No. 4, 2003

Alexander Anatolyev


Russian-German cooperation in energy field in action

Relations between Russia and Germany provide a real foundation for cooperation, a tangible possibility for genuine integration, expressly so since the two countries have been closely cooperating in the fields of politics, economy and culture for centuries.

Following footsteps of Peter the Great

Relations between Russia and Germany are rooted deeply into the times of the Russian emperor Peter the Great (1672-1725). Lasting economic, political and cultural cooperation had helped to draw the two nations together. Dialogue on energy problems between the two countries had also begun centuries ago.

The Russian State Archive keeps an interesting document dated May 6, 1747, by two Hamburg researchers D.M. Miller and D.M. Losau, who reported on their findings of sample testing of oil from Ukhta, which a Fyodor Pryadunov from Arkhangelsk had sent for analysis. So far it is the oldest written testimony regarding the birth of Russian-German relations in oil business.

But it is the year of 1867 that should be considered the true beginning of joint activities of the two countries in oil and gas. Two German businessmen Werner and Karl Siemens farmed oil springs of the "Shirak, Eldar and Marzaan steppes" based in Kakhetia, Tiflis Guberniya. In 1869, they built a refinery in the vicinity of Tsiteli-Tskaro, dubbed "Royal Wells," and sank a drilling well which marked a beginning of intensive oil production. By 1870 the total oil production by Siemens and Halske reached 87.7 thousand buckets (one bucket, or vedro, was 12.3 liters), 173.7 thousand buckets in 1875. Crude oil was handled at the refinery, which had two horizontal and two cylinder stills with the capacity of 1.6 m3 each. At the All-Russia Technical Fair of 1872 in Moscow the Siemens company demonstrated a wide range of its petroleum products, such as gasoline, kerosene, lubricants, petroleum ether, distilled gasoline aromatic hydrocarbons, various lacquers and gums. The company's products were awarded with a medal of distinction, but the bulk of the company's products had come ahead of their time, as there was no demand for them. Due to a number of reasons Karl Siemens decided to close his oil business and concentrate on developing electrical engineering production in Russia.

The early 1880s saw radical changes in the world oil markets. Russian petroleum products began to penetrate increasingly the German markets. In 1883 a leader of the Russian oil industry, the Nobel Brothers Partnership Oil Production sets up a company in Germany called Deutsch-Russisches Nafta Import Gesaelschaft. Russian kerosene was transported to Germany by three routes: by tankers from St. Petersburg across the Baltic Sea to Stettin, Luebeck and Bremen; by railroad across Poland to Silesia, and, finally, from Black Sea ports of Novorossiisk and Batumi to Hamburg and Bremen. By the early 1890s the Russian kerosene exports reached 1.5 mln poods a year (one pood, an oil Russian measure of weight, is 16.38 kg).

World War I had struck a serious blow on economic relations between the two countries, and Russian petroleum product exports were terminated for almost a decade. But after the Bolshevik revolt of October 1917 and the treaty of Brest-Litovsk between the Soviet Government and Germany (known as the Brest peace treaty) the oil issue came into being again.

After the Soviet-German Treaty of Rapallo in 1922 the Soviet Union demonstrated a keen interest in purchases of German technology and equipment, especially in electrical power engineering. Leonid Krasin, a renowned Soviet politician (1870-1926), and a former manager for technology of the Siemens-Schuckert joint stock company in St. Petersburg, played a key role in restoring bilateral relations.

Soon the Soviet-German relations were restored to a fairly high level, mainly in exchange of technical information, construction projects and supply of equipment and materials. In 1927 the Soviet Government signed a deal worth DM 18 mln with Vereinigte Stahlwerke to supply Russia with steel pipes for a 618 km long oil pipeline Grozny-Tuapse.

At the time of the world economic crisis of 1929 -1932, German exports of technology to the Soviet Union remained stable, and even became more important for German companies since other markets were closed.

The tragic events of World War II became the reason for a much longer hiatus of almost 25 years long in business relations between the two countries.

It took almost two decades to restore normal relations between the two countries. The leading role in it was cooperation in the energy field.

A great role was played by a leading German concern Ruhrgas AG and other Western companies in the development of unique gas fields of West Siberia, signed in 1968. These agreements are referred to as Gas-Pipes Agreements. In exchange for future supply of gas the Soviet Union was supplied with steel pipes, equipment and materials to complete gas fields and construction of gas pipelines. Since that time the goods turnover has been growing rapidly - from 544 mln rubles in 1970 to 2,957 mln rubles in 1977, a growth by 5.5 times.

The collapse of the Soviet Union and the appearance of a new Russia provided a new incentive in development of Russian-German political and economic dialog. In December of 1998 Ruhrgas became the first Western stockholder of the Russian company Gazprom. Later on Ruhrgas has been increasing its stake and by now owns 5% of Gazprom shares.

The bilateral goods turnover has grown by 16.8% by 2001 and reached an impressive record-high mark of 24.8 bln euros.

A considerable part of energy demands in Germany is provided by Russian raw materials, which cover 37% of German gas consumption and of 26.5% of its oil needs. Today, just like in the Soviet times, gas supplies are done on the basis of long-term contracts. They have fixed time and price terms.

Sizable supplies of Russian oil and gas impact positively other related industries. There are now varied and stable Russian-German ties in development of oil and gas fields, technology supplies and transfer of know-how.

Positive contribution to cooperation

A number of Russian-German joint ventures work successfully in the oil and gas business. Among them are: JSC Petrocom in Nizhnekamsk, producing a wide range of chemical and petrochemical goods; JSC Uromgas in Yekaterinburg, a holder of international Effy award for high technology, such as gas filling stations; JSC Gazelektronika in Arzamas, that has manufactured laboratory bench UPG-1600 in the base metrology laboratory of JSC Surgutneftegaz; JSC Ditangaz in Nizhni Novgorod, producing automated disharge control systems ASK-3V and portable computerized gas analyzers DAG-16; JSC TsVG-ROSA in Novosibirsk, manufacturing effective systems to treat water and industrial wastes, and many others. However, there is still more convincing example of contemporary Russian-German cooperation in oil business.

A Russian-German JV Volgodeminoil was set up in December of 1992. The venture was initiated by a protocol, singed by the Russian President and the Chancellor of Germany. The founders of the venture were a Russian production association Nizhnevolzhskneft in Volgograd and a German company of Deminex, an affiliate of Wintershall AG. At present Volgodeminoil is owned by Wintershall AG (50% stake), which is a part of BASF, and JSC LUKOIL-Perm (50% stake).

The company started its business from scratch, as it had neither discovered oil fields, nor prepared structures. Over $50 mln in foreign investments was raised in implementing a business plan. More than 1,200 jobs were created in contracting organizations, such as Volgogradneftegeofizika, Zaprikaspy Geofizika, Nizhnevolzhskburneft, VolgogradNIPImorneft. Incidentally, the Region collects some 90 mln rubles in taxes from the company.

Today Volgodeminoil carries out exploration and produces hydrocarbons at four licensed areas in 6 districts of the Volgograd Regoin. The company produces about 440,000 tons of high quality oil and is doing a unique wild-cat drilling at depths of up to 7.3 thousand meters.

Successful operation of Volgodeminoil is often cited by leaders of the two countries as a positive example of cooperation in oil business. In 2001 Volgodeminoil was awarded a diploma "Best Russian Exporter" and a medal "Golden Standard" of the International Program Partnership for Progress for contribution to production development and foreign economic ties.

The company's successes rest on well coordinated and skilled work of managers and engineers, blue and white collar workers. It only stands to reason that the company will reach the goal of increasing hydrocarbon resources by 100 mln tons and more than doubling of oil production by the year 2006.

A meeting dedicated to the 10th anniversary of Russian-German JV Volgodeminoil was held in Volgograd, on January 16, 2003, attended by leading officials of the founding companies, the city administration, the Russian Ministry for Energy, and numerous business partners. Speaking at the ceremony, Bernhard Schmidt, a member of the board Wintershall, said: "Ten years ago we acquired production facilities of Volgodeminoil with a view to build a foundation for still larger projects in Russia. We are positive now that our business is highly effective and hope for a long term cooperation." Viktor Lobanov, executive director of LUKOIL-Perm, responded in kind: "Our close and fruitful cooperation with the German partner is a guarantee of success of Volgodeminoil."

Plans for future

President Vladimir Putin, visiting Weimar in March 2003 outlined the future of the Russian-German relations in oil and gas. He called for further expansion of Russian exports of oil and gas, and suggested that mandatory diversification of gas suppliers be annulled (EU rules demand that no single gas supplier may control more that one-third of energy supplies of EU countries). Especially as gas consumption in Europe may grow by 100 bln m3 by the year of 2010.

In April of 2003 an important international congress took place in Hanover, the capital of Lower Saxony - Russian-German energy forum Fuel and Energy Sector: New Opportunities for Russia's Region. It was complemented by a meeting of scholars and specialists from various countries on decentralized energy sources. Over 250 top managers attended the congress, which testifies to the event's importance paid by German businesses, Russia's Vremya novostey paper was told by officials of the Eastern Committee of German Economy. It was specifically emphasized at the forum that future cooperation has a big potential. On the one hand, Russia needs foreign investments to maintain and develop the energy sector of the national economy; on the other hand, Germany would be interested in Russian energy imports. Russian energy companies in their turn displayed interest in German business activities. German businessmen are ready to invest in the Russian economy. The reforms that have been started or still being prepared by the Russian Government create still more favorable conditions for the endeavor. Everything will depend on how consistent and stable are these reforms.

A search for additional transit routes for the growing Russian exports to Western Europe is welcomed by German business interests. Development of new export routes for oil and gas in order to ensure additional safety of supplies is a top priority for the Russia's Energy Ministry. The new Energy Strategy, worked out by the Ministry and approved by the Russian government, provides for new oil and gas export routes to the world markets by 2020. A draft project was developed to build a North European gas pipeline from the Russian territory via the Baltic Sea to the German coast in order to enhance reliability of gas supplies to European consumers, first of all in Germany. A preliminary feasibility study developed by international engineering companies, proved the project's technical feasibility and economic effectiveness.

Further expansion of cooperation in the field of energy was in the limelight of the meeting of bilateral Russian-German energy working group, which took place on March 17, 2003, in Moscow. The meeting approved growing Russian-German dialogue on all the items of the agenda, including cooperation in gas and oil industries, power engineering, energy conservation, and the coal industry. Next there was the first meeting in the middle of this year of the Russian-German Working Group on Oil and Gas set up within the framework of the intergovernmental Russian-German Working Group for Strategic Cooperation in Economy and Finance. The meeting's session was attended by high level officials of the Russian Energy Ministry, JSC Gazprom, JSC Itera, JSC Gazexport, Germany's Federal Ministry for Economy and Labor, Wintershall AG, Ferbundnetz Gas AG and others. It was stressed at the session that the main tasks of the Working Group were to expand the Russian-German cooperation in the oil and gas field both at intergovernmental and corporate level, and to prepare proposal for governmental bodies and commissions of Russia and Germany. The two parties noted a successful development of the pilot joint project involving the development of the Achimovskiye accumulations of the Urengoi gas condensate field aimed at supplying gas to Western Europe. Also discussed was a German joint project to monitor and analyze gas pipelines and to provide measures to restore effective operation of these gas pipelines. The session of the Working Group noted that both sides were mutually interested in maintaining reliable partnership relations and in long-term projects, which include joint work in the field of environment protection new technologies and scientific research.

All of the above-said testifies to accelerating nature of mutually advantageous cooperation in the field of energy. There is no doubt that the German Russian Energy Summit scheduled for 2004 would demonstrate growing potential for successful cooperation of the two countries in the field.

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