Presented ByNur-A-Ashraful Alam 091-0038-060Sheikh Al-Mahmud 091-0295-060Ferdous Alam Faisal 091-0055-560Preetam Barua 083-316-060

The petroleum industry in Russia starts from 1870, when the czarist regime recognized the market potential of the lands around the Caspian Sea and opened the entire area to competitive private enterprise.

The first large-scale entrepreneurs were foreigners. The Rothschilds and the Nobels built their fortunes in this way, as did Shell.

This cozy relationship ended in 1905, Due to Revolution of 1905 , foreign investors began to pull out of the country.

Between 1904 and 1913, Russia’s share of world petroleum exports dropped from 31% to 9%. By the time the Bolsheviks seized power in 1917, the foreigners were virtually gone, and Russian oil came under the sole direction of the state. It remained there for the next 70 years

Oil in the Soviet Union was centrally controlled and hierarchically organized. Responsibility for the industry was divided among several ministries-Oil, Geology, and Pipelines.

Costs and profits did not enter anywhere into the calculations,

since inputs were allocated and prices set by the central planning agencies.

The structure of this system-hierarchical authority, conflicting goals, and split responsibility-pushed the oil industry inevitably towards inefficiency .

By the mid-1980s Production of crude petroleum, for example, fell from nearly 12 million barrels per day in 1983 to 8.4 million in 1992, while exports fell from 2.6 million to 1.4 million.

Russia was still the world’s largest single producer of crude petroleum. Its reserves of petroleum were the seventh largest in the world.

In 1991 the govt. granted legal right for joint ventures with 30% or greater foreign participation to export100% of their oil.

In 1992, the Law on Mineral Resources formally ended the state’s monopoly on resource development.

The Russian government, however, retained ownership of all resources.

Phibro Energy Production, Inc. is a wholly owned subsidiary of Salomon Inc, the New York- based investment firm.

In 1990, Phibro Energy focused its sights on the newly-opened Russian market and established Phibro Energy Production, Inc. in November 1990, Phibro took the plunge. Together with the Russian state-owned production association Varyeganneftegaz ("VNG"), it formed the White Nights Joint Enterprise, a 50/50 Russian/American joint venture.

The partners negotiated a "decline curve", which plotted the expected production from existing wells.

Under the terms of the joint venture agreement, all oil "under the curve," would go to VNG, which would sell the oil to its traditional Russian customers.

All oil "above the curve" would be exported and remaining after-cost proceeds divided among the venture’s partners in accordance with their ownership interest.

Phibro provide the advanced oilfield technology, services, and management skills which VNG lacked and which would allow White Nights to remain a viable joint venture for its full 25 year duration.

In June 1992, Conoco signed an agreement with its Russian partner Archangelskgeologia to establish a new joint venture named “Polar Light”.

Conoco’s involvement in the Soviet Union began late in 1989, when the company acquired several detailed geological studies and began to choose the most interesting targets for potential investment.

Conoco sought the active involvement of multilateral and U.S. government lending institutions and successfully lobbied the European Bank for Reconstruction and Development (EBRD) for a $90 million loan. The International Finance Corporation put up another $60 million and the Overseas Private Investment Corporation an additional $50 million.

Under the terms of the agreement, all partners to the venture would receive cash through the declaration of dividends by the Board of Founders, composed of Conoco and Russian members.

Getting the proper idea about the amount of oil reserved was a problem for foreign company. For example: in 1991, White Nights’ two producing fields proved to be far less productive than the Russian geological surveys had indicated.

Most troubling of all for potential investors was the general uncertainty that surrounded any business venture in Russia. Despite rapid attempts to create a Western-style legal framework, Russia’s legal system remained underdeveloped, lacking any serious foundation of contract, property, or corporate law.

The pace of change in the country had tremendously complicated the old hierarchies of control, leaving investors and oftentimes even officials unclear about who had real power.

The biggest problem was increased taxation. When White Light was formed in November 1990, it was subject to four taxes. By early 1992, however, the number of taxes had soared to a dozen. By the spring of 1992, White Nights was paying approximately 70% of its gross revenue in taxes to the Russian government.

White Night’s Russian partner VNG had problem with domestic sales. VNG was required by the state to sell oil to its traditional customers, most of whom were large state-owned refineries. But because these refineries were not being paid by their customers, they could no longer afford to pay VNG for their purchases. As a result of these and other factors, the White Nights venture began running significant deficits.

The taxation issue remained painfully unresolved for Polar Lights. Although Conoco had ultimately negotiated a formal exemption from Russia’s onerous export tax, it was not clear whether, and for how long.

As getting the proper idea about the amount of oil reserved was a problem for foreign companies, they could run their own geological research and exploration before entering into or investing in the oil industry in Russia. For example, Conoco did not just accept the technical and geological information provided by the Russians. They sent their own team to re-evaluate and test potential production sites.

As doing business in Russia is uncertain in terms of rules and regulations, tax laws, property and corporate law, foreign company can create pressure through their govt. and stock holders to form specific favorable terms for doing business in Russia for the long run.

Russian government need hard currency to propel their intensive industrial production. Also Russia needs western technology for their infrastructure (oil and gas) improvement. So Russian govt. should encourage foreign joint ventures by making business friendly policies, develop a modern legal system, foundation of contract, property, or corporate law.