PR, energy and corruption

One of the biggest stories in the Russian blogosphere is a car crash that killed a prominent doctor and her daughter during a Moscow morning rush hour late last month.  In the other car, and escaping with minor injuries, was a Lukoil vice president, Anatoly Barkov, and his driver.  Barkov is head of corporate security at Lukoil, and as has been pointed out, he has a conspicuous gap in his resume between being born in 1948 and graduating from the Ufa Oil Institute in 1992, the year he became head of the foreign projects department of Lukoil’s predecessor, LangepasUrayKogalymNeft (see the initials in there?).

The Moscow traffic police quickly blamed the crash on the car driven by the women, but an outcry spearheaded by their family and local automotive organizations brought attention to the case and accusations of a cover-up.  Video footage has emerged that shows Barkov’s black Mercedes pulling into the VIP center lane that separates the two sides of the road just moments before colliding with the other car, which was heading in the opposite direction.  The actual collision, however, is hidden by a billboard.

The incident and Lukoil’s initial rather callous response has hurt the company’s image and the ensuing public outcry has led to the reopening of the case.  Witnesses are being implored to step forward, though some apparently are fearful of repercussions.

Corporate security is a huge deal for these firms, and the divisions tend to be stacked with former (or current) security service employees.  The implication is that during Barkov’s formative years, and up until he began working at Kogalymneftegaz (apparently while attending Ufa Oil Institute), he was involved in the KGB, GRU and/or its successors.

This type of biography is not rare for higher ups, particularly in the oil industry.  There is similar speculation surrounding Igor Sechin, Rosneft’s chairman and the deputy Vice Premier who oversees Russia’s oil and gas sector.  He graduated with a degree in Portuguese and spent significant amounts of time in Africa, ostensibly as a translator, before emerging in the early 1990s in the same St. Petersburg mayoral administration that launched Putin’s career in politics.

These types of (alleged) connections to the security services give accusations of a cover-up involving the police more credence, but there is a general frustration among the latitude afforded to the “well-connected.”  A similar car crash in Irkutsk, where a daughter of a local United Russia figure killed one pedestrian and paralyzed another, has also generated outrage.  The momentum picked up when video footage of the horrific incident emerged online, clearly showing the driver emerging from the car and examining the damage to her hood, while ignoring the crushed bodies on the ground.  That case, which originaly absolved the driver of guilt, has also been reopened.

Elsewhere in the FSU, and thankfully less graphic, Azerbaijan’s ruling family could come under pressure after the Washington Post reported on some sketchy Dubai property deals were apparently done under the names of the children of the Azeri president:

Even by the standards of a city that celebrates extravagance, it was a spectacular shopping spree: In just two weeks early last year, an 11-year-old boy from Azerbaijan became the owner of nine waterfront mansions. The total price tag: about $44 million — or roughly 10,000 years’ worth of salary for the average citizen of Azerbaijan…In all, Azerbaijanis with the same names as the president’s three children own real estate in Dubai worth about $75 million, property data indicate. Dubai real estate dealers with knowledge of some of the transactions said the purchases were made by a buyer representing Azerbaijan’s ruling family.

Ilham Aliyev, Azerbaijan’s president, has ulimate control over his countyr’s oil and gas sector, and has apparently done quite well for himself (above and beyond his reported $228,000 salary). The Caspian oil rush following the collapse of the Soviet Union was marked by kickbacks, corruption and power struggles, as described nicely by Steve LeVine.  Many of those problems clearly continue today, though it’s unclear if stories such as this Dubai real estate excess will cause any changes to the system.

All it takes is a look across to other Caspian / Central Asian states to see similar dealings. The daughter of Uzbekistan’s leader is heavily involved in the country’s energy sphere. Turkmenbashi was famously skimming off gas export revenues for his ridiculous prestige projects. Iran’s Revolutionary Guard apparently benefits from control over gasoline distribution channels within the country, and can facilitate lucrative fuel smuggling operations.

The NYTimes had a front page article on Sunday detailing possible violations in US sanctions by companies investing in Iran, and particularly drawing attention to those receiving US money in grants, projects or loan guarantees.  Unsurprisingly, the oil and gas sector topped the list of industries affected, as numerous international companies seek to benefit from Iran’s attempts to modernize its refineries, develop its gas fields and expand oil production.

The efficacy of such (attempted) sanctions is debatable, but the potential scandal (and resulting pressure from the US) has caused some companies to pull back from their Iranian operations.  For example, the Indian refiner Reliance has added a clause to its oil product sales contracts where the purchaser is barred from re-selling the cargo to Iran. However, industry press is reporting that Petronas nevertheless sold gasoline from Reliance to Iran, in apparent violation of the refiner’s terms.  It’s easy enough to route a shipment through a layer of traders to clear your conscience when presented by the types of premiums Iran is forced pay out for its imports.

Lukoil has also allegedly supplied gasoline to Iran, exporting the product through the Caspian.  Such trade dealings do not have the same negative connotation within Russia as they do in the US, though, and would be unlikely to generate near the negative feedback as the car crash incident.  However, Lukoil maintains a 1,500 site retail network in the US east coast and counts ConocoPhillips as a strategic investor.  Should US efforts to tighten restrictions and sanctions on Iran intensify, these US ties may provide some leverage for gaining Lukoil’s cooperation. Anyway, the company would likely welcome any form of positive international PR in the face of continued backlash over the fallout from last month’s car crash.

Update: Time.com has an article on a pioneering shareholder activist, Alexei Navalny, who’s worked to expose shady dealings particularly among Russia’s energy firms.  Bill Browder did somewhat similar work with his Heritage Capital (though was more flashy at it and seemed to be driven more by profit) before being kicked out of the country and faced with legal claims.  Meanwhile, Forbes Russia has a video of two possible reconstructions of the Barkov’s car crash as the police piece together witness statements.  Regardless, seems pretty unsafe to have an undivided middle lane, despite its reservation for VIP/emergency use…

Kogalymneftegaz

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Lukoil loses Iraq toehold

As was expected (and as I wrote about in August), the Iraqi government has voided Lukoil’s contract to develop the vast West Qurna oil field. The contract had been canceled by the Saddam government itself before the US-led invasion, so this final decision was relatively expected. However, the New York Times article makes an emphasis on the role of US advisers in the final decision:

Early in the American occupation, the question arose whether the Hussein government’s decision [to cancel the previously-awarded contract to Lukoil] was valid, said Michael Stinson, the former chief adviser to the Iraqi Oil Ministry. The answer was supplied by the principal American legal adviser to the ministry at the time, Robert Maguire, who Mr. Stinson said was then working for the Defense Department. Mr. Maguire drew on pre-Hussein-era law to justify the cancellation, Mr. Stinson said.

The article doesn’t mention US oil firm Conoco-Phillip’s 20% stake in Lukoil, which was thought to be a possible aid in bargaining to keep the Russian company’s hold on the oil field. Nor does it say that Lukoil may receive some form of preferential treatment in the field’s new tender given the firm’s pre-production work and experience in the area.

The article also ties in the Russian threat of reneging on Paris Club debt forgiveness to Iraq as a result of this move, but Russian officials had already made it clear that the two issues will not be directly linked. There may yet arise another issue surrounding the Iraq’s debt, but it is worth waiting until after the new tender and contracts for West Qurna are drawn up to make too many conclusions. Iraq seems to be attempting to reassert its own national oil company into future major projects.

While oil has been expected to be a major contributor to Iraq’s budget and economic recovery, the Times’ Sunday magazine has a lengthy article on the “Perils of Petrocracy” by Tina Rosenberg, which — covering Chavez’s “gospel greased by oil,” Terry Lynn Karl’s “paradox of plenty” — is a cautionary tale on too much state involvement within the oil sector.

In the future, though, state-run oil companies will be a driving force in the global energy market — a working rubric for their management will be essential for both the benefit of consumers as well as the producing countries themselves.

Note: My friend Sam raised a good point, that Iraq has a long path before entering the same level of “petrocracy” Chavez has created in Venezuela.  I just wanted to stress the importance of finding the best way to balance state oversight and private management in the current and future global oil market.  Iraq, given it’s relatively clean slate following the devastation and disruption caused by the US-led invasion, will be an interesting study as it further develops.

Russia and the future of Iraq’s oil

Iraq’s oil minister, Hussain al-Shahristani, visited with Russian oil figures in Moscow on Thursday, discussing the role Russia might play in the development of Iraq’s vast oil reserves.

Al-Shahristani predicted that the Iraqi parliament will pass a long-awaited oil revenue law by September and stressed that Iraq’s national oil company (INOC) will take the lead on all major oil projects.

“As for the oil fields that are allocated to the Iraqi national oil company — and this includes West Qurna — it is up to the Iraqi national oil company to decide how best to develop that field,” he said. “They will decide what kind of contracts will provide the highest return for Iraq. That’s the criteria that has to be met by the law.”

(This policy sounds rather similar to the Kremlin’s own recent reassertion of primacy for national firms.) Lukoil had signed a PSA with Iraq in 1997 covering the development of the large West Qurna-2 field, but al-Shahristani made clear that Saddam-era agreements will not be carried over into this next round of development.

The oil minister did meet with Lukoil CEO Vagit Alekperov to discuss the potential role of the Russian oil company in pending developments. While not explicitly promising future cooperation, he did note that “Lukoil enjoys some advantages in winning tenders” due to its past involvement in Iraq. Some observers have also suggested that the Russian firm could benefit from its cooperation with the US-based Conoco-Phillips, which owns a 20% stake in Lukoil.

While it had been predicted that the issue of debt forgiveness could be leveraged to secure Russian involvement in Iraq’s oil industry — particularly with regards to Lukoil and Qurna-2 — it appears that Russia was unwilling to expressly cement the two issues together. Instead, the Kremlin has agreed to write off $8 billion of past loans to Iraq, in accordance to the 80% / %20 of framework developed by the Paris Club of lending nations, despite not receiving assurances of future Russian involvement.

Russia was a beneficiary of the UN’s corrupt “oil-for-food” program with Iraq, and it will be interesting to see if those past ties will re-assert themselves with the re-opening of Iraq’s oil industry. Yuri Shafaranik, now head of Russia’s Oil and Gas Worker’s Union, met with al-Shahristani as well on Thursday. Shafarnik is one of the Russian officials accused by the CIA of colluding on the plan that funneled $11 billion into Saddam’s government from 1997 to 2003, while amassing around $130 million for those Russian officials involved. Russian oil companies allegedly benefited through vouchers for cheap Iraqi oil, which was then sold at market prices, with a portion of the proceeds returned to the Iraqi government as a kickback. According to a listing in the “al Mada” paper, both Gazprom and Rosneft, among others, took part in this scheme (see Keith Smith’s “Russian Energy POlitics in the Baltics, Poland, and Ukraine” for more info).

Not to be outdone, Ukraine is also currently working on its own plans to utilize the renewed oil output from Iraq. Ukrainian PM Viktor Yanukovich has called for negotiations between Ukraine, Turkey and Iraq in order to develop a plan to send Iraqi oil up to the Black Sea and on up the Odessa-Brody pipeline. This would certainly add geopolitical significance to the long-debated pipeline, especially since it would represent a significant project that would not rely on Russian involvement — a key for a Ukraine that currently depends heavily on Russia for nearly all energy issues. Interest from the other two parties, however, is a bit tough to gage. We’ll see how things turn out.