Investment Adventures in Emerging Markets

Commodities and Conservation in the Caspian

Hello readers, thank you for your patience while I was away from this space for a few weeks. We continue to see quite a lot of market volatility, but of course we consider these to be times of opportunity in our ongoing hunt for attractive investments, and we have been pounding the pavement to look for bargains. Here’s a note from a recent visit.

At an oil rig on the Caspian Sea
At an oil rig on the Caspian Sea

What country is the world’s largest producer of petroleum? No, it’s not Saudi Arabia but Russia.[1] Oil and gas are important to Russia’s economy, as are a whole host of natural resources such as nickel, palladium, diamonds, etc. Because of what have been higher commodity prices, Russia’s economy is growing at a fast pace (it is projected by IMF to grow 4.3% this year),[2] interest rates have come down from their peak in 2008, unemployment is lower, foreign reserves have risen to over US$500 billion as at July 2011, and Russian equity markets have generally done well since 2008, even considering recent declines. That is why we have been to date interested in Russian oil companies. For this reason, I launched a trip to the Caspian Sea to see first-hand how oil drilling and production operations worked on an offshore oil rig. 

The plan was to fly to Astrakhan, the Caspian Seaport, and then proceed to the rig. Astrakhan, with a population of half a million, is a key city of southern Russia and has a fascinating, tumultuous history. Tamurlane burnt it to the ground in 1395, then Ivan the Terrible conquered it in 1556 and built a fortress that still stands in all its white glory, with incredibly thick walls and a beautiful Orthodox cathedral. When we visited the fortress, we found that the cathedral was full of worshippers young and old. The fortress has withstood many invasions, including in the 1600’s by the Ottomans, and even the famed Janissaries were not able to penetrate the thick walls. Finally, when the Ottoman sultan renounced his claim to the city, the whole region was opened to Volga River trade, and the city became a gateway to the Orient, used by merchants from Armenia, Persia, India and even the Muscovy Company of English merchants. In the city, we saw some of the old “caravansary” buildings, ancient rest-stops for travelers, still standing. During his reign, Peter the Great had a shipyard constructed here and made it his base for war against Persia (now Iran), right across the Caspian.

Oil wells were dug in the Caspian region as far back as the tenth century, when English traders described the oil coming out of the ground in the area around Baku, in Azerbaijan. The first offshore wells were made in 1873 in Baku, and by 1900, Bakuhad more than 3,000 oil wells, leading to its being called the “black gold capital”.

In addition to oil, the Caspian Sea is also famous for its beluga caviar since the sea is supposed to be rich in sturgeon, the source of this world-renowned caviar. Astrakhanwas especially well situated for this purpose, thanks to its location at the Volga River delta on the Caspian Sea. However, after excessive overfishing, sturgeon is now a protected species in Russia, and there is a strict ban on extracting its caviar. I decided to do more research about Russia’s efforts to repopulate the Caspian Sea’s overfished sturgeon. We drove out of the city to see a research institute and observed its successful program to spawn sturgeon artificially in an experimental spawning and breeding facility.

When we arrived, we were ushered into a complex of buildings with hundreds of tanks where fish eggs were being cultivated into fish fry and then into full-grown beluga sturgeon as well as a host of related species. Each year the institute releases over one million fish into the Caspian Seain different sizes, from as small as 10 grams to as big as 250 grams. It is a never-ending effort, since illegal fishing still thrives in the Caspian Sea, and cooperation between the countries bordering the sea—Russia, Kazakhstan, Iran, Turkmenistan and Azerbaijan—is difficult. Scientists at the institute told me that a few years ago, a Chinese delegation visited the research center, and today China is the world’s largest cultivator of sturgeon!

After this short but interesting detour, we turned our attention back to our main focus: the oil rig. We made our way to a modern ice-resistant stationary platform equipped with a drilling complex that had a capacity to drill wells 7,400 meters deep. Attached to the main platform, where our helicopter landed, were living quarters for over 100 people. On our tour, the engineers explained that oil was transported from the production platform via a subsea pipeline to a floating storage unit located outside the Caspian ice zone, where shuttle tankers pick up the oil. The spotless and highly efficient rig was bristling with high-tech equipment and all kinds of safety features. At the rig platform itself, we were told that the rig was not only drilling downward but also drilling horizontally, with pipe lengths exceeding five kilometers, so that it was possible to simultaneously drill in a number of productive formations. The control room included a host of monitors using satellite feeds to give the engineers the precise and real-time location of all operations, in addition to undersea cameras to observe the various wells.

I found it interesting and insightful to see first hand how the oil rig functioned, and this visit gave us more clarity on the health of the overall business. In my opinion, visiting operations and production centers on-site is one of the best ways to see how companies in Russia are doing.

[1]. Source:U.S. Energy Information Administration, as of 2009 (latest available data).

[2]. Source: World Economic Outlook, September 2011. © By International Monetary Fund. All Rights Reserved.

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