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. Last Updated: 07/27/2016

Oil Sales May Revive Chechnya

As oil wells and refineries burn and fighting rages in Chechnya, Moscow has sent experts to the war zone to assess how quickly Chechen oil can start being pumped and exported again to pay for the restoration of the war-devastated republic.

First Deputy Fuel and Energy Minister Alexander Kochnev said this week that state oil firm Rosneft will "take out" a 100 million-ruble ($3.5 million) loan from the International Industrial Bank to get the Chechen oil industry working again.

Another 100 million rubles may be collected from Russian oil companies as financial aid for the Chechen oil complex, Vremya MN reported Thursday.

Both Rosneft and the bank refused to confirm the deal or to give any details. The Fuel and Energy Ministry refused to confirm or deny the Vremya MN report.

Experts from Rosneft and the ministry are in Chechnya investigating the state of the oil industry, ministry spokesman Oleg Smirnov said Thursday.

"About 80 percent of the energy infrastructure in Chechnya has been damaged and about 400 [metric] tons of oil per day is burning at 16 wells," said Kochnev, who is a member of the government's interdepartmental commission for restoring Chechnya's economy.

Kochnev said his ministry hopes to produce up to a 1,000 tons of oil a day in Chechnya and extract up to 2 million tons this year.

He said Rosneft will become holder of the temporary federal licenses for oil extraction in Chechnya and it will receive all property and equipment that belonged to Grozny oil holding Grozneft and its successor companies, including four refineries, separation factories and domestic pipelines.

Vladimir Nosov, an oil analyst with Fleming UCB, estimated Chechnya had oil reserves of about 60 billion tons but added that the refineries "cannot be restored" and some burning oil wells will have to be blown up to put out the fires.

In the 1970s Chechnya "was the center of the oil industry of the North Caucasus and southern Russia," said Zia Bazhayev, who in 1995 was president of YUNKO, a state oil enterprise created to unite most of Chechnya's oil businesses, including Grozneft - the main Chechen oil company, which in 1998 became independent again - and the refineries.

Chechnya then produced more than 20 million tons a year said Bazhayev, who is now president of the Alliance Group, which is involved in restructuring oil businesses throughout Russia.

In 1990 Chechen oil production totaled 4.2 million tons, but in 1998 it had fallen to 845,700 tons, of which 400,000 tons was reported stolen.

Many of the oil wells were captured by groups of organized criminals who developed their own businesses based on makeshift refineries. Revenues from illegal oil extraction and refining are believed to have been major sources of funding for Chechen rebels.

In 1999 oil extraction was a mere 130,000 tons, according to investment bank Fleming UCB.

The number of oil wells in Chechnya fell from 1,501 in 1990 to about 40 in 1999, according to Vakha Musayev, who said that before the war started last September, he was the general director of Grozneft.

Grozneft had been restructured several times in the last decade but, Musayev said, the changes left the refineries as the property of the republic.

Musayev, interviewed in December in Chechnya said, "Huge investments are needed to restore the Chechen oil complex."

Bazhayev agreed, but added that first the state of the Chechen oil industry must be thoroughly researched.

"In 1995 we managed with minimal financing and within two to three months reached the level of 1.5 million tons a year. Then estimates showed that within the next 12 to 18 months it was realistic to achieve 4 million tons a year. Theoretically such a level could be achieved today. The question is with what resources and how quickly."

Nosov estimated the minimum investment needed to get the Chechen oil industry off its knees is $50 million to $60 million and said that exports of Chechen oil could raise such sums.

"The price of oil is about $187 per a ton for Urals blend," he said. "For Chechen oil - which is higher quality than Urals [blend] and which is located closer to export outlets - the price may be even higher. Let's say they could earn about $60 per ton in profits. So even if the level of extraction is the same as in 1999, they can easily make about $4 million in just half a year and reinvest the profits again and again."

The 100 million-ruble loan to Rosneft, Nosov said, is essential "to give it an impetus to start."

He said Chechnya will essentially become a raw materials arm of Russia.

"Probably some new smallish refinery will be built to process, say, about 400,000 tons for internal use, but mostly the oil will be exported."

But Bazhayev said that while at first oil exports must be restored to a level that would pay for the republic's living expenses, in the future a vertically integrated structure that will include extraction, processing and sales of oil must be created.

Neither oil experts nor officials would elaborate on the legal issues of assigning the property of Chechnya to Rosneft.

Kochnev said only that, in his opinion, Chechnya's oil industry is the property of the Russian Federation.

Nosov said, "Someone must deal with it because there are no former owners or masters there now. There is no working team, no organizational structure. Everything must be started anew.

"Providing resources to a state company will make sure they are used properly," Bazhayev said. "Strict state control of the resources must be introduced. Any involvement of private companies in the process [of the oil industry restoration] must be excluded. Otherwise there would be no real prospects of reviving the oil industry."

Nosov added, "Running this business will be dangerous in the future - there might be diversions. And Rosneft is a state enterprise that just obeys state orders and goes ahead. But some time in the future, I believe, there will be a tender for the license to extract oil in Chechnya."

Nosov strongly protested against speculation that the money will just be pocketed like much of the $3.5 billion provided by the Russian state coffers to Chechnya after the 1994-96 war.

Buildings were reported to have been built and then immediately destroyed by pinpoint air strikes, and cash intended to pay off salaries and pensions was robbed from cash carrier trucks en route to Chechnya.

"Of course, any war involves theft," Nosov said. "But it is mostly petty officials and officers who stealand run. [Rosneft] is going there long term and there is no point in theft."

Nosov said that while at first Rosneft managers will rule the roost in the Chechen oil industry, the company will have to hire local oil professionals.

Musayev said that Grozneft, which started out a 100 years ago, used to have 100,000 employees in its "better days."

"In 1995 I saw Grozny oil workers, ignoring stray bullets, repairing oil well equipment and extracting oil," said Bazhayev of the Alliance Group. "Conditions must be created to get those people back to their jobs - which is not that easy now."

Musayev said, "I am 50. I cannot work in a kiosk, my job is oil production. I will definitely be back - to any job offered to me."