The History and Politics of Chechen Oil

By Robert E. Ebel

Robert E. Ebel is the Director of the Energy and National Security Program at the Center for Strategic and International Studies (Washington, D.C., USA). Some of his publications include "Chernobyl and Its Aftermath: A Chronology of Events", "Energy Choices in the Near Abroad: The Haves and the Have-nots Face the Future." This article had been adapted from "Post-Soviet Prospects", a publcation by the Center for Strategic and International Studies.

In the early years of the twentieth century, Russian oil--and that then meant oil of the Caucasus--was regarded as an international prize. The oil age had arrived, displacing coal and steel. The economic and military strength of a nation very much would now reflect its access to oil. Covetous eyes turned to the oil of Baku, Grozny, Emba and Maikop.

Indeed, at the beginning of the twentieth century, Russian oil accounted for just about one-half of all oil produced in the world. A short ten years later, however, the very rapid growth in oil production in the United States and elsewhere, coupled with Russia's own slight decline, caused the relative importance of Russian oil to fall to about 20 percent of the world's total. By 1950, before the resurgence of Soviet oil and based on development first of the Urals-Volga oil fields (popularly known as the Second Baku) and then of Western Siberia, Soviet oil provided barely more than 7 percent of the world total.

The oil district of Grozny was, next to Baku, the most important Russian oil area before the revolution. Oil had been produced from shallow wells northwest of the city of Grozny as early as 1833, although commercial production did not commence until 1983. Grozny oil hit a prerevolutionary peak of 33,400 barrels per day in 1915 and accounted for about 18 percent of Russian oil production. The oil fields at Baku provided almost all the remainder.

Foreign interests in the Russian oil industry were considerable, as noted, and foreign capital followed that interest. More than one-half the capital investment in Russian oil came from abroad. It has been estimated that before World War I the total amount invested in the Russian oil industry was about $214 million. Of that sum, about $130 million represented foreign capital.

Great Britain, in its search for oil, was particularly active in Russia, providing more than 60 percent of the foreign capital. The British moved to take dominating positions where they could in the producing regions, ranging from 50 percent at Grozny to 90 percent at the Emba oil fields. The United States was barely a player at all.

The Politics of Chechen Oil

By today's standards, the oil fields of Grozny were never particularly prolific, reaching a peak of 154,000 barrels per day in 1932, then entering a slow decline until the role of oil in the USSR's energy balance was emphasized, beginning in the mid-1950s. Yet for Russia and then for the Soviet Union, Grozny oil had at one time been relatively quite important, accounting for roughly one-third the national total in 1932. But this share dropped quickly in succeeding years, a combination of growth in production elsewhere and a physical decline in Grozny.

Over the years Grozny has become a key oil pipeline juncture, because of its importance as an oil refining center supplying consumers in the North Caucasus and supplying specialty lubricants and paraffins to the country as a whole. Grozny is also a juncture for natural gas from gas fields in Russia and from Central Asia.

Some observers have suggested that the decision by Moscow to send its military forces into the breakaway republic of Chechnya was motivated by a desire to secure control over its oil industry. Others have suggested that repressing the Chechen desire for independence from Russia was driven by economic considerations-to ease prospects for construction of a pipeline from the Tengiz fields of Kazakhstan across Russia to the port of Novorossisk on the Black Sea and of a pipeline extending northwest from Baku to link up with the proposed line from Tengiz.

The most logical pipeline routing to move Tengiz crude to Novorossisk would be Tengiz-Atyrau-Komsomolsk-Tikhoretsk-Novorossisk. This route, if chosen, would run well to the north of Chechnya, although certainly not beyond the reach of dissident action.

But bringing oil from Baku to Novorossisk would be a different matter. A number of years ago a crude oil pipeline was built from Tikhoretsk through Grozny to Baku to deliver crude oil to the Baku refinery complex. Although this line would have to be substantially rebuilt and expanded and the direction of flow reversed, it is nonetheless a viable option, despite the fact that it transits Chechnya.

A quiescent Chechnya is thus important to Russia if crude oil to be produced by the Western consortium as it develops fields offshore in the Caspian Sea is to flow through Russia enroute to world markets. If Chechnya remains a threat, then a pipeline routing through Turkey becomes a more attractive alternative.

Selection of a pipeline routing involves a mix of political and economic considerations. Far more than the collection of transit fees is at stake. Pipelines can and have become points of leverage in times of political disagreements and hostage in times of armed conflict.

Two recent developments hold implications for all interested parties. First, Russia has covered its equity share in the Caspian Pipeline Consortium (CPC) by nominating as its contribution the 200 kilometer section of pipeline linking Atyrau and Komsomolsk and forming part of the proposed Tengiz-Novorossisk line. The CPC is a Russian-Oman-Kazakhstan partnership established for the purpose of building an export pipeline to connect the Tengiz oil field in Kazakhstan with the port of Novorossisk. The value of this section of pipeline, placed at $300 million, was derived through an audit performed by several Western companies.

Second, the CPC has taken the first step in providing for an outlet of Tengiz crude oil to world markets by agreeing to build a 250-km pipeline from Kropotkin, located south of Tikhoretsk, to a new terminal to be built north of Novorossiisk. This pipeline link, to cost, to cost about $400 million, is to be ready sometime in 1997. Initially this first segment will carry mostly Russian oil and reportedly will be financially viable when handling 180,000 barrels per day.

Chevron, the foreign partner in the joint venture to develop Tengiz, is not a member of the CPC, having rejected membership conditions as too onerous. Without Chevron's commitment to utilize the planned Tengiz-Novorossiisk pipeline, any future construction beyond the Kropotkin-Novorossiisk link could not be justified.

It has often been conjectured that the first pipeline to become available, whether ostensibly to move Baku crude or Tengiz crude to market, would then become the pipeline of choice for both. The availability of the Kropotkin-Novorossiisk link and of expanded handling facilities at the port could encourage the Western consortium engaged in Caspian Sea oil development to choose a Baku-Kropotkin-Novorossiisk routing over the Turkish alternative.

Limited Chechen Oil Potential

It is unlikely that Moscow's venture into Chechnya was motivated by a desire to control Chechen oil. At one time, oil from Chechen-Ingushetiya was a very important contributor to the USSR's supply, accounting for about 10 percent of total Soviet crude oil production, but its national importance has long since vanished.

On a regional basis, Chechen oil has had more going for it, at least in relative terms. In 1980, Chechen oil accounted for a bit less than 40 percent of oil produced in the North Caucasus. That relative share has been rising in recent years, reaching 50 percent in 1992, as crude oil production in the Kuban and Stavropol regions of the North Caucasus has fallen at a faster rate than has Chechen oil.

Chechnya's declaration of independence in 1991 and the following political and economic uncertainties seemingly have worked against the interests of the oil industry. Indigenous supply has been steadily falling and the onset of armed conflict with Russia has brought the industry to a virtual standstill. The daily output of oil in December 1994 had fallen to fewer than 6,500 barrels, in large part as workers departed to join in the defense of their homeland. The Russian Ministry of Fuels and Energy has reported that at the beginning of December no more than 100 of Chechnya's 1,500 wells were actually producing.

Oil reserves in Chechen-Ingushetiya can be estimated, under the best of circumstances, at 60 million tons, divided roughly equally between Ingushetiya and Chechnya. These reserves, in the proven category, are sufficient to support crude oil production at the level of the early 1990s for some 15 years.

Nonetheless, once the hostilities have ended, an early return of Chechen oil even to previously limited production levels should not be expected. Most of the experienced oil workers left the Grozny oil fields several years ago, and considerable time will be required to develop qualified replacements. And that is in addition to the time and capital needed for repairing the damage to oil-related facilities. Further, most of the oil wells are low-yield, and these kinds of wells, if out of operation for any extended time, may never be brought back.

Looking Ahead

A politically stable Chechnya, when and if that happens, does not of itself guarantee the smooth and uninterrupted flow of oil across its lands. Chechen nationalism is deeply imbedded and clearly will not be erased by whatever settlement terms may be reached between Chechnya and Russia. Pipelines are easily blown up, although they are almost as easily repaired. Nonetheless, political risk increases when a pipeline crosses an international boundary. The anticipated return must at least offset anticipated risk.