The rise and the decline of the Soviet oil industry

The Caspian and North Caucasus remained the center of the Soviet oil industry until the Second World War, with rising production feeding the country's rapid drive to industrialize. Securing control over oil production in Baku was a centrepiece of German strategy during the war, and for a time the Soviet Union found itself cut off from access to its oil. Caspian oil production once again began to pick up after the end of the war, and reached a new record high of some 850,000 b/d in 1951. Baku remained the centre of the industry and nearly two-thirds of Soviet oil field equipment was manufactured in the area.

But at the same time, Soviet planners began to accelerate development of the Volga-Urals region, which had been under development since the 1930s. Fields in the region were often close to existing transportation infrastructure, and the geology was not particularly complex. By 1950, the new fields accounted for 45% of Soviet oil production. The massive investments in the region paid off, allowing for a big hike in Soviet oil production. The extra barrels went to feed a wave of new refineries which were brought on stream in the period between the 1930s and the 1950s. The Omsk refinery was opened in 1955, and later grew to become one of the largest refineries in the world.

The growth in production also allowed the Soviet Union to begin ramping up exports of oil. Moscow was keen to maximize hard currency earnings from oil exports, and priced aggressively in order to boost its market share. By the early 1960s, the Soviet Union had replaced Venezuela as the second largest oil producer in the world. The arrival of lots of cheap Soviet barrels on the market forced many Western oil companies to cut their posted prices for Middle Eastern oil, thus reducing royalty revenues for governments of the Middle East. This reduction in revenues was one of the driving forces behind the formation of the Organization of Petroleum Exporting Countries (OPEC).

Production from the Volga Urals region peaked at close to 4.5 million b/d in 1975 but later dropped back to less than a third of that level. Just as the Soviet Union was thinking about how it could sustain production from maturing fields in the Volga Urals, the first major discoveries in Western Siberia were announced. The early years of the 1960s saw a series of discoveries in the region, culminating with the discovery of the super-giant Samotlor field in 1965, home to recoverable reserves estimated at some 14 billion barrels.

The West Siberian basin presents a hostile environment in which to produce oil, with the territory ranging from permafrost around the Arctic circle to extensive peat bogs in the south. But in spite of the difficulties, the Soviet Union was able to ramp up production from the region at an astounding rate. Growth in West Siberian production underpinned an increase in total Soviet production from 7.6 million b/d in 1971 to 9.9 million b/d by 1975. By the middle of the 1970s, West Siberian production was filling the gap being left by the decline in Volga Urals output.

But in achieving phenomenal production from fields in Western Siberia, the Soviet oil industry had also sown the seeds of its own decline. West Siberian fields were relatively cheap to develop and offered huge economies of scale, and Soviet planners gave priority to maximizing short-term rather than long-term recovery. Production associations tended to overproduce existing fields to meet production quotas without regard for proper reservoir management practices, drilling too many wells and injecting too much water. There were also no incentives to improve efficiency and scant investment in new technology. The problems soon began to manifest themselves in the form of falling well productivity, low reservoir pressure and rising water cut.

By the middle of the 1970s, Moscow was already aware that a production decline was just around the corner. The first decline hit in 1977, caused by chronic under-investment in exploration in Western Siberia, but authorities managed to reverse the decline by boosting spending on drilling. The second fall happened in the period between 1982 and 1986. This time too, Moscow managed to head off a crisis by injecting more cash.

In 1988, the Soviet Union hit a new record of some 11.4 million b/d. At this point, it was the largest producer in the world, with output significantly higher than in either the US or Saudi Arabia. It was also this year that output from Western Siberia peaked at 8.3 million b/d. But by that point, a sustained decline in production was inevitable - thanks to poor reservoir management techniques, the Soviet Union only managed to lift production marginally during the first part of the 1980s, despite a dramatic increase in capital expenditure. When it came, the collapse in production was as dramatic as the rise had been - Russian production fell continuously for a decade and ended up at almost half its original level.

The slide was aided by the economic crisis which engulfed the region in the wake of the collapse of the Soviet Union. The collapse of the economy resulted in a big drop in the domestic consumption of oil, but export capacity restraints meant that companies were forced to continue selling a large portion of their output on the domestic market, often to insolvent customers. The companies' financial difficulties forced a complete halt to all new exploration and drilling activity, and even work-overs of existing wells, a situation which worsened the collapse in production.

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