Our 4-year-old company–run by two of us Russian-born émigrés and a natural-born American–is exploring for oil in western Siberia along the Kazakhstan border. The past four years have shown us that in this harsh region of the world, both opportunities and obstacles abound.

To start, what makes Siberian exploration attractive is that the reservoirs are shallow and yield oil easily and cheaply. Petroleum and mineral reserves can be purchased at 10 percent or even 5 percent of prices found elsewhere in the world. Wage rates trail by a similar amount, yet the workforce is highly educated. But Russia’s market suffers from excess supply that depresses domestic crude prices to roughly 66 percent of those commonly found elsewhere.

Russia’s oil market also suffers from a crying need for export infrastructure. There are two large pipelines under construction in Siberia, where most of Russia’s oil lies, leading to China and other parts of Asia. But Siberia also needs direct links to Western Europe and North America. Rail transport is significantly more expensive.

We set out to create a company that would use Western technology and capital to access Russia’s inexpensive resources at a time when Russia had many small oil companies on the auction block. These we avoided entirely. Too many buyers learn who the target company’s true owners are only after signing the papers, sometimes leaving the buyers stuck with tax debts or a company associated with criminals. Instead, we bought licenses for mineral exploration at auction from the Ministry of Natural Resources. We now own exploration rights to more than 630,000 acres in western Siberia and will enter seven more auctions to acquire another 700,000 acres.

Navigating the Waters
It is still difficult to obtain capital, primarily because investors are concerned about political intervention. Their fears are not unfounded, but there are ways to navigate the system. We did it by establishing ourselves as a publicly traded, U.S.-based company with 100 percent of its assets in Russia. We are looking into listing the company on London’s Alternative Investment Market or AMEX to take advantage of the greater liquidity and interest in natural resource companies there.

Any company in Russia, whether foreign or domestic, needs political support, yet it must manage to keep its nose out of the political process. If Khordokovsky had played a lesser role in government affairs, he would probably still be CEO of Yukos. Putin certainly knew that his arrest would make foreign investors nervous. But he saw it as a risk worth taking in order to stop Khordokovsky and other oligarchs from gaining enough power to dictate the terms under which Yukos would produce oil.

We do not flatter ourselves; our company is not big enough to worry about butting heads with the Putin administration. But we admit it is safer to do business in Russia when we have political support from someone allied with Kremlin policy. We also find it essential to make friends in the area where we operate. Regional governors have lost some of the independence they enjoyed under Boris Yeltsin’s presidency, but still exercise significant sway over what happens locally.

As outsiders in Siberia, we have found that the best way to obtain political support is through the help of knowledgeable locals. To start drilling, we needed signatures from approximately 60 different governmental organizations and the goodwill of some 400 bureaucrats and landowners.

Our local partners knew how to approach the necessary parties. But we also had to show the locals that we could be valuable corporate citizens. We are exploring in the Kurgan region, which is now 75 percent agricultural. But during the Cold War it served as a stockpile for chemical weapons and was closed to all industries except military production between 1943 and 2001. We have made a commitment to create economic growth there, and to paying taxes. Unlike some competitors, we registered our local operating company in the region rather than in a tax haven such as Cyprus. This is a move that adds surety of title to our assets. Giving, we hope, is receiving.

Art by Matt Mahurin.

David Zaikin is chairman and CEO of New York—based Siberian Energy Group.