American University International Law Review Volume 7 | Issue 3 Article 12 1992 Western Opportunities for Investment in the Oil Industry of the Former Soviet Union Lori Ann Feathers Follow this and additional works at: http://digitalcommons.wcl.american.edu/auilr Part of the International Law Commons Recommended Citation Feathers, Lori Ann. "Western Opportunities for Investment in the Oil Industry of the Former Soviet Union." American University International Law Review 7, no. 3 (1992): 703-731. This Article is brought to you for free and open access by the Washington College of Law Journals & Law Reviews at Digital Commons @ American University Washington College of Law. It has been accepted for inclusion in American University International Law Review by an authorized administrator of Digital Commons @ American University Washington College of Law. For more information, please contact [email protected]. WESTERN OPPORTUNITIES FOR INVESTMENT IN THE OIL INDUSTRY OF THE FORMER SOVIET UNION* Lori Ann Feathers** INTRODUCTION As recently as 1988, the Soviet Union produced 20.6 % of total world oil output, making it the world's largest oil producer.' In that same year, exports of both oil and gas accounted for eighty percent of the Soviet Union's hard currency exports to the West.2 With a reported ten percent decline in gross national product for the first half of 1991,3 the Soviets desperately need hard currency to strengthen their collapsing economy.4 Unfortunately, the percentage of hard currency obtained from oil exports to the West has also sharply declined. 5 Soviet oil pro- * This Comment addresses Western business opportunities in the oil industry of the former Soviet Union. While recent political events have shifted power from Moscow to the governments of the newly independent states, many of the problems that hindered Western investment in the Soviet oil industry prior to the dissolution of the Soviet Union persist today. For example, the "war of laws" that once existed between republican and Soviet authorities endures between the members of the Commonwealth of Independent States and local regions within these member-states, both of which are vying for control of mineral rich areas. Moreover, many of the operational and financial concerns addressed in this Comment, such as registration, procurement of supplies, transfer of technology, protection of intellectual property, labor, taxes and currency, continue to raise barriers to investment. Thus, the issues and conclusions presented remain both timely and valid. ** J.D./M.A. Candidate, 1994, Washington College of Law and School of Interna- tional Service, The American University. 1. Moe, The Future of Soviet Oil Supplies to the West, SOVIET GEOGRAPHY, Mar. 1991, at 137, 137 [hereinafter The Future of Soviet Oil]. 2. Natural Resources, DOING Bus. INE. EUROPE, Nov. 1, 1989, 56, 57 (LEXIS, Nexis Library, Bus. File). 3. Boulton, Soviet GNP Falls By 10% In First Half, Fin. Times, July 18, 1991, at 1. 4. Goldman, The Catastrophe of the Soviet Economy, INT'L ECON., Aug.-Sept. 1990, at 54, 57 [hereinafter Catastrophe of the Soviet Economy]. See ECONOMIIST IN- TELLIGENCE UNIT COUNTRY REPORT, No. 2, QUARTERLY REPORT ON THE SovIET UNION FOR 1991 32 (1991) [hereinafter EIU REPORT ON THE SOVIET UNION] (noting that the 45.1 percent drop in imports for the first quarter of 1991 as compared with the first quarter of 1990 is particularly indicative of the need for hard currency). 5. See EIU REPORT ON THE SOVIET UNION, supra note 4, at 27 (reporting a 9 percent drop in Soviet oil and gas production in the first quarter of 1991 relative to production in the first quarter of 1990); see also Kovski, Soviet PotentialLingers De- spite Current Upheaval, OIL & MONEY INT'L, May 13, 1991, at 1 (reporting that Soviet officials expect a 50 percent decline in oil exports in 1991). But see Lelyveld, Oil AM. U.J. INT'L L. & POL'Y [VOL. 7:703 duction dropped from 12.48 million barrels per day in 1987,1 to less than ten million barrels per day in December 1991.7 Likewise, oil ex- ports declined by thirty-three percent in 1991.8 This drop in production resulted from, among other causes,9 increased production costs, 10 dete- riorating equipment," a failing infrastructure,"2 ethnic strife,' 3 and Exports May Finance Import Rise for USSR, J. OF COMMERCE, Aug. 6, 1991, at 1 [hereinafter Oil Exports May Finance Import Rise] (declaring that Soviet oil exports for the first half of 1991 actually fell only 25 percent compared to the first half of 1990, rather than the 50 percent drop reported by Soviet officials). This miscalculation on the part of Soviet officials is blamed, in part, on recent shifts in control over Soviet oil production. Id. Once the exclusive domain of the Soviet oil ministry, control of oil production is now shared with the various republics. Id. Nevertheless, this 25 percent decline in oil exports is a dramatic acceleration from the 12 percent decline exper- ienced in 1989. The Catastrophe of the Soviet Economy, supra note 4, at 57. 6. 20,000 Soviet Wells Reported to be Idle, OIL & GAS J., July 29, 1991, at 38 [hereinafter 20,000 Soviet Wells]. 7. Strauss, Major Shifts in Oil Market Could Create More Stability, J. OF COM- MERCE, Dec. 31, 1991, at 4B. See Soviet Flow Skids to Less Than 10 Million Bid, OIL & GAS J., Dec. 30, 1991, at 24 (citing several reasons for the sharp decline in oil production, including the sharp decline in drilling volume, insufficient financing, lack of equipment, and the diminution in the quality of reserves); see also Trouble in Barrels, THE ECONOMIST, Dec. 21, 1991, at 84 [hereinafter Trouble in Barrels] (predicting that the energy output of the Soviet Union will decline by an additional one to two million barrels per day in 1992). 8. Tanner, Former Soviet Union's Oil Woes Unlikely to Hurt Exports as Much as Expected, Wall. St. J., Jan. 9, 1992, at A2. See Oil Exports May Finance Import Rise, supra note 5, at I (reporting a 50 percent drop in oil exports for the first half of 1991); see also The Domestic Economy, EIU REPORT ON THE SOVIET UNION, supra note 4, at 27 (stating that oil production for the first quarter of 1991 was the lowest quarterly output in fifteen years). 9. See 20,000 Soviet Wells, supra note 6, at 38 (asserting that the drop in oil production is a product of the Soviet government's recent emphasis on consumer goods manufacturing rather than energy production); see also Russia: Gasping for Breath, Choking in Waste, Dying Young, Wash. Post, Aug. 18, 1991, at C3 (reporting that millions of barrels of petroleum are lost each year in the Soviet Union because of acci- dents that occur during the extraction and transportation of oil). 10. See The Future of Soviet Oil, supra note 1, at 145 (stating that increases in the costs of production result from the unfavorable location and complexity of fields currently being exploited). 11. See Ebel, Can Soviet Oil Save Gorbachev?, INT'L EcON., Oct.-Nov. 1990, at 45, 46 [hereinafter Can Soviet Oil Save Gorbachev?] (explaining that wells stand idle because of poor construction, infrequent inspections, and shortages of spare parts); see also 20,000 Soviet Wells, supra note 6, at 38 (discussing a Scottish report on the Soviet oil and gas industry that estimates that 20,000 productive Soviet wells arc idle due to lack of equipment or unreliable equipment). 12. See Catastrophe of the Soviet Economy, supra note 4, at 57 (stating that the failure to provide much needed repairs to the Soviet railroad seriously endangers con- tinued oil production). 13. See Can Soviet Oil Save Gorbachev?, supra note 11, at 46 (stating that ethnic unrest in the Armenian capital of Baku, the nation's center for the manufacture of oil field equipment, disrupted oil production). 1992] WESTERN INVESTMENT outdated technology. 4 Thus, commentators have recognized that the Soviet Union's future ability to increase oil exports to the West, and to generate the needed influx of hard currency,'5 requires drastic reform of the country's oil industry.1 6 One such avenue of reform is the estab- lishment of joint projects with Western companies in order to enhance the development of the Soviet Union's oil reserves.1" Foreign companies appear eager to invest in the oil industry of the Soviet Union because of the potential for reaping enormous profits. 18 First, the Soviet Union may possess the world's largest oil reserves." Secondly, because the Soviets have confirmed the existence of oil, for- eign oil investors20 avoid the usual exploration costs. 21 Thus, Western 14. See Sausbury, U.S. Expertise Tops Soviet Union's Energy Shopping List, J. OF COMMERCE & COMMERCIAL, Aug. 8, 1991, at 7B (hereinafter Soviet Energy Shopping List] (reporting that Soviet energy officials hope that United States removal of trade barriers will provide greater Soviet access to new energy production technologies). 15. See supra notes 1-4 and accompanying text (explaining the predominate role oil exports play in the Soviet Union's hard currency earning potential); see also EIU REPORT ON THE SOVIET UNION, supra note 4, at 32 (reporting that for the first quarter of 1991, exports to the developed West from which hard currency could be derived fell by 10.7 percent); The Future of Soviet Oil, supra note 1, at 138 (asserting that the volume and value of oil that the Soviet Union exports is the single most important determinant of the country's ability to participate in the international economy); Note, The New Soviet Joint Venture Law: Analysis, Issues, and Approaches for the Ameri- can Investor, 19 LAW & POL'Y INT'L Bus.