Caspian oil during and after WWI: gun battles and boardroom wars – and lessons to be remembered

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01.10.2012 09:40
Kazakhstan’s hopes to be swiftly lifted to the position of a core world producer are still glimmering today, with only step-wise improvement in sight. So they were shortly before, during and immediately after the First World War. At the time, world politics, heavily intertwined with a fierce fight between America’s Standard Oil and Anglo-Dutch Royal Dutch Shell, undermined a rapid rise in Kazakhstan’s importance. The way in which it developed, dictated by corporate greed and personal ambition on the side of the two western rivals and a fruitful splendid isolation on the Soviet side, carries lessons for today’s situation that should not be ignored.

Charles van der Leeuw*)

On the eve of the World War, Kazakhstan’s blue-chip Dossor field downstream the river Emba, operated by the Royal Dutch Shell under the firm name Ural Caspian, was already falling into decline. After the initial gushers, no more new wells were found, in contrast to neighbouring blocks under operation by Nobel’s Emba Caspian. This required exploration further away from the river, and shortly before the war’s outbreak the Royal Dutch obtained concessions for the fields of Makat, Glyudi and Iman Kara, along with options for a number of adjacent prospective fields. But they were bypassed by Nobel, who discovered an immensely rich deposit on its Chernoye field close to Guriyev, present-day Atyrau, as late as 1915.

For both operators, Russia’s entry into the war had disastrous consequences. Skilled workers were called into the army and whereas across the Caspian the core oil area of Baku could hire Iranian staff instead, there was no such possibility in the remote northeastern zone of the Caspian Sea. Worse: in early spring 1914, each rival on the banks of the Emba and the Ural had opened a refinery. Through summer, together they had managed to distill close to 200,000 tonne of oil. As of November, production came to a virtual halt.

Both operations remained profitable for the sole fact that existing storage reserves had been hedged in future contracts, thereby escaping the measure taken by the Russian state on the outbreak of the war to impose a cap on sales prices lest oil would end up in the enemy’s hands since both Sweden and The Netherlands remained neutral in the global onslaught. But lack of replacement resulting in only 6,500 tonne remaining in the storage tanks by summer 1916.

Hopes pinned on Dekinin

The Menshevik Revolution of early 1917 did not result in Russia’s withdrawal from the battlefront – nor did it trigger a major reshuffle in oil interests. This was to change dramatically with the Bolshevik October Revolution. Initially, it did not look like that since the Soviet that had seized power in Baku under Shaumian swiftly declared that though all the land had become state property, exploitation rights would be respected – for the moment, that is.

With the British occupation following the end of the war, condoned by the Mussavat government of Azerbaijan and virtually unlimited provileges for the Royal Dutch Shell, the equally unlimited ambitions of the man behind it seemed like a dream come true. His man was Henry Deterding – the same who had orchestrated the takeovers of all assets belonging to Britain’s Marcus Samuel and to the French Rothschild family before the war.

In Kazakhstan, though, the situation was different. In February 1919, the Bolsheviks lost all their positions over an area stretching from the northeastern shores of the Black Sea deep into Central Asia, due to the advance of a maverick army under General Denikin, consisting of a colourful mix of czarist and Menshevik vengeance-seekers, “Islamic” nationalists from various Turkish-speaking parts of the obsolete empire, individual adventurers of varying stature (including leaders of straightforward criminal gangs) and Social-Revolutionaries for whom the Bolsheviks were neither socialist nor revolutionary enough. Glorified by Lloyd George and western oil barons alike, they believed that through Denikin Soviet Russia’s days were counted and property rights would be restored soon – even though the general himself never uttered a word about it.

Britain goes to war… against the US

It was in this euphoria that Both Rockefeller and Deterding started asset grabbing, with the former buying a controlling share in Nobel’s property and the latter laying his hands on a minority share, along with large concessions from Franco-Belgian disowned firms in Grozny, a number of Russian and Armenian former proprietors around Baku and elsewhere. Payment was done in terms – the first term in cash over the counter and the rest in coupons – which would never be paid in the end. But with the property rights, not recognised by the Soviets, Deterding, soon followed by Rockefeller, approached Leonid Krassin in early 1920 at the office of the newly opened Arcos company, charged with overseas sales of Russian commodities, proposing a swap consisting of property rights to be exchanged for sales concessions.

The model proposed by Deterding looked very much indeed like today’s equally controversial production sharing deals, concluded immediately after the break-up of the USSR between oil multinationals and cash-strapped newly independent republics. Realising that this would grant the Royal Dutch a virtual monopoly over Russia’s sales abroad, Krassin, after a publicly fought war of words between both sides of the Atlantic and a series of vain interventions and threats on political levels, politely declined.

The main reason he could do so was a radical change on the ground. On December 1919, Rostov had fallen into the Red Army’s hands and before the winter was over Denikin had been driven back to his last stronghold deep in the Turkmen desert. In January 1920, Guriyev fell after the fleeing Cossack regiment had set the oil tanks on fire, destroying the infrastructure and burning 90 per cent of the 10 million pud of crude they contained. In late April, Baku and its surrounding areas fell into Bolshevik hands without so much as a shot being fired. As a result, western governments made moves to recognise Soviet Russia and resume trade relations – leaving Rockefeller and above all Deterding empty-handed.

Soviet Russia conquers the market

In his book “The Most Powerful Man in the World - The Life of Sir Henri Deterding” (Covici & Friede Publishers, New York 1938),  the American author Glyn Roberts relates how Rockefeller pushed his way through into Russia’s oil business at the outcome of the Great War. But it also clearly shows that in the end neither of them would win the race for control over the new proletarian state. “Very quickly the nationalized oilfields found a market for their product. In 1922-23 Russia exported 330,000 tons, in 1923-24,771,000 tons and in 1924-25, 1,360,000 tons,” the book reads. “This was done with absolutely no outside assistance. England and France, the two countries most hostile to Russia, proved the best customers for Red oil. Of the 81,000,000 pounds sold by the Soviet Oil Syndicate in 1924-25, England bought 34,000,000. Turkey, German, Italy and France were also big purchasers, and the oil of Red Baku became a really important factor in the industry and transport of Europe and the Near East. The navies of several capitalistic countries relied partly on Russian oil. In many countries, notably Italy, the competition of Russia became a serious threat to the markets of the largest oil combines.”

All this was much to the fury of Deterding. “He wanted the Russian oilfields as a lever, the decisive lever perhaps, in his war with Standard. What was now threatening to happen was that this thick black flood of Soviet oil would calmly spread out from the Black Sea into half the countries of Europe, and then into Asia and finally America, undercutting him and his competitors. This would not be difficult, either, because he had made so many price agreements in various markets that a really businesslike competitor could easily undersell him.”

As the head of the Royal Dutch, fumed out his rage, what he feared happened nonetheless. For Leonid Krassin, who had been Stalin’s tutor and saviour in Baku in the early years of the century when the latter was a reckless revolutionary adventurer and the former the bright-shining millionaire-owner of the city’s electricity grid and Russia’s contractor of Germany’s power giant AEG, had died of a blood disease (poisoned on behalf of Russia’s czarist renegades according to some, which could theoretically even point at Deterding’s involvement) in London in 1925, would have found a brilliant student in his former protégé.

Oil’s victory over capital
For Kazakhstan, the turbulent war and subsequent boardroom battle meant salvation and delay at the same time. Keeping up production was on top of the list, and Baku remained the top producer. Second came the area of Tatarstan and Bashkortostan, where numerous new gushers had been put into exploitation and was already dubbed a “second Baku”. Even though the Emba fields were repaired and taken back into exploitation, further explorations in Kazakhstan such as the oil-bearing areas of Mangistau and Aktobinsk, would have to wait until during and after the next World War.

Emba remained in business, and by the end of the 1930s untapped reserves amounted to well over a billion tonne (see table). But new reserves were drilled for further to the east from the late 1920s on, and as of 1930, their finds amounted to 44 per cent of the entire USSR’s. At the same time, the industrialisation and the agro-mechanisation throughout the USSR demanded swiftly increasing amounts of fuel. With the purchase of modern drilling and refining equipment, mainly from the USA, there was little need and little hope for foreign capital to get somehow engaged in the Empire once more. As production went steadily up in the run-up to World War II, exports equally diminished (see table), even though statistics published at the time show some discrepancies.

In all, what has happened in those days bears a formidable lesson for the present, and that lesson has already be explained by the early Soviet days’ contemporaries. “Oil, if a man learns the trick, can give him power. It is a simple trick, and at the end of the XIXth century its mastery was open to any man of determination who could but grasp its import. Rockefeller was the first expert performer of the trick,” Glyn Roberts notes in his book. “The last hundred years has witnessed the crystallization of capitalist forms of production and financial organization. It is easy to look back now and to detect the strong drift toward monopoly. In any field the private ownership of the instruments by which material wealth is produced leads inevitably to the creation of larger and larger units. But Rockefeller and Deterding learned the lesson of the times long before it was printed in any textbook. They both knew that the road to power ran over the bowed heads of ruined competitors; they both knew this, and out of the knowledge arose the worldwide conflict from which Deterding emerged the victor.”

How Stalin came to western consumers’ aid
Did he? If Rockefeller bit the dust in the end, it must have been far less by Deterding’s furious assaults and frantic intrigues then by America’s public opinion which was to end in the anti-trust laws that put an end to his price orchestration schemes. The real victor was to be found in Soviet Russia and the man who had been aware of it from the very beginning had been Leonid Krassin. After the latter’s death, it was Stalin who took over the strategy without delay, as Robert Glyndon quotes him as telling a delegation from western workers’ unions on visit in the mid-1920s.

“The fact is that certain oil concerns of other countries are endeavoring to throttle the oil industry of Soviet Russia, whereas the latter has to defend herself in order to be able to exist and develop,” Stalin is quoted as stating. “You will probably ask me, are the Soviets really so well off that they are able to sell cheaper than the wealthiest capitalist concerns? It goes without saying that Soviet industry is not wealthier than the capitalist concerns. […] It should be pointed out that Soviet goods, particularly Soviet oil, are a factor in the international market which reduces prices and improves thereby the position of the mass of consumers. This constitutes the strength and at the same time the means of defense of the Soviet oil industry against the attacks of the capitalist oil concerns. This is also an explanation of the violent opposition of the oil concerns of all countries, and particularly of Deterding, to the Soviet and the Soviet oil industry; they disguise their policy of high prices and robbing the consumer by the now fashionable phraseology about 'communist propaganda'!"

What had really happened in the wake of the formation of the Soviet state – namely the greed-driven cutthroat competition between western corporations offering it a place on the playboard on a silver plate – can easily be recognised today, not just looking back but looking at present-day conditions as well. “The socialist too contends that the elimination of competition within a certain service or industry is a right and proper objective, but he insists that the control of the unified organization shall be, as directly as possible, in the hands of the ordinary man who works,” Glyndon observes. “The capitalist merely aims at the destruction of his competitors […] and at the creation of a ring or monopoly for his own greater profit.” There can be no doubt that today the likes of Vladimir Putin knows that period of history all too well. There are striking parallels between what happened in the 1920s and what happened following the break-up of the USSR. The only difference is that the absolute winner today has not yet been declared.

KAZAKHSTAN’S OIL DEVELOPMENT FROM 1931 ON WITHIN THE USSR
in million tonne
area                   prod.1931        prod.1933      prod.1936      prod.1938       res.1938      target 1942
all-Union                    22.3                    23.4                   27.4                  30.2            8640.0                   48.4
Emba                              0.3                      0.2                      0.5                   0.7             1171.5                     2.0
Volga-Ural                       -                         -                         1.0                   1.3             2704.2                     7.0
Azerbaijan                 13.2                    15.3                    20.5                22.1              2741.9                  27.0
Dagestan                         -                          -                          -                     0.2                   n.a.                     0.6
Maikop                         0.6                       0.6                       1.1                  2.2               236.7                     3.7
Grozny                         8.0                        4.8                       3.3                 2.7                655.0                     4.1
source: Anton Hantschel: Baku, ein Kampf um Bohrtürme, Berlin 1939

USSR: OIL PRODUCTION AND EXPORT 1932-1938
in million tonne
year              output           export
1932                22.7              6.0
1935                26.8              3.4
1936                29.2              2.7
1937                30.7              1.9
1938                32.2              1.5
source: Anton Hantschel: Baku, ein Kampf um Bohrtürme, Berlin 1939

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