When Royal Dutch Shell reduced its kerosene prices in India on September 23, 1927, the Standard Oil Company, which was buying cheap Soviet kerosene, did the same. A kerosene price war broke out and quickly spread from India to other regions. Kerosene prices declined by more than 30% by the end of 1927 and the two oil monopolies incurred total losses of roughly $17 million.
In an effort to end the price war, the three leading oil corporations— the Standard Oil Company, Royal Dutch Shell and Anglo-Persian Oil Company—signed the “Red Line Agreement” under which an international oil cartel was created. The price war between the oil giants came to an end.
At the same time, the so-called “Sakhalin oil concession” occupied a special place in the Soviet leadership’s oil strategy, vividly demonstrating the priority political interests held over purely economic interests in the economic policy of the USSR in the 1920s.
The story of the Sakhalin oil concession began back in 1921, when the Far Eastern Republic, an ally of Soviet Russia, began holding talks with the American company Sinclair on the development of oil-bearing land in North Sakhalin.40 With regard to the draft concession, the Bolshevik government thought: “A clash of interests between Japan and America in the Far East would be extremely beneficial politically.”
After the Far Eastern Republic joined Soviet Russia, the agreement with the Americans was endorsed in Moscow on January 26, 1923. Sinclair, however, was unable to begin developing the field as Japanese troops still remained in North Sakhalin. Moreover, the Japanese were extracting Sakhalin oil without permission from the Soviet government and without paying for it; in 1924 they extracted 13,300 tons of oil at the rich Okha fields. During negotiations later that year, Japan agreed to withdraw its troops from North Sakhalin but demanded concessions for the development of Sakhalin oil in exchange.
The USSR and Japan signed a convention establishing diplomatic relations in Beijing on January 20, 1925. Among other issues, the agreement offered Japanese entrepreneurs oil and coal concessions in North Sakhalin. An agreement was signed on December 14, 1925, providing oil concessions to a specially created Japanese company that became known as the North Sakhalin Oil Joint-Stock Company in 1927. The company’s stockholders included some of Japan’s largest companies: Mitsui, Mitsubishi, Sumitomo as well as Okura Kochyo, Nihon Sekyo and Kuhara.
The concessions for the use of the open fields were granted for 45 years, while concessions for prospecting new fields were granted for 11 years. The Japanese concessioners were required to pay annual rent amounting to 4% of production. In addition, royalties of 5% of the initial 33,000 tons produced were paid to the treasury. This share increased by a quarter percent for every additional 11,000 tons produced. Once production reached 253,000 tons, the Soviet government was paid a flat royalty of 15%. Royalties were negotiated separately for flowing oil (from 15% to 45% depending on the volume produced) and for gas production (from 10% to 35% depending on gas content). The Japanese also paid a land tax amounting to 3.84% of total production. The payment obligations in the agreement were consistent with standard international practice in those years.
The first chief executive of the Japanese concession company was Admiral Nakasato, who represented the interests of the Japanese Navy, the main consumer of Sakhalin oil at the time. Later, throughout the 1930s, North Sakhalin Oil maintained a close relationship with the Naval Ministry, with the Japanese selecting the company’s management and some of its staff from among its naval personnel.
North Sakhalin Oil produced 33,000 tons of oil in North Sakhalin in 1926, 77,000 tons in 1927, 146,000 tons in 1928 and 165,000 tons in 1929. The North Sakhalin concession accounted for approximately 13% of Japanese oil consumption in 1929, but above all the oil was of great importance to the Japanese Navy.
In late 1928, the USSR Labor and Defense Council passed a resolution on capital investments in the export industries of the economy. In drawing up the capital construction plan for the 1928–29 fiscal year, the State Planning Committee was instructed to pay special attention to the issue of financing for industrial sectors connected with exports, including oil exports. In order to increase USSR oil exports in the mid-1920s, the government decided that it was necessary not only to increase oil production, but also to provide proper conditions for its transportation (above all, to Black Sea ports), to adjust the structure of refining to the changing demand in European countries, to build oil storage facilities abroad, and to establish a viable sales network.
In this vein, the second most important domestic refinery, after Standard Oil’s Batumi refinery, was built in Tuapse with considerable assistance from America’s Graver Corporation to refine Grozny oil. Foster Wheeler Corporation (New York), Badger and Sons (Boston) and Winkler-Koch Corporation (Wichita, Kansas) performed the design and engineering for the new Soviet oil refineries, while General Electric handled most of the electrical equipment supplies (pumps, compressors, control devices, etc.).
Leading Soviet engineers traveled to America regularly to gain the experience necessary to operate the foreign equipment. Ivan Strizhov (1872–1953), senior director of the oil industry at the Supreme Council for the National Economy, left for America on October 1, 1927 to study the latest achievements in refining. Strizhov visited 23 refineries in 10 US states during his six-month trip. Later he remarked: “I never received a refusal for the inspection of any refinery or part of a refinery. I was welcomed with open arms. They showed me everything I wanted to see.”41 Upon returning to the USSR, Strizhov published a book titled American Refineries [Amerikanskiye nefteperegonnyye zavody], in which he gave a detailed description of all the newest refining systems of the time.
With the use of foreign technologies and efficient equipment, Soviet refineries began producing several products that were new at the time, including cracked gasoline and a special sort of lubricant called “bright stock.” The share of the most valuable light petroleum products in overall oil production grew to 10.1% in 1927–1928 and then to 15.1% in 1932 because of the significant contribution of these products.
The growth in the volume of high-quality petroleum products quickly justified the capital investments in the industry. Almost one-third (31.85%) of all petroleum products produced in the USSR were exported in fiscal 1928–29, including 88% of all gasoline manufactured.
In response to increased exports, oil tanker fleet tonnage also began expanding at an accelerated rate. In a report for 1928, Neftesindikat remarked: “Over the last two years, the fleet has added four new ships: the Azneft, the Grozneft, the Elbrus, and Neftesindikat. Construction is nearing completion on the oil carriers Embaneft, Soviet Oil, and USSR Miners Union. Once these carriers are introduced, overall tonnage should reach 66,000 tons. In addition, Soviet shipyards are building another five ships ordered by Neftesindikat, having an overall tonnage of 44,000 tons.”
By the late 1920s, Neftesindikat had branches, agencies and firms in Milan, Vienna, Prague, Constantinople, Smyrna (Izmir), Tallinn, Helsinki, and Harbin.
Russian Oil Products, Ltd. (ROP) once again became very active in Great Britain. Exports of Soviet petroleum products to Britain amounted to 95 million gallons in the first half of 1929, a 50% increase from the first six months of 1928. Lamp oil accounted for 40.7 million gallons of that amount, automotive fuel for 38.5 million gallons, and lubricants for 9 million gallons, while heating oil and gas oil accounted for the rest. In other words, almost 11% of all petroleum products delivered to British ports came from the Soviet Union. For the year 1929 as a whole, 217 million gallons of Soviet petroleum products were delivered to the British Isles, an increase of 94 million gallons over the previous year. Expecting further growth, ROP hurriedly built additional terminals and storage facilities at ports in England, Scotland, and Ireland, while industrial production of small packages of lubricants began under the ROP name in the town of Barking. The Soviet company’s investment program was quite large for the time, £700,000. During that period, Soviet oil exports were geographically structured as follows: the largest importer of USSR oil and petroleum products in fiscal 1927–28 was Italy (with 545,000 tons), followed by the UK (427,000 tons), France (391,000 tons), and Germany (379,000 tons). The same four countries were also the leading importers of Soviet petroleum products in 1929, although not in the same order.