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Prospects For Chechnya's Oil Sector Remain Unclear

Chechen leader Ramzan Kadyrov (right) asked Russian President Vladimir Putin (left) in late 2015 to expedite the handover of the state company Chechenneftekhimprom, which controls Chechnyan oil-sector infrastructure (file photo).
Chechen leader Ramzan Kadyrov (right) asked Russian President Vladimir Putin (left) in late 2015 to expedite the handover of the state company Chechenneftekhimprom, which controls Chechnyan oil-sector infrastructure (file photo).

For years, Chechen Republic head Ramzan Kadyrov has been pressuring the Russian leadership to cede to Chechnya the state-owned company Chechenneftekhimprom, which controls oil-sector infrastructure, including oil wells and two refineries.

In late December 2015, Russian President Vladimir Putin finally gave the green light for the handover. But one year later, federal Minister for the North Caucasus Lev Kuznetsov has told journalists the details have still not been finalized.

Kuznetsov also divulged that the state oil company Rosneft has postponed indefinitely plans for the construction, in line with an agreement signed with the Chechen government in 2010, of an oil refinery in Chechnya with an annual capacity of 1 million tons. Oil extraction in Chechnya in 2014 was less than half that amount.

Following Russia's decision in November 2016 to duplicate OPEC's decision to cut back on oil production, and with crude prices predicted to rise only slightly in 2017, it is understandable that Chechnya's oil sector is not currently a priority for the cash-strapped Russian government. Other players, however, are apparently willing to invest billions of dollars in reviving it.

Chechenneftekhimprom is owned by Russia's state property agency Rosgosimushchestvo. Its fixed assets were valued in 2014 at 2 billion rubles ($33.58 million). At present, it is managed by Rosneft. It does not engage in prospecting or extraction. Those are the preserve of the Rosneft subsidiary Grozneftegaz, which leases some of Chechenneftekhimprom's assets, including an unspecified number of its 1,113 oil and gas wells.

Optimizing Assets

Kadyrov's stated rationale for demanding ownership of Chechenneftekhimprom was that Rosneft does not make optimum use of its assets, including a tract of land that the Chechen authorities want to use for the construction of a factory to manufacture lithium-ion batteries under an agreement signed in December 2014 with the South Korean company KOKAM. The Chechen leadership also hoped to restart oil production at some wells that had been mothballed.

Chechenneftekhimprom was initially scheduled for privatization by the end of 2016, which would have created obstacles to that project. That is presumably why Kadyrov asked Putin in late 2015 to expedite the handover of the company. In June 2016, Russian Prime Minister Dmitry Medvedev duly removed Chechenneftkhimprom from the list of state-owned companies to be privatized before the end of the year.

But Rosgosimushchestvo and the Chechen leadership have apparently not been able to reach an agreement even on the composition of the joint working group that was to draw up an inventory of Chechenneftekhimprom's assets, let alone on how those assets were to be divided between Rosneft and the Chechen government.

The daily Kommersant reported in late June that Rosgosimushchestvo had proposed that Chechenneftekhimprom should cede to it those of its assets that Grozneftegaz currently leases, which would then become the property of Rosneftegaz, and keep the remainder. The fees from those leases make up the lion's share of Chechenneftekhimprom's revenue.

Alternative Proposals

Two months later, Rosneft came up with two alternative counterproposals "with the aim of securing the necessary balance of interests between the [Russian Federation], the Chechen Republic, and Rosneft."

The first, according to the Russian daily Kommersant, envisaged Rosneft retaining all Chechenneftekhimprom's assets except for a plot of land it would make available for construction of the lithium-ion battery plant.

The second was that Rosneft would end its involvement in Chechnya completely, handing over all Chechenneftekhimprom's fixed assets and selling Grozneftegaz and that company's assets "at the market value as determined by an international appraiser" either to the Chechen government or another prospective investor.

Kommersant subsequently reported on September 22 that the federal Economy Ministry favored Rusneft's second option and has formally asked Chechnya if it wants to purchase Grozneftegaz and all other Rosneft assets in Chechnya. At that juncture, it was anticipated that the deal could be completed by year's end. But Kuznetsov said in late December that Rosneft has not yet made the final decision.

Trump's Former Partner

Meanwhile, the privately owned company Grozneft, which was registered in the spring of 2016 with the aim of attracting investment in Chechnya, signed a letter of intent in November 2016 with the Canadian oil company Genoil "to develop and construct upgrading and energy projects in Russia and Chechnya." Genoil CEO David Lifschultz is a former business partner of U.S. President-elect Donald Trump.

The chairman of Grozneft's board of directors is Andrey Gusak, who was involved in Chechnya's oil industry in the early 2000s. Gusak told the Russian newspaper Vedomosti that the first such project will focus on reviving oil extraction in Chechnya, and the subsequent construction of a refinery with an annual capacity of between 3 and 6 million tons, for which Genoil reportedly plans to raise $15 billion from a consortium of Chinese companies.The output will be exported to China; how is as yet unclear.

As noted above, Chechnya's current oil production is less than half a million tons; estimates of untapped reserves range from 8.36 million tons to 70 million tons.

Skeptical Analysts

According to the letter of intent, "the Russian Government and the Ministry of Fuel and Energy of the Russian Federation, as well as other required ministries and departments will give their full support to this project to ensure timely completion. The project will be listed in a trade agreement, pact or cooperation agreement between Russia and China."

Russian and Chechen analysts, including Shamil Beno of Avanti Business Solutions, have voiced skepticism, however, given the huge sums cited. Moreover, implementation of the agreement will presumably be contingent on Rosneft finally selling to Grozneft the rights to extract oil in Chechnya currently owned by Grozneftegaz.

Alternatively, it is conceivable that the signing of the letter of intent was orchestrated by the Chechen leadership with the aim of forcing the Russian government to expedite either the handover of Chechenneftekhimprom and/or construction by Rosneft of a new refinery. Kadyrov has said more than once that if Rosneft fails to do so, Chechnya will find other investors.

The views expressed in this blog post do not necessarily reflect the views of RFE/RL.

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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