it in one word and even several sentences. All I know is that we need consistent long-term measures. It must be borne in mind that for the Russian mentality the key word is "FAIRNESS." As the polls show this feeling  is particularly aggravated. People belonging to different layers of Russian society believe that during the process of privatization of the 90-ties great injustice was done. About it speak even those who then generally backed that  wrong direction . So now in this area one can not allow even the slightest injustice. How to do this specifically is a complex question. There can not be some kind of a simple scheme. The more so because the problem can not be solved simply by additional distribution of state property. That is why it is so distressing to hear the calls now:  let's privatize all that remains of the state. But to privatize now, for example, Rosneft, when we are “hanging” on it sea shelf development – will be extremely wrong! We should vote not to touch this company at all for the next 25 years.

The second important aspect - the need to improve the efficiency of our companies. Privatization and enhanced efficiency should be two closely related elements of the same process. Let us enhance the efficiency of enterprises, accelerate the growth of  the economy, and privatization processes will go less painfully. However, there is still a belief that private companies will always be more effective. Experience has shown that this is not the case. I would say more: as the number of employees in the company is more than 5 thousand people, a form of property is  not decisive any more. The overall performance of the company, first of all, depends on the efficiency of its management and the state of institutions of  market economy. Take , for example, Vagit Alekperov ( LUKoil ) , Vladimir Bogdanov ( Surgutneftegaz ),  Shafagat Takhautdinov ( Tatneft ) . They have been successful leaders of the Soviet state-owned companies and are not less successful now managing private companies. Meanwhile, in the West there are many examples of huge private companies going bankrupt . The energy giant Enron, utterly private, burst in one day.

I am amazed every time when the demagogic chatter starts: "to privatize or not to privatize ." The main thing is not the legal form of the enterprise but its performance. If the manager is unable to create a structure and effectively manage it, find another one. We have a country with enormous human potential - intelligent people are always there. With the fifth, relatively speaking, attempt you can always find the right top manager or CEO.

But just to give away property - this is a crime against Russia, the state,  the people, concrete persons.

- You said that it is necessary to look for and replace top managers. Is it not the reason for frequent changes at the top of the Ministry of Energy? Since 1991 the industry has had 17 ministers.

- Here we are talking about different things. Let us differentiate. I meant a person who will make the company work efficiently. But the minister - is a political figure. A minister like a cucumber, for some time may stay sweet in salty water. But finally he will become salty anyway. If you get  into government, no matter how great you are, you will always play with this government. A leapfrog with ministers did really happen. Some were replaced after half a year, some just in three months.

- In one of your interviews you said that oil to Russia is neither luck, nor curse but a trial. What were the reasons for such a statement?

- Oil can be described by different words and phrases. But to describe it concisely, just in one word, it is really a TRIAL. It just so happened that the best results in its development Russia reached in periods, which may be called periods of mobilization. The great economic leap the country made in the 30 's, then in the post-war 50 's and 60's . These times were dramatic even tragic. One may argue that success was achieved then by "inappropriate methods ." I absolutely agree. But if we are so smart now, let us achieve the result by other methods. Fortunately, the choice of examples is there. At the end of the 80-ties other BRIC countries envied us, and now their economies are growing more rapidly than ours!

I feel hurt when Western sources say that our economy has always depended upon the extraction and production of raw materials. This is totally wrong and unprofessional. Remember Soviet all-union construction sites, where hydropower, nuclear power plants, roads were built. The niveau of our aircraft industry, icebreakers fleet and defense industry was very high. Their products corresponded to high world standards. And all that was achieved with no excess oil, to be exact - with lack of it up to 1970-ties.

Why oil is a trial for Russia? Because all petrodollars have been earned without much effort. The Lord has provided us with rich oil and gas deposits, thanks to fortune world oil prices remain so high. And the huge money that we get from the export of hydrocarbons is not appreciated as it should be. As they say “easy come, easy go”. Years will pass before our children and grandchildren wittingly or unwittingly will appreciate how much money was received and what was achieved during this period. Of course, much is being done now. But has the national economy over the past 20 years achieved the same growth rate as in the 30-ties or 50-ties? Do our companies develop new technologies? Has the state created favorable conditions for that, have  specific programs been developed?

That is why I say that oil is a trial. For everyone - from top management of companies to the political leadership of the country.

- Yuri, you put a lot of effort into public activities related to the development of Russian fuel and energy complex:  Chairman of the Committee on Energy Strategy and Energy Development of the Chamber of Commerce and Industry of the RF, Chairman of the Supreme Council of the non-commercial partnership "The Miners of Russia ", Chairman of the Union of Oil and Gas Producers of Russia - this is an incomplete list of the undertaken obligations indicating a great social load. How do you manage to perform all these duties? How important are these activities for you? Are there any preferences?

- You know, I always wanted  and aspire to completeness of life. Therefore, for many years while doing  business I have never put aside social and professional activities. Besides I always try to help, for example, my native village of Karasul, its children, support those who study or pursue art. I think willingness to do something useful for Russia (or for certain persons, if we talk about the village and children) is natural.

An important objective of public activities - to eradicate the lack of professionalism that now reigns everywhere. My colleagues and I regularly meet and formulate key issues for a broader and more extensive public discussions. It should be noted that some of our formulations had been several years ahead of their time.

- The role of foreign companies in the development of offshore projects. There are two points of view on this subject: some believe that foreign companies should not be involved in the development of our shelf, as there is a risk to national security, while at the same time, Rosneft actively creates joint ventures with foreign companies. Where do you think lies the truth?

- I do not pretend to full knowledge of the truth, but will express my own point of view. Certainly, the shelf is a zone of state’s  interest. Therefore, activities on the shelf must be strictly regulated by government agencies. And therefore let the state decide (and it has decided ) that  shelf deposits are to be developed exclusively by state-owned companies. By the way, in Norway all such activities are regulated and controlled by a specific government department. It is possible that tomorrow we also decide that the shelf should be developed not by state-owned companies, but by some government body: a department, a ministry, a state committee.

The state represented by state-owned companies or the relevant body should have a controlling interest in the project. Next, you should immediately clarify that in the next 25 years, these state-owned companies are not subject to privatization. Here we need clarity and consistency. But some of our people talk about transfer of the shelf to state-owned companies and  almost simultaneously start to discuss privatization of Rosneft .

The next thesis - on consortia that are necessary for offshore projects. Rosneft is right  creating joint ventures with foreign partners. And in this case it is better to talk about a consortium, not about a joint venture. It is necessary to have more than just one but two or three partners to develop a project. Heydar Aliyev did the right thing in Azerbaijan. He used a political approach to the issue, chose France and Britain or China and America. This is a very delicate matter. It is necessary to take into account the state’s interest, the state’s public policy.

Consortia are needed to alleviate risks,  to raise funds,  attract technology, and, more importantly, to counter corruption. Only thus the project will be properly and effectively implemented.

Now, let's say that all this should only be in the interests of Russia  and underline with a thick line and put three exclamation marks after. Therefore any consortium must be tied up by legal, contractual and other significant documents, stating that in the development of the offshore program priority should be provided for Russian industry and local enterprises. The main effect of the program should be in encouraging the development of domestic industry, not just a ton of oil or a cubic meter of gas, which we shall some day extract from our shelf.

Yes, today many Russian industries are not prepared to produce high-tech equipment. So let's create a project on such favorable terms as to enable the consortium to raise technological level of our industry. After all in the past we produced such equipment and it was far from being the worst in the world. So we must be able to do it now. We still have the potential for this - technological, designing, professional. One must buy exclusive equipment and technologies only. But it must be kept within, say, 30% of the total project cost. This approach requires a lot of coordination between the ministries, proper distribution of actual political, economic, contractual and legal responsibilities.

- The problem of attracting investment in the domestic energy sector. Why a major foreign investor is more willing to go to some countries of Africa than to us? Why it is often not profitable to invest in Russian energy sector?

- This is a serious public issue. There is a political will, there is the Government's desire to create a situation that will attract investment. But that's not the point.

The main point is to create equal conditions for competition. In some areas, for example in the sphere of oil and refinery products trade it has become real. Although there is a concern, that the trend to monopolization can recapture even this market. There should be competition and conditions should be the same for all market participants.

The political will and a universal desire to attract foreign investment are there. But we still lack  real actions. This is a disease and the disease should  be treated even if it is painful by  tough actions. Definitely we can say - our investment climate is still bad.

And it's not only the tax system. Statistics show that companies do  have started to pay taxes better. And not just because of the fight against offshore companies. After all, why a business seeks to channel cash out of the country to Cyprus or to Cayman Islands? Not because taxes are low there. The point is basic legal protection. On Cyprus Anglo -Saxon law really works, there are quite decent courts, good lawyers, who are incorruptible. Who forbids us to work on this field properly? Let's declare, for example, as an enclave of legal standard Kaliningrad’s region. And try to get proper results just in this region! However, the question arises where to take  independent judges from? Maybe from abroad? To follow the example of the Russian Premier League, inviting foreign players and referees, or  of  the Skolkovo inviting foreign scientists ... I'm sorry if this irony my seem misplaced here .