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Chechnya to Acquire Federal Oil Industry Assets On Its Territory

Ramzan Kadyrov says he will push for the construction, either by Grozneft or other investors, of an oil refinery with an annual capacity of 1 million tons.
Ramzan Kadyrov says he will push for the construction, either by Grozneft or other investors, of an oil refinery with an annual capacity of 1 million tons.

Russian President Vladimir Putin acceded late last month to a request by Chechen Republic head Ramzan Kadyrov to transfer to Chechen ownership the assets of Chechenneftekhimprom, the state-owned company that controls the republic's oil-refining and petrochemical industry infrastructure.

Kadyrov, however, is holding out for more, specifically the construction in his republic of an oil refinery that economists say is not economically viable, and that Kadyrov himself described five months ago as "unrealistic."

Some experts say the transfer of Chechenneftekhimprom to Chechnya is intended to compensate for the inevitable scaling back in 2016 in light of the continuing economic crisis of funding from the federal government. Mikhail Remizov, president of the National Strategy Institute think tank, suggests it shows that "the price of Kadyrov's loyalty to Moscow has risen" in light of the ongoing civil war in Syria and the tensions between Russia and Turkey.

Whether the Chechen population will benefit from the deal is a different question. Chechenneftekhimprom, which is currently owned by the State Property Agency and had been scheduled for privatization by the end of this year, yielded a profit in 2014 of just 44 million rubles ($600,000 at today's exchange rate).

What is more, Putin's decision to hand over Chechenneftekhimprom to the Chechen leadership may have set a precedent he could come to regret. Krasnoyarsk Krai deputy parliament speaker Aleksei Kleshko has publicly advocated that the vast Siberian region follow Kadyrov's example and demand the transfer of federal oil-industry infrastructure to local ownership.

Kadyrov's rationale for asking for Chechenneftekhimprom, as outlined in a letter he sent to Putin on December 3, was that the state oil company Rosneft, which leases Chechenneftekhimprom's facilities and with which Kadyrov has been at odds for years, was not making optimal use of its resources, in particular its land and infrastructure.

The company reportedly owns two oil refineries, oil storage facilities, and workshops for the repair of equipment. It does not engage in oil exploration or extraction, which are the preserve of Grozneftegaz, an affiliate of Rosneft. Grozneftegaz is jointly owned by Rosneft (51 percent) and the Chechen government (49 percent).

Kadyrov explained that the Chechen government wants to use Chechenneftekhimprom land to build a factory to manufacture lithium-ion batteries in line with an agreement signed in December 2014 with a South Korean company, Kokam.

But he subsequently changed tack, saying that if the handover of Chechenneftekhimprom takes place, Grozny will push for the construction, either by Grozneft or other investors, of an oil refinery with an annual capacity of 1 million tons.

Kadyrov has been trying to coerce Rosneft into funding such a refinery for the past eight years, even though it does not make economic sense. According to Igor Yushkov of the National Energy Security Fund think tank, Chechnya would need to produce a minimum of 5 million tons to supply a refinery with that capacity.

In 2014, however, Grozneft produced just 448,080 tons of crude, less than 10 percent of Yushkov's required minimum and 91 percent of the amount produced in 2013.

Chechnya has nonetheless been lobbying for construction of its own oil refinery since early 2008, the year after Putin put Kadyrov in charge of the region. It succeeded in nixing Rosneft's alternative plans for a refinery elsewhere in the North Caucasus, in the Kabardino-Balkaria Republic.

And in November 2009, an agreement that Rosneft would go ahead with building a refinery in Grozny was formally announced at a meeting between Kadyrov and Grozneftegaz director Musa Eskerkhanov.

Rosneft duly dispatched experts to Chechnya in January 2010 to select a site for the refinery, and two weeks later, then-Rosneft head Sergei Bogdanchikov assured Kadyrov that construction would start the following year and be completed in 2013. Kadyrov for his part called for more than doubling oil extraction to exceed 2 million tons.

In April 2011, it was reported that construction would begin by the end of the month, and be finished by October 2013. The cost of the refinery, which Bogdanchikov had said would be equipped with the most modern technology, was estimated at between $400 million and 17 billion rubles ($600 million at the time).

But a year later, Kadyrov complained that Rosneft kept postponing the start of construction for no good reason. It was only in November 2013 that Rosneft launched a tender for drafting a blueprint for construction of a new refinery with an annual capacity of 1 million tons.

Just two months later, however, Igor Sechin, who by then had replaced Bogdanchikov as Rosneft head, commented that given the economic advantages of exporting crude oil, the Grozny refinery was not viable. (At that juncture the price of Urals crude was $106.40 per barrel.)

And by mid-2015, when the ruble had fallen to 55 to the U.S. dollar, the original 17 billion-ruble estimated cost of the new Grozny refinery had risen by approximately 80 percent.

Meanwhile, the Vietnamese state oil company Petro Vietnam is reportedly ready to invest $150 million to $300 million in the Daghestan State Oil and Gas Company established in June 2014 at the behest of Republic of Daghestan head Ramazan Abdulatipov, including construction of a refinery with an annual capacity of 6 million tons. In light of Chechnya's steadily dwindling output, a refinery of that size would call into question the need for a much smaller one in Grozny.

About This Blog

This blog presents analyst Liz Fuller's personal take on events in the region, following on from her work in the "RFE/RL Caucasus Report." It also aims, to borrow a metaphor from Tom de Waal, to act as a smoke detector, focusing attention on potential conflict situations and crises throughout the region. The views are the author's own and do not represent those of RFE/RL.


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