Archive

No. 1, 2005

Prof. Alexander Igolkin,
Dr. Sc. (History)

HIGH PRICE OF SOVIET OIL


Oil exports in the 1920s and 1930s laid the financial basis for an accelerated industrialization in the Soviet Union

Starting from the 1920s, oil and petroleum products were among the few items that enabled the Soviet Union to receive considerable currency earnings.

As early as the period of New Economic Policy, the Soviet leaders made massive efforts to build up petroleum product exports, increasing them from 948,000 tons (1913) to 1,685,000 tons (1926) and to 2,882,000 tons (1928). By 1928, the share of Soviet oil exports was already 5.2% of the world figure.

Within the blockade circle

In 1920, Western business people behaved as though they were absolutely certain that the nationalization of the Russian oil industry was not going to last. For example, on April 2, 1920, when Grozny was already occupied by the Red Army, several French financial groups established Societe des Petroles Essences, Naphtes, in Paris, a joint-stock company with a capital worth 25 million francs, which soon grew to 80 million francs. The company OpurchasedO plots in Grozny that had been owned by entrepreneur Chermoyev, as well as a majority holding in New Caucasian Oil Field, a OCaucasianO company. The French believed the plots could produce as much as 80 million poods (1 pood equals 16,38 kilograms) of oil a year. Yet another company with plans to produce oil in Grozny was formed in Antwerp in 1920, French-Belgian joint-stock company Trust Franco-Belge de Petrole. It expected to draw as much as 60 million poods of oil a year. The French-Belgian group also took over the stock of companies that were producing oil on the Emba, establishing, in same 1920, Societe d'Emba Grosny.

In 1921, an enterprising emigrant, Mr. Chermoyev founded in Paris, jointly with Trust Franco-Belge de Petrole, a company to transport Grozny oil via Novorossiysk, Societe pour le Transport du Naphte de Grosny. A contract was signed with the Olawful ownersO of the Vladikavkaz railway who had turned up in the West and were willing to offer exclusive rights to lay an oil pipeline parallel to the tracks.

As a result, the West accepted the Grozny and Emba oil fields as French-Belgian-owned, and the majority of Baku oil fields as British- and U.S.-owned. Thus, the whole of Soviet oil allegedly had "owners" in the West, and, in their view, the Soviet government could under no circumstances sell it in external markets.

The formation of Soviet republics in Azerbaijan, Armenia and Georgia was sobering news to foreign shareholders, whose first reaction was to boycott Soviet petroleum products sales in world markets. In 1921, major foreign buyers were boycotting Soviet oil, with exports mostly reduced to selling small batches of kerosene in barrels. For example, Alexander Serebrovsky, Chairman of the Managing Board of Azneft Trust, succeeded in selling in Constantinople, aside from kerosene, only insignificant amounts of machine oil and gasoline. Later he obtained a permission for Azneftekom to trade on its own internationally - not only in Turkey but also in Persia and other oriental countries. The permission was granted.

By early 1922, AzNaphtha Syndicate had offices in Kars, Samsun, Trabzon and Istanbul. It also exported oil and imported various goods.

The scale of Persian trade expanded rapidly. A Russian-Persian company, Shark, was established in late 1923, its capital worth 400,000 toumans, of which 28% belonged to Persian merchants. In July 1924, Shark took part in establishing Persazneft, an export company. Along with Shark (34% of capital), its founders were Azneft (51%) and the USSR Trade Mission in Persia (15%). In late 1924 and early 1925, kerosene exports from Baku to Persia considerably exceeded the 1913 level. At that time, Persia was the USSR's chief trade partner in the East, accounting for approximately a half of its entire Eastern trade.

But, of course, the capacity of the European oil market was incomparable with the Eastern one, and it was in Western Europe that the USSR could have sold the bulk of its petroleum products. The Soviet leadership launched a vigorous fight to obtain the market. Soviet Naphtha Syndicate offices were inaugurated in Berlin and London as early as 1922. A chance turned up to export 400,000 tons of Grozny crude oil to Hungary in the same year. There were other deals, too, but the main parties in the world oil market went on with their boycott.

Breaking through the oil blockade

And yet, Royal Dutch/Shell started, in late 1922, clandestine purchases of Soviet kerosene, which it later resold in the Far East. Quite likely, Shell was guided by the wish not only to receive immediate profits but also to curry favor with the Soviet leadership.

Sal, a small British firm, bought 30,000 tons of Soviet kerosene in spring 1923, a deal that immediately got wide publicity. True enough, it is still uncertain to this day whether or not Shell was behind the transaction. At any rate, Henry Deterding immediately seized at the opportunity, declaring that the "oil blockade" of the USSR was no longer in existence because of one obscure firm, Sal, rather than because of Shell (which continued its clandestine purchases). "In connection with the changed situation", Shell, almost in the same breath, bought from the USSR 10.9 million poods of kerosene. When reproached, Henry Deterding replied that he had been forced to make the transaction, since Sal was pursuing a separate policy anyway.

New companies joined oil trade with the USSR in 1923, and the Soviet exports started to grow rapidly. Soviet oil was exported to five countries in 1921/22, and 13 countries in 1922/23. In 1923/24, Naphtha Syndicate had business contacts with 28 trading companies in 20 countries. Petroleum product exports amounted to 10.2 million poods in 1921/22, 19.8 million poods in 1922/23, and 42.9 million poods in 1923/24. The export amounts doubled each year, and the oil industry became increasingly export-oriented. The share of exports in Soviet overall petroleum product production was 6.1% in 1922/23, and 11.8% in 1923/24. Petroleum products accounted for 23.6% of the USSR's entire industrial exports. The national leadership planned to continue increasing oil export at a rapid pace.

A problem oil specialists and the Soviet leadership faced was which petroleum products predominantly to export. Fuel oil was in much demand internationally. In 1922, Gosplan papers noted that world refining was increasingly oriented to fuel oil, which accounted for 48% of all industrial petroleum products manufactured in the United States in 1919. In early 1922, one metric ton of fuel oil cost 6-10 times more than the same amount of best coal.

Actually starting in 1923/24, fuel oil exports shot up almost 11 times in 1924/25, exceeding the pre-war level by a vast margin. 1924/25 was when the 1913 level in gasoline export was exceeded for the first time, nevertheless subsequently gasoline exports grew very rapidly. The Soviet leadership set a course for maximal gasoline exports and managed to achieve certain successes.

In 1923/24, Soviet output of petroleum products grew faster than the domestic demand, resulting in a marketing crisis that hit the oil industry. Export of all petroleum products, fuel oil included, grew for an added reason that many potential buyers at home had no money to pay for any fuel.

In 1923/24, petroleum products accounted for 23.6% of industrial exports and 7.2% of the total cost of USSR exports. While before World War I Russian oil exports were mostly made up of kerosene and lubricants, this pattern changed to gasoline and fuel oil in 1924/25. In 1913, for example, kerosene and lubricants comprised 77% of all exports, the figure declining to a mere 23.5% in 1924/25.

In 1924/25, oil and petroleum product exports from the USSR almost doubled again in comparison with the previous year, reaching 81.7 million poods.

In the latter half of 1924, the U.S. Standard Oil Company made its first ever purchase of Soviet petroleum products. Both the American and Anglo-Dutch companies bought Soviet petroleum products in order to resell them to countries in the Middle and Far East. Naphtha Syndicate had no distributor network of its own in those markets and was unable to cooperate with any firms independent of Standard Oil or Shell. There were no such firms in existence. The world trusts organized retail sales of petroleum products in those countries on their own, and let no one take part.

The oil trusts sold 44% of all Soviet kerosene in 1924/25, and 33% in 1926/27. The entire Soviet export to India and Egypt went through several major Western oil companies. But in Turkey, a branch of Naphtha Syndicate was selling kerosene on its own from its depots.

In West European markets, the Soviet Union was able to use a different marketing strategy that brought greater profits than anything likely in colonial markets. Naphtha Syndicate could sell its products to medium and small European firms that were independent of the world giants and extremely interested in supplies of this kind.

Building up export capacities

In 1928/29, 31.8% of the entire national petroleum product output was exported, and the gasoline figure even reached 88%. The Soviet oil industry was clearly export-oriented, and it was decided, in the latter half of the 1920s, that the orientation should be enhanced even further. It is with this aim in view that two powerful pipelines were being constructed in the direction of the Black Sea (Baku-Batumi and Grozny-Tuapse), as well as refineries at the pipelines' starting and terminal points were put up.

The Soviet Union, an English-language yearbook, announced in 1927 that a plan to construct a Baku-Poti pipeline worth ?3.5 million and a number of refineries in Poti worth a total of ?1.2 million was under consideration. In reality, the direction of the pipeline was from Baku to Batum, the latter city also the site of the refineries.

The Grozny-Tuapse pipeline was commissioned in spring 1929, and the Baku-Batumi pipeline in February 1930. A majority of refineries in Batumi and Tuapse, like in Baku and Grozny, were put into operation by that time as well. The construction of new refineries was particularly important in view of the need to increase the production of gasoline which was in great demand in international markets.

By 1928, the pattern of world oil exports changed considerably in comparison with the pre-war period, as is evident from the following table.

As we can see, the share of kerosene declined three-fold over 15 years, while that of gasoline doubled.

But the 1927/28 Soviet oil products export pattern differed significantly from its world counterpart.

The big share of gasoline was explained by the fact that almost the total gasoline output was exported from the USSR, while kerosene had to be reoriented to Eastern markets: Egypt, India, Turkey and Persia.

The world trusts acted as intermediaries where Soviet kerosene exports to Egypt and India were concerned, with 44% of all Soviet kerosene passing through them in 1924/25, 24% in 1925/26, and 33% in 1926/27.

Kerosene sales in Turkey were handled by a branch of Naphtha Syndicate, which had stocks of that product in its depots. A special contract with the Turkish monopoly established a definite norm for Soviet petroleum product imports to Turkey.

Persazneft, a Soviet-Persian company, handled petroleum product sales in Persia in the 1920s, its capital assets contributed by Azneft (51%), the USSR Trade Mission in Persia (15%), and the Soviet-Persian Shark Company.

In the mid-1920s, Soviet foreign trade agencies established Deutsche-Russische Naphta Kompanie (Derunapht), a petroleum product distributor of their own in Germany. Derop was another Soviet oil company in this country.

Where more active work in the European market was concerned, Naphtha Syndicate used four main types of commodity channels to sell its petroleum products: (1) sales to governmental consumers; (2) sales to independent firms which undertook to hand products down to consumers; (3) sales to companies affiliated with the main world oil groups, and (4) sales through its own distribution agency.

For example, Russian Oil Products (ROP), a firm with 100% Soviet capital holding, started operation in Great Britain in August 1924. In early 1925, it completed construction of distributive storages in Bristol and Cardiff, and started selling petroleum products through an oil agency of its own, charging, at first, one penny to threepence less than other firms.

In 1927, Naphtha Syndicate had its branches and agencies in Milan, Vienna, Prague, Constantinople, Smyrna (Izmir), Revel, Helsingfors, and Harbin. In addition, Naphtha Syndicate was a shareholder in joint-stock companies in France (Naphtrusse) and Italy.

Even before the pipelines were completed, the USSR was building up its oil fleet. Naphtha Syndicate's report said this in 1928: "Over the last two years, the fleet got four new vessels: Azneft, Grozneft, Elbrus, and Naphtha Syndicate. The construction of the fuel oil vessels Embaneft, Soviet Petroleum, and USSR Union of Mining Workers was at its final stage. Following the commissioning of all these ships, Naphtha Syndicate's tonnage should reach 60,000 tons. Aside from that, Soviet shipyards were constructing another five Naphtha Syndicate-ordered ships displacing a total of 40,000 tons".

The early 1930s was when the Soviet Union continued getting to increasingly far-off markets. In 1931, Soviet petroleum products appeared for the first time in Southern China and Korea, and in 1932 in Canada and New Zealand.




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Oil of Russia, No. 1, 2005
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