No. 1, 2004
Natalya Bogomolova
THE FIRST EXERCISE OF OIL BUSINESS TRANSPARENCY
Two events topped the list of the early 1924 newsbreaks: on January 21, Vladimir Ulyanov (Lenin), the head of the USSR Government, passed away; and on February 3, word came that Woodrow Wilson, the 28th President of the United States of America (1913-1921) was dead. As if by a divine decree, the two leaders of the two major world powers who had largely decided the course of the subsequent epoch-making events in the 20th century, departed this life just twelve days apart thus completing another chapter in world history.
The ice of mistrust thawing
Almost simultaneously, British papers carried an obituary for the “peacemaker” Woodrow Wilson and the news that Alexey Rykov, a firm adherent of the New Economic Policy – an alternative for the policy of war communism – had been elected Chairman of the Council of People's Commissars of the USSR (the head of the Soviet government). And again, by some strange coincidence, the statement by Labor government prime minister Ramsey MacDonald about Britain's readiness to recognize the USSR was made public almost on the same day. The British press gave much prominence to those developments. “Does the recognition of Soviet Russia by the Labor government mean that compensations are forthcoming for the industrial companies nationalized by the Bolsheviks and for the default on the tsarist Russia's liabilities?” The Petroleum Times, a mouthpiece of the British oil magnates, asked in what was not a rhetorical question at all. “Well, that's quite possible. The point is,” the reputable journal commented at length, “that there are fewer barriers between capitalists and proletarian internationalists than it is customary to presume. At the same time, the precedents of the 1922 Genoa Conference suggest that for all the progress made, Moscow is still firmly committed to the idea of Russian independence.” And further on: “The Soviets are by right apprehensive of an invasion of strong foreign elements backed by old emigres. It would take lavishing on Russia a flow of credits it does not expect to have the Kremlin concede on the issue.”
As if taking its cue from the journal's analysis, Ramsey MacDonald's Labor government took concrete steps in that direction. A British-Soviet conference opened in London on April 14, 1924.
The stand of the Soviet delegation led by Khristian Rakovsky, the USSR's plenipotentiary in Great Britain, was set forth in the Soviet government's special instructions. The main thing was to obtain loans and minimize the USSR's obligations to repay Russian debts and to compensate the British for the loss of their nationalized companies. Naturally enough, the British side had its own case to state. Therefore, negotiations did not go all that smoothly.
When all was said and done, the whole thing hinged on the access to Soviet oil which alone could set the ball of cooperation between the Bolshevik East and the capitalist West rolling. The production of crude oil was insignificant then. In 1922, the aggregate oil production in Baku, Grozny, and the basins of the rivers Ural and Emba added up to slightly over 4.5 million tons, and barely touched 5 million tons by the year 1923. Back in 1916, Russia had produced twice that amount of oil.
In order to back domestic efforts by a more vigorous foreign trade, the USSR took a series of actions along export lines. The French were granted an oil concession on the Emba. Moscow's Neftesindikat set up the Arcos joint venture with the British to sell Soviet oil to Turkey. In the meantime, the same Neftesindikat agreed with the U.S. Standard Oil on cooperation in exporting oil to Turkey and Egypt. In other words, few avenues were left unexplored – but the nation still had too little to show for all those efforts. The strategic breakthrough in the drive for large loans and investments was still to come.
The world energy system taking shape
Under the circumstances, the Soviet government decided to send a representative delegation to the First World Energy Conference which opened on June 30, 1924. The delegation, led by Professor Leonid Ramzin, Director of the All-Union Heat Engineering Institute, included Professor Mikhail Prigorovsky of the Mining Academy, Professor Viktor Glushkov, Director of the State Hydrological Institute, engineers Alexander Kogan and Sergey Balakshin who were among the architects of the GOELRO (State Plan of Russia Electrification) project.
Leonid K. Ramzin (1887 – 1948) was a prominent Russian scientist and engineer. In 1914 he graduated from the Moscow Higher Technical College. He was involved in researches of fuels, designing heating and power stations. In 1921 he found the All-Union Heat Engineering Institute and was its first director in 1921 – 1930. In 1921 Leonid Ramzin became a member of the State Planning Committee (Gosplan) and a member of a Working Commission of the USSR State Plan of Electrification. In 1929 he was repressed by Stalin's regime. However, while imprisoned, he continued his work and invented a direct-flow boiler with high pressure. For that work he was released and awarded the State Prize in 1936. In 1943 he established a steam boiler construction department at the Moscow Energy Institute.
The main report on Russia's fuel and energy industry Professor Ramzin delivered at the conference had the effect of a bomb explosion. Although very much down to earth, his report set the audience and the press all agog. Contrary to what was expected from the “scheming and insidious Kremlin,” he provided a more outspoken account of the nation's energy resources and prospects for their development, as his government saw them, than many emissaries of the capitalist countries did. A Western delegate referred to his report as “amazingly frank.”
In his report, Professor Ramzin naturally highlighted coal the national economy then chiefly relied upon for its recovery. Peat, firewood and other fuels were also given their due, but the pages devoted to Soviet oil made the most exciting reading
Dwelling on the proven oil reserves of the USSR, Professor Ramzin cited the following figures at the London forum: 1,419.9 million tons in Baku; 886 million tons in Grozny; 64.6 million tons in the Kuban area; 32.3 million tons in the Transcaucasia (apart from the Baku region); 257.9 million tons in the Urals; 32.3 million tons in Ukhta; 32.3 million tons in the Trans-Caspian region (Cheleken); 16.2 million tons in Ferghana; and, finally, 96.9 million tons in Sakhalin. That made a total of 2,838.4 million tons 87% of which, according to the Professor, were allegedly concentrated in the European USSR. Later updates proved that estimate a mistake which the Professor was not in the least to be blamed for.
Having matched 2,838.4 million tons of Soviet oil resources against 4,476 million tons of “black gold” found in the rest of the world, Professor Ramzin came to the conclusion that the USSR accounted for 38.5% of global oil reserves. That was much in excess of the then estimated resources of South America (1,210 million tons), the United States (915 million tons), Persia and Mesopotamia (763 million tons), Mexico (602 million tons) and British India (394 million tons). Considering, the speaker went on, that the Grozny region's reserves may eventually turn out to be double the tentative estimate cited above, the USSR's share in the world balance might rise to 45%. Unreasonably high hopes? It only remained to wait and see.
Casting “national pride” aside, the speaker honestly admitted to a low pace of the Russian oil industry's progress. Whereas in 1901, when tsarist Russia had hit its all-time oil production high of 11.4 million tons which constituted 52.2% of the world's total, in 1909, following the destructive “Baku disturbances” of the first Russian revolution, our country's share in global oil production diminished to 23.2%; on the eve of and during World War I the decline continued. Post-revolutionary economic dislocation made the matters worse still: in 1923, the USSR's share was barely 3.9%. In 1924, however, things began to look better, and toward the end of that year the Soviet Union came to account for 5.5% of the world's oil production just as Professor Ramzin had predicted.
“On the whole,” the Professor told the London forum in a bid to draw prospective investors' attention to that change for the better, “the current situation in Russia's oil producing regions can be described as quite satisfactory. Our coal and oil production is far in excess of the nation's domestic need for these fuels. As a result, our oil producing regions suffer from excess of supply over demand although export is growing steadily and has already regained its prewar level...
“The ratio between industrial and nonindustrial fuel consumption volumes appears even more striking when compared with that outside Russia. Normally, only one-quarter of national fuel output served industrial purposes with the rest three-quarters going into the nonproductive sphere, while in industrialized countries the opposite was the case. As to the per capita fuel consumption index, Russia's was one-fourth to one-tenth the other great powers.”
“Today's situation in Russia's oil industry is most uncertain,” Leonid Ramzin went on, “and therefore any ventures to introduce new refining processes such as cracking, pyrodistillation, etc., there would be premature, to say the least.”
Indeed, according to a table the Professor submitted to the forum, Russia produced 167,000 tons of gasoline in 1923 as against 236,000 tons in 1914. The corresponding figures for kerosene were 1,427 million tons and 564,000 tons; for lubricants, 194,000 tons and 156,000 tons. It was only the output of heavy petroleum products such as boiler oil that remained largely unchanged. Those were obvious indications of a hopeless decline.
What's worse, the leader of the Soviet delegation further disclosed, the low level of Russia's oil consumption – per capita consumption, above all – was not made up for by a conjectural cheapness of fuel distribution over the country. The aggregate average calorific value of Russian oil, coal and peat is about half that in, say, Britain. Consequently, nationwide fuel distribution would take, proportionally, much more freight cars, railroad platforms and tank cars; considering Russia's distances and the weakness of its railroad and pipeline infrastructure, cost-effectiveness will go further down.
The Western audience's fundamental conclusion could only be that Russia was all but doomed to remaining a fuel exporter. Incidentally, the petroleum product export situation showed signs of improvement exactly while the London forum was in progress – foreign investment had already taken effect by then. In 1924, Soviet Russia exported 128,000 tons of gasoline as against 40,100 tons in the previous year (a quarter of the prewar 1913 figure). Over the year, the export of oil rose from 185,000 to 205,000 tons; of lubricants, from 40,000 to 128,000 tons; of gas oil, from 18,000 to 69,000 tons; of other petroleum products, from 37,100 to 216,000 tons. In a word, it looked as if all that range of products was available for convertible currency wholesale – but…
Guided by intuition and having an insight into the Soviet government's long-term economic objectives, Professor Ramzin got across a terse message that put the audience on the alert: the USSR was dead set on industrialization, and the nation would not be the West's raw material appendage any longer.
“Oil will steadily gain in importance for the USSR,” the speaker explained, “with the development of screw-propeller internal combustion engines for sea- and river-going craft's and with the introduction of diesel locomotives.” Remarkably, that statement was made way back in 1924 when a half of the Russians had never set eyes on a locomotive! The sober-minded businessmen free from ideological prejudices against the USSR were not worried by the above-mentioned prospect – rather on the contrary… They realized, though, that Western governments would hardly encourage partnership with a Russia flexing its military-industrial muscles.
“It is to be expected,” the Soviet delegate went on to say, “that current oil production increment rates will slow down while consumption will gradually approach the fuel production level and then exceed it. The only ways to overcome these difficulties are as follows: boosting energy production, and exerting a strong and sustained effort to improve energy utilization efficiency techniques. The authorities are already at work along these lines… Today Russia lags far behind other countries in terms of industrial development but in the future such pessimistic estimates will probably be unwarranted… In the second half of the coming decade Russia will experience a shortage of fuel resources owing to a rise in domestic demand and a decline in mineral fuel production. The export of hydrocarbons will naturally have to be reduced. But we shall still have oil and petroleum product surpluses to be disposed of. Toward the end of the next five-year period, i.e. by the year 1930, Russia's oil production will grow to 8.75 million tons, and its annual export rate will increase to at least 2.5 million tons.
Epilogue: light and shade
Professor Ramzin and other Soviet speakers brought down on the forum an avalanche of statistics and comments thereto. Their reports, including Professor Mikhail Prigorovsky's Resources en Carbon, Schistes Bitumineux et Naphte de URSS (in French), contained enough information to keep Western analysts busy for years ahead. However, frankness is known to cut both ways, especially in the labyrinths of the global market environment marked by fierce competition and mutual mistrust.
Take, for example, the subject of the electrification of the USSR that was the order of the day then. Hard as the Russians tried to assure the audience that the USSR would depend on energy carriers other than hydrocarbons for electric energy supply, the specter of total oil requisitioning for the lighting and heating of titanic construction projects of socialism haunted the hall. Naturally, Soviet scientists were out to prove the contrary, i.e. that electrification would not make inroads on oil export volumes. That was the subject of engineer Alexander Kogan's report Le Plan d'Electrification de la Russie. In their reports on hydraulic resources, Professor Viktor Glushkov dwelt on the overall energy potential of Russia's rivers, and engineer Sergei Balakshin of Tomsk, on the possibilities for building cascades of hydroelectric power plants in Siberia. The Central Electrotechnical Council's report Apercu sur la Production et la Distribution de l'Energie Electrique dans l'Union des Soviet Republiques Socialistes, published in London at the time, was also about the diversity of energy resources found in the USSR, the land taking up one-sixth of the globe. Those reports aroused keen interest but, alas, were not always taken on trust. Many still wondered whether it was really possible to illuminate the whole of Russia and to set it in motion without any detriment to the nation's oil export potential.
Victor G. Glushkov (1883 – 1937) was a famous Russian specialist in water engineering and hydrodynamics. He was a creator of contemporary hydrologic calculation methods. In 1919 he founded the State Hydrological Institute and until 1936 was its director. In 1932 he became a Corresponding Member of the USSR Academy of Sciences. Professor Victor Glushkov participated in the preparation of the State Plan of Russia Electrifi-cation. Also he was elected and in 1935 became an academician of All-Union Academy of Agricultural Sciences. In 1936 he was repressed by Stalin's regime and executed in the next year. In 1956 Victor Glushkov was rehabilitated posthumously. In retentive memory a modern river cruise ship was named after him - "Academician Victor Glushkov".
As a result, the Soviet delegation's openness and successful presentation of Russia's fuel and energy production program were of little avail. While the export of Soviet oil continued to grow, the other forms of partnership were gradually phased out toward the late 1920s. That does not mean, though, that the first exercise of oil business transparency was lost on all those concerned. Now that the Cold War is long gone, a campaign for nationwide and corporate transparency in disclosing and developing fuel resources is steadily gaining in momentum and scale. This campaign is having a favorable effect on the sessions of the Soviet-American energy dialogue, in particular.
“I consider what we have achieved here,” S.O. Merryll, the U.S. chairman of the forum's concluding session, said with emotion, “as something of extraordinary importance in terms of volume and value. We have brought the whole world's leading engineering experts together in this hall. In the reports submitted to the conference we have summed up what I see as the greatest ever contribution to the discussion of the very subject of Energy. These reports will become engineers' manuals and textbooks for years ahead.”
The past eight decades have hardly detracted anything from the truth of that statement.
