Vertically integrated oil and gas companies in Russia. The history of formation and their role in the country's foreign policy

Khadzhi Aleksandr Sergeevich Postgraduate student; Department of International Relations; Diplomatic Academy of the Ministry of Foreign Affairs of the Russian Federation 53/2 Ostozhenka Street, Moscow, 119021, Russia haji.sasha@gmail.com Other publications by this author

Introduction

Today, the largest vertically integrated oil and gas companies (VICS) - Gazprom, Rosneft and LUKOIL – are the largest taxpayers and employers, play a key role in the development of the Russian fuel and energy complex, contribute to the country's economic growth and scientific and technological progress.

Their place as a subject of Russia's foreign policy is especially important. The implementation of large infrastructure projects for the extraction and processing of energy resources in other countries is an important tool of Russian energy diplomacy, contributing to improving the country's image on the world stage and the formation of new trade and economic partnerships.

The emergence of vertically integrated oil and gas companies in Russia

Vertical integration, which involves building a financial, economic, organizational and managerial chain from production to processing and sales, is today a characteristic element of the functioning of the energy industry, dominating the structure of the oil and gas business since the 1930s. Extractive companies, in an effort to gain and further strengthen their position in the retail market, have quite reasonably embarked on the path of involving or creating new economic entities at different stages of the production and economic activity of the oil and gas industry ^{[1, p. 172.173]}.

Despite the fact that the modern domestic raw materials industry, after the collapse of the USSR, actually needs to adapt to the development trends associated with the functioning of WINK, the palm of the world championship in creating such structures still belongs to Russia: in 1874, the first joint–stock company in the Russian oil industry was established - the Baku Oil Company, which united the entire technological the chain from the borehole to the end user (enterprises for the extraction, processing, storage, transportation and marketing of petroleum products) ^[2,3].

Established in 1879, the vertically integrated Nobel Brothers Oil Production Partnership strengthened the position of the Russian oil business by introducing promising developments in the field of production, transportation and storage of petroleum products ^[4].

The establishment of Soviet power, coupled with the nationalization of the fuel and energy complex and structural changes in the entire economy, radically changed the approach to the energy industry management system.

The statement about the development of the vertical integration system in the USSR is true: such organizational forms of production as territorial production complexes, production associations, scientific production associations, etc., really worked within the framework of such an economic architecture ^[5].

However, it is worth noting an extremely important point here: the directive economy, which requires subordination to the State Planning Committee, in which the enterprises of the Soviet fuel and energy complex existed, made all links of the chain (geological prospecting office, drilling management, refineries and others) extremely "slow" and dependent on each other. Moreover, the planned system created obstacles to the technological re-equipment and supply of oil and gas enterprises, which greatly slowed down the development of the entire industry ^{[1, pp.27-28]}.

As a negative factor in the management system of the industry, we will also highlight the existence of a whole group of executive authorities involved in the work of neftegaz. Among them were the Ministry of Geology of the USSR, the Ministry of the Petroleum Industry, the Ministry of the Gas Industry, the Ministry of Oil Refining and Petrochemical Industry, the Main Directorate for Transportation, Storage and Distribution of Petroleum and Petroleum Products, the Ministry of Construction of Oil and Gas Industry Enterprises – such an overblown bureaucratic apparatus, where powers were often overlapped by different bodies, simply could not ensure the adoption of quick and effective effective solutions that contribute to the qualitative development of the oil and gas industry ^[6].

The constant increase in plans for the extraction and processing of raw materials, aimed at obtaining even more foreign exchange earnings from exports, also had a significant impact on the state of the entire fuel and energy complex of the USSR: firstly, the pressure of the directive economy remained, requiring new indicators, and secondly, financial problems that were trying to be alleviated by extensive development of the raw materials sector., had an even greater negative impact. It is worth adding to this the already mentioned problem of the backlog of the logistics system, which causes the degradation of enterprise funds. The deep crisis of the financial and economic system of the former USSR led to the collapse of the raw materials industry and the emergence of non-governmental companies in the early 90s, marking the transition of the industry to a market economy ^{[7, p.50]}.

Vertically integrated companies have become a form of ensuring "the interest of combining the efforts of oil production, refining and marketing enterprises in order to save on production costs and through the introduction of new technologies", which was needed to improve the industry and bring it out of the complex crisis of management and finance ^{[1, p. 7]}.

One of the founders of the idea of introducing, or rather, the actual return of VINK to Russia, was the future head of LUKOIL, V.Y. Alekperov, who held the post of Deputy Minister of the Oil and Gas Industry in the early 90s. Familiarization with the experience of Western companies was of great importance ^[8].

On November 17, 1992, Decree of the President of the Russian Federation No. 1403 "On the Specifics of Privatization and Transformation into Joint-stock Companies of State-owned Enterprises, Production Associations of the Petroleum, oil refining industry and petroleum Products Supply" was signed.

The decree provided for the creation of three types of organizations in the oil industry:

1) Oil production, refining and oil product supply enterprises, which, through the transfer of blocks of shares, come under the control of the state enterprise Rosneft;

2) Private WINK: LUKOIL, Yukos, and Surgutneftegaz, which combined oil production, refining, petroleum products supply, and other related industries;

3) Enterprises in the field of oil and petroleum products transportation, whose shares are included in the authorized capital of Transneft and Transnefteprodukt companies.

LUKOIL became the first vertically integrated oil company in modern Russia. Its history began with the Decree of the Government of the RSFSR No. 18 dated November 25, 1991 "On the formation of the LANGEPASURAIKOGALYM Oil Concern (LUKOIL)".

Rosneft, on the contrary, has become one of the last vertically integrated oil joint-stock companies in Russia. Rosneftegaz was established by Resolution No. 555 of the Council of Ministers of the RSFSR dated October 18, 1991 on the basis of the disbanded Ministry of Oil and Gas Industry of the USSR. In April 1993, it was transformed into the state-owned enterprise Rosneft, and in 1995 it became a full-fledged joint-stock company, where the state remained the main shareholder.

The previously mentioned Yukos, as well as smaller companies like Sidanko, Slavneft and others, will eventually come back under de facto state control, being absorbed by Rosneft. However, some large regional WINCs, such as Tatneft or Surgutneftegaz, continue their activities to this day.

A process similar to the history of Rosneft was associated with the formation of a large vertically integrated Gazprom holding company, which was formed in 1989, which marked the first step in the transformation of the Soviet gas industry to market realities in the late 1980s and early 1990s. In fact, the management of the gas industry was transferred from the hands of the Ministry of Oil and Gas the USSR industry is in the hands of a new entity, independent in decision-making. This made it possible to remove the entire industry from bureaucratic red tape and preserve it for further development in the conditions of a worsening economic and political situation ^[8,9].

On November 5, 1992, a Decree of the President of the Russian Federation was signed on the transformation of the state concern Gazprom into RAO Gazprom, and on February 17, 1993, RAO Gazprom was established by a Decree of the Council of Ministers - the Government of the Russian Federation. The company has become an essential element of the domestic stock market and the largest joint-stock company in Russia.

The emergence of vertically integrated oil and gas companies in the post-Soviet crisis made it possible to preserve the industry and give an impetus to development, transferring control of the entire production chain from production to supply to the end user into hands more or less free from the bureaucratic pressure of a planned economy. The system of maximum vertical integration that existed in the USSR, with a large number of authorities, regional scientific and industrial associations and local enterprises united by the goal of Gosplan, simply could not work effectively due to directive management methods rather than a free market.

The state, in its attempts to stop the degradation of the country's economy, would not have been able to ensure effective management of the oil and gas industry, which was already in a declining state. An example of a political decision to transfer the industry to "parastatal" hands, as happened with Gazprom and then Rosneft, became the key to positive trends in the oil and gas industry.

WINCS were able to ensure the free movement of capital within the industry, and the consolidation of enterprises in related sectors of the economy contributed to the required logistical support and scientific and technological progress.

The place of vertically integrated companies in Russia's foreign policy

Today, Russia's oil and gas sector plays an important role not only in the national economy, but also contributes to ensuring the energy security of many countries around the world.

Vertically integrated companies are an effective instrument of Russia's energy diplomacy, enhancing the country's international authority and prestige through the implementation of large and often promising strategic projects for the extraction and transportation of raw materials.

Ensuring international energy security through the supply of energy resources

One of the key tasks that large Russian oil and gas companies are solving is to meet the needs of importing countries for raw materials for the efficient operation of the economy and industry.

The most striking example in this area is Gazprom's long-term natural gas supplies to European countries, which contributed to the intensive development of all industries.

Soviet contracts with European countries and the logistical structure became the basis for the development of VINK's export activities in 1990-2000. Since the 21st century. Gazprom has begun actively expanding its network of main pipelines, connecting European consumers with the Russian fuel and energy complex. The expansion strategy, especially in terms of gas supplies, was based on maximizing benefits (occupying new niches, developing existing potential), minimizing risks, and, importantly, outperforming competitors and creating obstacles to their activities ^[10].

It was important in this context to ensure national energy security in the context of reducing dependence on transit states, in particular, Ukraine, through whose territory Soviet export pipelines were historically built ^[11].

· Yamal-Europe is a gas pipeline built in 1994-1999 through the territory of Belarus, Poland and Germany. The design capacity is 32.9 billion cubic meters of gas per year. It has not been operational since March 30, 2022.

· Blue Stream is a gas pipeline built in 2001-2002 through the Black Sea for transit–free gas exports to Turkey. The design capacity is 16 billion cubic meters of gas per year.

· Turkish Stream – built in 2017-2018 through the Black Sea to increase supplies to Turkey and ensure the interests of importing countries in Southeastern Europe. The design capacity is 31.5 billion cubic meters of gas per year.

· Nord Stream and Nord Stream – 2 a are transit–free export gas pipelines to Germany via the Baltic Sea. They were built in 2010-2012 and 2018-2021, respectively. The design capacity is 55 billion cubic meters of gas per year (for each branch). They are currently not functioning after the sabotage in September 2022.

Support for developing countries

The operational activities of oil and gas companies in developing countries are related to a number of important aspects. Firstly, companies provide an influx of investment funds to countries in Africa, the Middle East and Latin America for the purpose of geological exploration, extraction and processing of raw materials. Secondly, the activities of the oil and gas business are also related to the development of cooperation in terms of strengthening human, technological and professional capacities in the countries of presence through training programs, education, exchange of experience, etc. ^[12].

This process is typical not only for Russian oil and gas companies, on the contrary, it is a distinctive feature of the entire global oil and gas business in the context of a changing global agenda, increasing attention to issues of sustainable development and human capital. This forces global companies to pay more and more attention to issues of social investment, support for local communities, solving local problems and promoting development ^[13].

Here are a couple of examples: in 2015 Rosneft has signed a four-party agreement with the Venezuelan company PDVSA, the Gubkin Russian State University of Oil and Gas and the University of Hydrocarbons of the Republic of Venezuela. The agreement implied strengthening energy cooperation, in particular, the export of Russian oil to Venezuelan refineries, as well as cooperation in the field of education and science. And in 2024, on the sidelines of the XXVII St. Petersburg International Economic Forum, an agreement on cooperation in the field of education and training was signed between Rosneft and the Cuban State Oil Company (CUPET).

Symbiosis of government and business

Large Russian oil and gas companies, while carrying out their activities in the field of extraction and production of energy resources, simultaneously carry out representative functions of Russia in terms of national policy on oil and gas issues. Such activities help companies to obtain additional preferences and administrative resources on both domestic and foreign policy tracks. For example, companies receive preference in the allocation of licenses for the development of new deposits, secondly, the state provides protectionist functions, restricting access of foreign players to the domestic market, provides comprehensive political support in controversial issues at the international level ^[14].

The expansion of the geographical presence of Russian oil and gas companies and the intensification of activities related to the implementation of joint production and production projects with foreign partners, firstly, reduces dependence on high volatility in oil prices, and secondly, helps minimize political and economic risks ^[15] - the participation of Russian companies, especially where the share in The cost of the project is high, it forms a certain "safety cushion" from the pressure of government structures or third parties.

The large-scale sanctions pressure exerted by the West is forcing Russia and fuel and energy companies to form new partnerships and diversify their geography and supply portfolio. The so-called turn of energy to the East, the pace of which increased after 2022, is today one of the main trends in the Russian energy sector.

The Asia-Pacific region, where consumption growth is growing many times and there is a high interest in Russian energy resources, opens up new horizons for domestic WINCS.

Moreover, it is important to note that countries such as India are ready to defend their national interests and engage in energy cooperation with Russia, despite condemnation from Western countries. This forces Russia's main competitors on the world stage to start looking for new approaches to the leaders of the Global South.

Prospects for a multiple increase in supplies to China through the construction of new large gas and oil pipelines are also being discussed at the highest level.

Russian companies are also paying great attention to the development of mining and processing projects in Africa, where competition with the United States and Arab countries is beginning to increase.

Separately, it is worth highlighting another vertically integrated company that also operates in the energy sector, but is not a representative of neftegaz - the state corporation Rosatom.

Rosatom's projects are now making Russia a global leader in the use of peaceful atomic energy: promising models of new-generation reactors, safety and control systems for nuclear power plants are attracting the attention of potential customers from other countries. The company is actively involved in the construction of facilities in other countries: currently, nuclear power plants are already being built in Bangladesh, Hungary, Egypt, India, Iran, China, Turkey and other countries. And the world's only fleet of nuclear icebreakers gives Russia a strategic advantage in implementing projects near the North Pole ^[16].

Conclusion

Today, Russian vertically integrated giants are actively involved in the implementation of Russia's energy policy aimed at diversifying markets, finding new partners, and ensuring global energy security. The implementation of new projects demonstrates the country's ability to adapt to global policy changes and not lose its position in global energy markets.

As the key tasks that Russian WINCS solve in the country's energy policy, we will single out:

· Strengthening economic ties by increasing export volumes;

· Expansion of the geographical presence due to new mining, processing and transportation projects;

· Ensuring the energy security of partner countries by increasing export volumes on favorable terms;

· Increasing the prestige of Russia through promising technological developments in the fuel and energy sector.

Vertically integrated companies in Russia have gone through a rapid development path in an extremely unfavorable economic and political environment. The important policy decisions taken in the early 1990s, including the transformation of the internal structure of the fuel and energy complex and the transfer of management to companies that can freely use their own capital, allowed the oil and gas industry to improve.

Further reorganization in the first decade of the noughties, with the allocation of two state-owned and one private giant, made it possible to strengthen the centralized nature of industry management and set strategic development impulses.