2
World War II to 1987
Russia Looks Inward and Outward
To Hitler, Russia stood for wheat and petroleum, but Hitler’s information was at least partially dated. Once under Soviet control Russia’s grain surpluses diminished rapidly. Whereas pre-revolutionary Russia had exported 9 million tons of wheat in 1913, the most the Soviets could muster prior to the Second World War was 5 million tons in 1931, and to do that they had to starve their own people.1
But if the breadbasket of Europe was not as full as it once was, the oil wells were pumping and as attractive as ever. One of Hitler’s highest priorities was to capture the Baku fields. Although German troops did not quite reach Baku, they did attack the Grozny fields in Chechnia in the north Caucasus. Even there, however, by the time the Soviet troops were forced to retreat, the oil fields were so badly damaged that Hitler was unable to derive much benefit from them. But in the process, Hitler did manage to deny their use to the Soviets. Moreover, the Germans disrupted supply routes from Baku to the north so that the Soviets had a hard time maintaining their fuel supply. The USSR was helped to some extent by Lend-Lease oil shipments of 2.7 million tons of petroleum from the United States. Nevertheless, by the time the war ended, many Soviet oil fields had been badly damaged, so that in 1946 Soviet oil production had fallen to 22 million tons, down 30 percent from the 1940 peak of 31 million tons.2
THE VOLGA-URAL REGION
To expedite the postwar reconstruction of both the fields and the refineries, the Soviet government swallowed its pride and once again sought foreign help. They also confiscated $1 million worth of oil field equipment from Romania as a form of war reparation.3 Most of the Soviet effort was directed at reconstituting and expanding the traditional Baku area, but gradually they moved north toward the meagerly developed Volga-Ural region. Although exploration in the newer area predates the revolution, no oil was found there until 1929.4 Even then not much happened, and when the Second World War started annual output was not quite 2 million tons a year. Some major finds were made in the Volga-Ural’s Devonian geological level deposits during the war in 1944, but serious drilling work began only in 1955.5 Despite considerable drilling effort, because of the wartime damage, output in Azerbaijan in the Soviet era, especially Baku, never fully recovered. Even in 1966, the postwar peak, Soviet oil producers were unable to equal the 22.2 million tons pumped in Azerbaijan in 1940. (After the collapse of the USSR, Western companies were brought in by the government of Azerbaijan and production soon surpassed earlier output.) Fortunately as more and more new fields were discovered in the VolgaUral region, output there rose rapidly and that area soon outproduced Azerbaijan. As a result, by 1949, total output in the USSR surpassed the previous level of production (see Table 2.1).
Overall output in the Volga-Ural region continued to increase until about 1970. This included the field at Romashkino in the Tatar ASSR (Autonomous Soviet Socialist Republic). For some time this field was thought to hold the largest crude oil deposits in the world. But after 1965 the rate of increase in output per well in this region began to fall sharply.6 The response was to seek some way to enhance “secondary recovery.” As in many other parts of the world, the initial solution was to inject water into the wells to restore the pressure needed to facilitate the extraction of petroleum. But water injection was only partially successful. Occasionally it made matters worse. For a time the extra water worked and increased the petroleum yield from the well, but the Russians typically injected too much water; as a result, it often became more difficult than necessary to extract the petroleum the water was intended to flush out. Special pumps were required, and before long the workers often found themselves pumping out more water than oil.
While Soviet petroleum engineering was often very effective, there were other more advanced procedures that could have been used; but because Soviet authorities restricted contact between their technicians and foreign specialists, many production methods used in the West were not familiar or were unavailable to Soviet petroleum technicians. Moreover, even when such knowledge was available, the Ministry of the Petroleum Industry lacked the authorization to import the necessary equipment. The purchase of foreign equipment had to be approved by Gosplan, the Central Planning Agency, and foreign currency for the purchase had to be set aside by the Ministry of Foreign Trade and the Ministry of Finance. Even then, because Soviet authorities did their best to prevent onsite visits by foreign specialists, the manufacturers of that equipment could not always demonstrate how to use it properly. Thus much of what the USSR imported at the time served no useful purpose. Moreover, during the Cold War, U.S. authorities did all they could to embargo the export of advanced equipment and technology that the Soviets needed for enhanced recovery.
TABLE 2.1 Petroleum Production (Crude)
WEST SIBERIA
When output per well in the Volga-Ural region also began to fall, the slack was taken up by the opening of new areas in West Siberia. In contrast to the long period from 1929, when the first oil was struck, until the late 1940s, when production in the Volga-Ural region finally began to reach a meaningful level, the lag between discovery and production in West Siberia was much shorter. Although exploration for liquid energy in the region began before the Second World War, the first find occurred by accident in West Siberia in September 1953.7 A drilling team was delayed while sailing up the Ob River near the town of Berezov. On the spur of the moment they drilled a test well and found gas in what became the Berezovskoe gas field. It was seven more years, in 1960, however, before the first oil was discovered in a Jurassic zone near Shaim on the River Konda, a tributary of the Ob and Irtysh. The “super-giant” field in a Cretacean level at Samotlor, about 500 miles to the east, was discovered in 1965, and the first commercial-scale well was completed in April 1968.8 Whereas it took almost twenty years for the Volga-Ural fields to move from discovery to delivery to consumer, it took only eight years in the West Siberian Tiumen region. By 1970 production had reached 31 million tons; by 1975 it was 145 million tons; and in 1977, about 210 million tons.9
Notice the pattern here. The output in West Siberia seemed to compensate for the drop in productivity in the Volga-Ural fields in the late 1960s and early 1970s, just as the output in the Volga-Ural regions, coming on line in the late 1940s and early 1950s, offset the declining output of Baku. So far, each time output in one major region slackened, the Soviets found a new region. It would be nice if Russian oil operators could continue in this leapfrog manner. The American geologist John Grace doubts that will happen, since most of the giant fields in Russia, at least those that are easily reachable in terms of production and transportation costs, have already been discovered. But this type of solution to their production problem also had a negative side. It postponed the time when the Soviets would have to face the need to use their resources more efficiently. This is important because outside analysts began to warn as early as 1977 that the Soviets would shortly run out of new fields to develop. In an April 1977 open report that made big headlines in the United States, the CIA predicted that without a substitute for water injection technology, Russia’s annual output would drop sharply in the Volga-Ural region. As the CIA saw it, by 1985 Russian oil output would fall off so sharply that the USSR would no longer have enough petroleum to export. In fact, it predicted that by the mid-1980s, the USSR and its East European allies would be forced to import 3.5 to 4.5 million barrels a day (175–225 million tons). As we shall see, the CIA’s predictions were wrong; none of that happened.
THE SOVIET PLANNING, PRODUCTION, AND INNOVATION SYSTEM
The Soviet planning and incentive system and the special peculiarities that affected the Soviet raw materials and petroleum industries all but guaranteed that the Soviets would have difficulty solving their efficiency and productivity problems. In fairness, it should be pointed out that an inability to manage innovation effectively was not an affliction brought on solely by the Russian Revolution. The revolution seems to have compoun
ded the problem, but even before 1917, we saw when discussing drilling technology in Baku in the nineteenth and early twentieth centuries, Russia’s existing methods lagged behind developments in the West. Invariably it was necessary either to import more advanced technology or bring in foreigners to run actual concessions.10 Such lags were not necessarily characteristic of all pre-revolutionary and pre–Five Year Plan technology, but they were widespread enough to cause suspicion that something deeper than a poor incentive system was at fault. There are a number of explanations: Russia was too remote to be affected by the West European Renaissance, Napoleon never stayed in Russia long enough to bring with him the reforms of the French Revolution and their emphasis on scientific enlightenment and rationality, widespread literacy was lacking until midway into the twentieth century, and the oppressive legacy of authoritarian and rigid governments before and after the revolution discouraged initiative. A mixture of all these factors probably contributed to the problem. Whatever the exact explanation, there is no doubt that Russian culture and history combined with the Soviet system of central planning and a lack of economic incentives stifled creative thinking, at least in the economic and technology spheres.
The Soviet development of the turbo-drill illustrates how shortcomings in the Soviet process of producing, planning, and innovation affected the development of the Soviet petroleum industry. In a perceptive analysis, Robert Campbell of Indiana University explains why the innovation-shy Soviet petroleum engineers were nonetheless prodded into developing this unique process which could utilize lower quality steel pipe.11 To drill effectively using rotary drilling, the driller must have good-quality pipe that can withstand increasing tension and pressure as the drilling goes deeper. With poor-quality steel pipe, breakdowns, cracked pipe, and tool-joint failures are endemic.12 This means not only an increased need for replacement pipe but lost time spent on repairs and lifting and lowering the portions of the pipe string that remained intact. With the type of pipe available to the Soviets at the time, they could drill down only 2,000 meters.13 In 1950 that was the depth of almost 90 percent of Soviet wells. Though inefficient, it was adequate for the drillers in the Baku region. The Soviets were able to satisfy their needs, albeit with a good deal of waste.
While shallow wells may have been suitable for Baku, they were of no use in the producing fields in the Volga-Urals region where oil and gas deposits were much deeper. Furthermore, the use of the traditional rotary drill process with low-tensile-strength pipe meant that the drillers could reach the 2,000 meter depth only when the ground was soft and the rock not too hard. But as Campbell pointed out, Soviet drill pipe at best was made from what in the United States is considered unsatisfactory grade D and some higher grade E steel.14 In the United States, drillers restricted themselves to the use of grade E steel and pipe or even higher grades.
Why did the Soviet Union, as the world’s largest producer of steel, not produce higher quality steel? As long as the Soviet system placed stress on quantity rather than quality of production, the Soviet manager had little or no incentive to produce the higher grade steel. His pay depended not on producing high quality but on producing as much quantity as possible, usually measured by the weight of the steel.15 Generally, the Soviet manager was not concerned about whether his product was sought after in the marketplace. It was usually enough that his product was produced and transferred from the factory floor. Once that happened and a factory achieved its physical output plan targets, the workforce would then share in the enterprise bonuses.
To ensure that such bonuses would be forthcoming, the factory manager devoted virtually his whole effort to searching for ways to increase production. Over time, Soviet managers developed a fine-honed sense of just how this should be done. Those who did not succeed were discarded along the way. Soviet economists soon discovered, however, that a single-minded devotion to quantity led managers not only to ignore quality and variety but to dispense with them. Every time, for example, a machine was shut down to change size or to improve the process, less time was available for production. Occasionally a change in process might lead to faster or improved production, but there was always the possibility that the innovation would not succeed and production would not increase. By contrast, there was always the certainty that in switching production models, production would be curtailed at least temporarily. Because few managers were willing to take such risks, quality improvement inevitably suffered. In the Soviet system, innovation was disruptive and therefore to be avoided.16
For the oil drillers, this meant that the steel manufacturers they depended on had no incentive to produce or even contemplate producing the higher grade qualities of steel.17 In his colorful way, Nikita Khrushchev put it vividly when he complained: “The production of steel is like a well-traveled road with deep ruts; here even blind horses will not turn off, because the wheels will break. Similarly, some officials have put on steel blinkers; they do everything as they were taught in their day. A material appears which is superior to steel that is cheaper, but they keep on shouting ‘steel, steel, steel!’ “18 While this attack was delivered in the context of criticism of the planners’ inability to switch to new, more sophisticated and innovative industries like electronics, computers, and chemicals, Khrushchev’s complaint was equally valid when addressed to the need for qualitative improvements within the steel industry itself.
The planning system was equally ill-suited for locating new deposits. Since planning targets were usually spelled out in terms of some physical measure, for those in agencies like the Ministry of Geology whose work involved drilling, the most reasonable index seemed to be the number of meters drilled. Supposedly the more meters drilled, the better the performance. But Soviet geologists soon discovered that the deeper they drilled the longer it took them and the less drilling they did.19 As a result, the geologists quickly developed the practice of drilling shallow holes. As an article in Pravda pointed out, “Deep drilling means reducing the speed of the work and reducing the group’s bonuses.”20 A description of the area sounded more like a smallpox rather than a mining report. “In some places, the land is becoming increasingly pitted with shallow, exploratory holes drilled in incessant pursuit of a larger number of total meters drilled.” It was not surprising, therefore, that “there are geological expeditions in the Republic of Kazakhstan that have not discovered a valuable deposit for many years, but are counted among the successful expeditions, because they fulfill their assignment in terms of meters. The groups that conscientiously ‘turn up’ deposits are often financial losers.”
Moreover, even if the drillers from the Ministry of Geology found a field, they bore no responsibility for determining its size. Consequently, the actual producing ministries also had to maintain their own drilling units. In some instances there were two and on occasion as many as three separate drilling agencies duplicating one another’s work.21 Undoubtedly it would have been much more efficient to base the drilling team’s compensation on the amount of raw materials actually recovered, but this was resisted by the planning agencies and the Ministry of Geology, which feared such a shift would disrupt its planning procedures. As often happened, they had confused the means— that is, how many meters are drilled—with the end, how much oil was found. Another way the Soviet planning system created institutional blockages to a more efficient utilization of mineral deposits was that responsibility for production and drilling was usually divided up among several large ministries or state committees such as the Ministry of the Chemical Industry, the Ministry of the Gas Industry, and the Ministry of the Petroleum Industry.
Unfortunately, nature did not always break itself up into the same neat and precisely defined categories. This also helps to explain why so much natural gas was burned off, that is, flared. Virtually none of the flaring was done by enterprises within the Ministry of the Gas Industry. Most of it was done by drilling units working within the Ministry of the Petroleum Industry. They produced the gas as a by-product in extracting petroleum,
which, after all, was their main concern.22 Therefore, the plan fulfillment efforts of the Ministry of the Petroleum Industry set out in tons of petroleum produced were little affected by what happened to the by-product, natural gas (a by-product of petroleum extraction). Since Petroleum Ministry officials received no credit for producing gas, they did not concern themselves with building gas pipelines to move the gas to market. Why should they bother? To rid themselves of the nuisance, more often than not they simply flared it.
THE CIA’S PREDICTION OF A SHARP DROP IN PETROLEUM PRODUCTION
Given so many counterproductive and illogical practices, it is easy to see how CIA analysts could conclude that despite the Soviet Union’s large land mass, Soviet petroleum output would drop sharply. Since the oil field operators would most likely continue to flood more and more of their best oil wells, it seemed inevitable that before long the USSR was bound to become a net petroleum importer. Moreover, were production to continue to fall as the CIA predicted, the USSR was sure to find itself with problems that extended far beyond the Ministry of Petroleum. Petroleum was virtually their only hard currency export, and if they could not export it they would not be able to earn the hard currency they needed to pay for imports. Were that to happen, they would be unable to fund the $6.5–8 billion a year they periodically spent on meat and grain imports.23 As it was, even with the petroleum exports they frequently ended up with a trade deficit.24 In 1975 and again in 1981, for example, the Soviet trade deficit exceeded $4 billion. It would have become even higher if the Soviets had been unable to respond by increasing their petroleum exports.25
Petrostate:Putin, Power, and the New Russia Page 6
