#4
Baltimore Sun
December 28, 2001
Oil is czarina of Russia's economy
Industry is vital, subject to vagaries of climate, market
By Douglas Birch
Sun Foreign Staff
NEAR KHARYAGA OIL CAMP, RUSSIA - Sitting next to his shortwave radio in a wood hut near the Arctic Circle, Vladimir Milukov keeps a lonely vigil over Russia's economic lifeblood.
Every half-hour, he puts on his oil-proof parka and trudges into the deepening gloom of winter here, where temperatures reach 50 degrees below zero. He makes sure the seven wells clustered around the hut are pumping petroleum up through the permafrost fast enough. If a pump begins to fail and the pressure falls, the oil slows and cools, and the pipe can freeze solid - cutting the flow until next summer.
Milukov has worked for seven years in the hut, with its big oil heater, blazing electric lights and wood benches. As senior man, he gets the day shift: 8 a.m. to 8 p.m. In winter, he sees only a few hours of gray twilight. Winds roar through, shaking the walls. Blizzards make it seem as if someone painted his window white. Is he bored? "We are used to it," he shrugs.
When things are quiet, he listens to the news on Radio Russia, sips tea and stares at the landscape. A few days ago, he watched a herd of thousands of reindeer sweep by. When a well begins to freeze, he radios for the dispatch of a team that forces boiling oil down the pipes.
Thousands of wells across Russia together yield 7 million barrels of crude oil daily - making Russia the world's second-largest producer after Saudi Arabia. It's Russia's pumps and pipelines, many of them in some of Earth's most desolate regions, that have helped drive the country's economic revival for the past two years.
But now that recovery is threatened by recession in the West and slumping oil demand. Oil prices have dropped from $28 a barrel in the month before Sept. 11 to about $19 last week.
Falling demand isn't the only problem. The Organization of Petroleum Exporting Countries recently called on nonmember Russia to cut exports by 5 percent, or 150,000 barrels a day. Russia agreed, at least for the first three months of 2002. But analysts consider them phony production cuts. Because of severe cold in the Arctic fields, production always drops in winter. And while the Kremlin wields significant influence over the private oil industry, it has no direct power to regulate output.
If Russia fails to reduce exports, OPEC has threatened a price war. That would be good news for the United States and other industrial nations. But it could mean hard times for Russia, where oil accounts for about 40 percent of its revenue from exports, says Professor Alexsay Khaitoun of the Russian Academy of the National Economy.
Memories are still sharp among workers in Kharyaga of the last time oil prices fell, in the mid-1990s.
The region's largest oil company, Komineft, pumped oil at a furious pace but wouldn't spend the money needed to repair broken equipment. Many wells had to be shut down. Workers weren't paid for months at a stretch; they eventually were put on eight-hour weeks. Oil workers and their families began to leave their homes in this region, about 1,000 miles northwest of Moscow.
Government employees, high school graduates and retirees fled Usinsk - the main town of 60,000 people about 100 miles south of the Kharyaga camp. Usinsk eventually lost one resident out of five.
Among those who stayed, there was a sharp increase in alcoholism and suicides. Residents talk of a man who sold his apartment for three bottles of vodka, of a woman who jumped off the roof of her apartment building with her baby in her arms - tales of despair.
Komineft's aging oil pipeline sprang several leaks in the summer of 1994. But the company neither made repairs nor stopped the flow of oil.
By some estimates, 700,000 barrels of oil spilled into the creeks, swamps and bogs that feed the meandering Kolva River. That's almost three times the volume that gushed from the hull of the Exxon Valdez off Alaska in 1989. In some areas, fish were nearly wiped out.
Despite international criticism, little was done. Vladimir Zamoiski, who served as an environmental expert with a group set up to monitor the cleanup of the 1994 disaster, resigned in frustration a couple of years ago.
"What kind of ecology could there be in a bandit state with a bandit economy?" he says. "A bandit ecology!"
The industry was already an important source of hard currency in Soviet times and an indispensable tool for subsidizing shaky socialist regimes from Bucharest to Havana. Production peaked in 1988, when the industry produced 11.4 million barrels a day - 63 percent more than Russia does today.
But those levels could not be sustained. The Russians pumped oil out of the ground as quickly as possible, rather than using slower, more expensive techniques to squeeze the most oil out of each field. By the time the Soviet Union dissolved in 1991, many wells were running dry.
When the industry was privatized, few Russian oil executives showed much interest in replacing rotting pipes, buying modern machine tools or drilling new wells. When oil prices dropped, there was less incentive to invest. The industry drifted to the brink of collapse.
Then in the late 1990s, world oil prices began to rise, and the buccaneering oil business in Russia grew a little tamer.
Lukoil, Russia's largest and best-run oil company, bought Komineft in 1999. It did what its predecessor had failed to do: renovated repair shops and refineries, laid new pipe and drilled new wells. The company brought in Western experts and technology to find new oil deposits and squeeze more petroleum out of existing fields. And it tripled the size of Komineft's work force.
Meanwhile, Western oil companies resumed investing in Russia. Lukoil struck a deal with Conoco to drill offshore wells in the Barents Sea. Oil giants Royal Dutch Shell, Exxon Mobil and Chevron Texaco might join Russian companies to tap oil deposits off Sakhalin Island in Russia's Far East.
But to environmentalists, oil remains a dirty business. Company executives concede that nearly two-thirds of the 1,700 acres polluted by Lukoil's predecessor during the 1990s remains soaked in oil. Only about one-third of the Komineft's leak-prone, 26-year-old pipeline has been replaced with modern, corrosion-resistant pipe.
When Oganes Targulan, special projects coordinator with Greenpeace, visited Usinsk in the summer of 2000, he saw oil leaks near the pipeline along the main road north. (Most of the polluted landscape is now hidden by snow.) Residents told him that new leaks occur all the time and said the company burns off some of its oil spills - a practice that pollutes the air and leaves a toxic residue.
However, the company says the pipeline is closely monitored and can be shut down quickly if a spill occurs. Lukoil denies that it sets fire to spills.
"It doesn't matter what Greenpeace people say, I operate only with facts," says Viktor Lukashov, environmental director of Lukoil.
As oil prices fluctuate, Russia is holding its breath. Khaitoun, the economist, said Russia's oil companies can continue to expand if prices are $19 to $20 a barrel. Below $18 a barrel, he says, there will be little new development. Moscow and local governments will be forced to cut taxes on oil production.
That would be very bad news for Usinsk.
"The whole budget of the town is based on the taxes from the oil industry here," says Raviya Bikbaeva, head of the town's Department of Social Development. More than half of Russia's federal tax revenue comes from its oil and gas industries.
If prices drift significantly lower, oil companies might find themselves breaking pledges that they would not cut salaries or staff. "We hope that the prices will not fall that low," Bikbaeva says.
Meanwhile, progress in cleaning up the environment remains slow.
This is a vast region of bogs, swamps and meandering rivers that cut through the dwarf birch and snow-clotted pine trees of the taiga. Abandoned derricks, oil tanks and "walkers" - teeter-totter style pumps that are now obsolete - litter the landscape. Plumes of orange flame and gray smoke bloom on the horizon, as waste gases are burned off.
Kharyaga is little more than a scattering of metal Quonset huts, pipes and tanks. Nobody lives here permanently. About 210 Lukoil workers - including Milukov - work in 12-hour shifts for two weeks at a stretch.
Geologists say the oil reserves that sprawl from the Urals in the east to the Barents Sea are the second-largest in Russia, after those in western Siberia.
There is enough oil near Kharyaga, said Igor Revnyi, the manager of Lukoil's operations here, to keep pumping for the next century, "or even much longer."
But the oil is deep - most of it more than 2 miles down. And it is loaded with paraffin, a waxy petroleum byproduct that lends this oil the consistency of chocolate mousse. (Russians, who love home remedies, use Kharyaga oil to treat cold sores and rheumatism.) The paraffin quickly gums up pumps and pipes. And the sluggish pace of pumping makes pipes more prone to freeze during the long northern winter. The nights are long, the work is never-ending.
Since 1992, Mikulov has been stationed in the little wooden hut on the ragged edge of the world. The late 1990s, he says, brought great hardship. Komineft seldom paid him on time. He was forced to borrow money from friends and family, who had little to spare.
Yes, things are better now, he says. He has money now and new job benefits. The town of Usinsk is booming. But would he want his 5-year-old son to work in the oil business? He stares at his callused hands and shakes his head.
"No," he says. "It is too hard."
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