White Sun of the Desert

A series of articles in Upstream Online illustrate well the mentality of those attempting to run Russia’s oil and gas industry.  First up is a report of yet more “tough talk” from Igor Sechin, Russia’s deputy prime minister and chairman of Rosneft.  Unfortunately, “tough talk” – for which read macho posturing and anti-foreign idiocy – is pretty much all we ever get from Sechin, who – not for the first time – could probably do with reading up on how businesses operate in the world outside Russia’s borders (he’s not the only one).

Russian gas giant Gazprom must raise its game by penetrating the swiftly growing markets of Asia after a fall in exports to European Union customers, Russia’s Deputy Prime Minister Igor Sechin said today.

Oh, we’re back to this again.  Every year or so some Russian bigwig says that Russia will start supplying Asia with oil and gas, usually accompanied by a crude threat aimed at Europe.  Firstly, why can’t Russia start supplying Asia anyway regardless of what Europe is doing?  Secondly, why is the chairman of Rosneft telling Gazprom what to do? (more…)

As I said in this post, I’m planning a trip to Sakhalin in August and am going through the process of obtaining a visa.

I got the letter of invitation without any problem once we’d agreed I’m not going to Yuzhno-Sakhalinsk, this document being compulsory and of such importance to the security of the Russian nation that they can be ordered over the internet for $30 and emailed to you within an hour.  I then filled out out the application form, which is completely different from the one which is available for download on the embassy websites and if you arrive with that one you get told to fill in the proper one.  Fortunately, I knew about this from the last time I applied so had a spare copy with me and could fill it out at home.

Which is just as well when faced with questions such as:

“List all educational establishments you have ever attended, except high schools.” Twenty character spaces are provided for writing the address and phone number of each.

“List your last two places of work, excluding the current one.” and include the name, address, your position, phone number, date of joining and dismissal, and “Your chief’s surname”.  Presumably that last one is for native Americans.  For your current  job, they give you two small lines in which to enter your position, company name, address, phone number, fax number, and email.

“List all countries you have visited in the last ten years and indicate the year of visit.” Three small lines are provided for this information; mine looks like this:

Azerbaijan (2008), Cambodia (2008), Canada (2000), Hong Kong (2010), Ind0nesia (2007, 2010), Japan (2008-09), Kazakhstan (2008), Kuwait (2003-06), Malaysia (2002, 2009-10), Netherlands (2005), Oman (2003, 2006), Philippines (2008), Qatar (2005-06), Russia (2004-10), Singapore (2001-2, 2007, 2009-10), South Korea (2005, 2007), Spain (2008), Thailand (2007, 2009-10), Turkey (2007), UAE (2003-06), UK (2003-06, 2008-09), Ukraine (2005), USA (2000, 2004), Vietnam (2008).

Needless to say, I needed a separate piece of paper and it took a couple of hours of nosing through old passports looking at smudged entry and exit stamps to figure it all out.  Not something you want to have to do when you arrive at a Russian consulate.

Anyway, I filled out this ludicrous form and went to Malaysia, where I am sitting now.  Why the hell did you go to Malaysia? I hear you all asking.  Because there is a daft rule the Russians have invented which says you can only apply for a visa at an embassy in a country in which you hold a residence permit of more than 90 days, which for most people means you can only apply in your home country.  But for some reason the Russian embassy in KL accepts visa applications from Brits even if they don’t live there (I blogged about the inconsistency and unpredictablity of Russian embassies when I was last here).

Sure enough, today was no different.  I walked in, the admin lady said it would be ready either today or Friday depending on how much I paid.  The embassy is closed on Tuesdays and Thursdays so no chance of getting it tommorow, so I chose today.  I submitted my documents, then ten minutes later the lady behind the counter came out saying it would take seven days.  Seven days?!!  Where the hell did that come from?  That’s what the consul said, apparently.  So I asked why it was going to take seven days and not the usual 1-3, and suddenly the consul burst into view shouting “Vot is ze problem, I say seven days, feeneesh!” and slammed the door shut.

The admin lady looked very apologetic and said she didn’t know why this has happened, and I replied that I did: these are Russia authorities and they are being typically hopeless.  As I gathered up my documents with the intention of flying back to Thailand and sending them all off to a visa agent in London (which would probably have been cheaper in the first place), she whispered that maybe I should come back tomorrow because they usually do express visas on a Thursday morning.

“Huh?” I replied “I thought the embassy was closed on Thursdays.  And that dickhead in there said it would take seve…”

“Yes, I know,” she said “but call me at 9am tomorrow and we might be able to get your visa for you then.”

Somebody should produce a reality TV show set inside a Russian consulate.  It would be certain to generate both entertainment and wide-eyed amazement in equal measure.

I’ll call ‘em up tomorrow and see what happens then.

There is an article in Upstream Online which is a great example of the incompetence with which the Russian oil and gas sector is run:

Russian gas giant Gazprom sees no need to develop the giant Kovykta gas field in the near future, a company executive told a news conference today.

“From the point of view of long-term balance we don’t see how gas from Kovykta can be used,” Reuters quoted Viktor Timoshilov as saying.

UK supermajor BP’s Russian venture, TNK-BP, said last week its unit that controls Kovykta had filed for bankruptcy following a failure by TNK-BP to sell the field to the Russian government.

Kovykta, which TNK-BP has controlled for about 15 years, had been meant to supply China before Moscow started asserting control over natural resources and made Gazprom a gas export monopoly.

Russian officials have repeatedly threatened to withdraw the Kovykta licence from TNK-BP for low production volumes.

So in May 2007 the Russian government banned TNK-BP from selling gas to China and then threatened to withdraw the Kovykta licence for the subsequent low production volumes; a month later the government forced an agreement on TNK-BP to sell a majority stake in the field to Gazprom, which it rapidly backed down on once it ran out of money in the oil price crash;  and three years later they don’t have a clue what to do with it having forced the operator into bankrupcy.

This is one of the biggest gas fields in the world, there was a competent part-Russian joint venture operating the field for 15 years which knew exactly what to do with the gas but was prevented from doing so, and now it will lie idle because the Russian government doesn’t know what to do with it.

And there are people who wonder why I don’t think Russia will ever achieve anything like its potential.

BP is clearly struggling to get the Macondo well under control, and it’s latest attempt at a “top kill” has unfortunately failed.  Last night I was watching BP’s live video feed from the ROVs which are on the bottom of the sea around the well (Yes, I need to get a life.  Or a job.  I’m working on it, okay?  Watching ROV feeds is free, drinking beer all night long costs money) and I watched an ROV attempt to cut a clamp fixing one of the pipes to the BOP with a circular saw.  They managed to drop the thing and break it, and without a spare in the toolbox a mile under the sea they had to go back to the surface (a 30 minute trip) to either get it fixed or get another one.  For anyone interested in subsea engineering it was pretty interesting stuff, and it is rare you get to see a live feed of this work going on.  A bunch of like-minded folk, or geeks, have set up a live chat page where the activities of the ROVs can be commented on in real time.  It’s far more amusing than you think.  Clearly, I was not the only one who thought the ROV wielding a circular saw in the eerie light of its headlamps looked like an outtake from Terminator, and when the saw was dropped everybody chorussed “Butterfingers!”  Well, it was funny at the time.  I guess you had to be there with an engineering degree and a healthy interest in subsea well-head repair.

Anyway, BP’s struggles to regain control of the Macondo well has given license to various nutters to come out with bright ideas on how to fix it.

First we have this (currently just a rumour):

Hayride sources indicate that today’s effort at a “top kill” of the Macondo gusher carries with it gigantic stakes for BP – as if no measurable progress is made on the spill through that method, President Obama will announce when he comes to New Orleans on Friday that the federal government will seize control of the response from BP and turn it over to the U.S. Navy.

Secretary of the Navy Ray Mabus has reportedly floated the idea of sinking a battleship directly on top of the Macondo well in order to drop 80,000 tons on it and crush the drill pipe and the blowout preventer alike.

Yes, one way to improve a situation where you have a leaking well, a damaged BOP and a broken riser is to change things whereby you have a leaking well, a damaged BOP, a broken rise, and a ruddy great 80,000 ton battleship sat on top of it all.  That’ll really test the skill of the ROV operators! I am almost certain that Mr Mabus is contemplating no such thing, but it hasn’t stopped people in various comments threads around the internet nodding their heads enthusiastically at the simplicity of it all.

But some of these suggestions are more than just rumours and are being made in all seriousness.  There is a chap called Matt Simmons who thinks the “only thing we can do” is to explode a nuclear weapon in the well to seal it up:

Simmons said the US government should immediately take the effort to plug the leak out of the hands of BP and put the military in charge.

“Probably the only thing we can do is create a weapons system and send it down 18,000 feet and detonate it, hopefully encasing the oil,” he said.

So kick BP off the job and then “create a weapons system”.  Then let it off “hopefully encasing the oil.” Like all good ideas, it’s obvious when pointed out.  And of course, the effects of letting off a nuclear bomb in an enormous oil and gas reservoir beneath the seabed are all known and quantified, are they?  Somebody said the oil would just evaporate, presumably thinking “evaporate” means “cease to be” instead of “turn from a liquid into a gas”.  Then where would the gas go?  We’re not told.

“If you’re 18,000 feet under the sea bed, it basically wont do anything [on the surface],” he said.

Well, that’s reassuring.  Mr Simmons is … wait for it … an investment banker.  An investment banker?!!  Aren’t these the chaps who created a global toxic mess all of their own a while back?  Why the hell is anyone listening to him?

The problem is the story has gained traction because apparently nukes have been used to collapse a well before by, you guessed it, the Russians.  Whenever there is some batshit daft idea floating about that involves nuclear weapons doing something that nuclear weapons are not meant to do, somebody always digs up a story where the Russians have done it.  One would be forgiven for thinking the Russians spent three decades playing a huge episode of Mythbusters where they tried to do all kinds of crazy stuff with nukes.  The story originated in Komsomoloskaya Pravda, but it wouldn’t surprise me if the editor had seen Borat and thought he too could make westerners look like ignoramuses by peddling a story about the Soviet Union that would be swallowed whole.

Weapons labs in the former Soviet Union developed special nukes for use to help pinch off the gas wells. They believed that the force from a nuclear explosion could squeeze shut any hole within 82 to 164 feet (25 to 50 meters), depending on the explosion’s power. That required drilling holes to place the nuclear device close to the target wells.

…

A first test in the fall of 1966 proved successful in sealing up an underground gas well in southern Uzbekistan, and so the Russians used nukes four more times for capping runaway wells.

“The second ‘success’ gave Soviet scientists great confidence in the use of this new technique for rapidly and effectively controlling ran away gas and oil wells,” according to a U.S. Department of Energy (DOE) report on the Soviet Union’s peaceful uses of nuclear explosions.

A last attempt took place in 1981, but failed perhaps because of poor positioning, according to a U.S. Department of Energy report.

Sadly, a search of the Department of Energy’s website using a variety of terms, including the sentence supposedly quoted from a DoE report, reveals nothing of Soviets blowing up their wells with nuclear weapons.  Still, the story has legs because there is a small but vocal group of people (which includes some Americans) who think all Americans are as thick as pigshit and everybody else, especially the Russians, are ten times smarter.

Komsomoloskaya Pravda suggested that the United States might as well take a chance with a nuke, based on the historical 20-percent failure rate.

Somehow I doubt the Americans are thick enough to be taking advice from a Russian newspaper on the use of nuclear weapons in oilfield applications.

UPDATE

I stand corrected: it seems there is a DoE report describing Soviet use of nuclear weapons in peaceful applications, including for shutting off runaway gas wells.  Fascinating stuff.  Although I think the use of such a device at the bottom of the Gulf of Mexico on the Macondo well would be insane.  That the Soviets did something is not usually a reliable indicator that it was a good idea.

Via my wife, I hear that residents of St. Petersburg are finding horrible brown spots appearing on their cars, which is the ash from the Icelandic volcano that has closed much of Europe’s airspace.  And courtesy of the BBC we get the map below showing the extent of the ash cloud, and it would appear that parts of Russia, including St. Petersburg are affected:

But via the same BBC webpage, we also learn that although airspace is closed in Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Ireland, Latvia, Luxembourg, Netherlands, Poland, Romania, Slovakia, Switzerland, UK; there are partial closures in Italy, Norway, Bulgaria, Poland, Sweden and France; and flights are operating in Greece, Lithuania, Portugal, Russia, Turkey, Ukraine, Spain.

Flights are operating in Russia with no partial closures despite the monster ash cloud hanging above St. Petersburg’s Pulkovo Airport?  Are the Russian airlines throwing caution to the wind and flying anyway?  This report indicates flights have been cancelled, but implies that it is the destination airports which are closed, not the Russian airspace.  Does anybody know?  Certainly, when I was living in Sakhalin it was well known that the Russian airlines would continue to operate long after the Asiana flights had been postponed due to weather conditions.

The European airlines are already complaining that perhaps the airspace closures were unnecessary:

As several airlines questioned the curbs, some carried out test flights and reported planes showing no obvious damage after flying through the ash.

Give the Russians a call, they’ll let you know!

There isn’t!  I swear, there is no escape.  It’s like the mafia, once you’re in there is no leaving.

I’m talking about Russia, of course.

A young Russian from St. Petersburg is renting the aparment opposite ours, where he was staying with his wife and baby before he packed them off back to the Motherland a few weeks ago.  He often has visitors in the form of two other young Russians, with the result that most times I am in the communal pool I end up speaking more in Russian than I do English, none of them being able to speak the latter.  There is also another Russian family living in the condominium, and there is an American chap living here with a Russian wife.

My wife has discovered that gay Russian men like to live in Phuket to practice the homosexuality which is so frowned upon in Russia, meaning that whenever we are out together we inevitably meet one or two or three Russian men she knows, and a conversation ensues in Russian.

Last week a Russian friend of ours from Sakhalin called us up to say he’s in town, and so I dutifully joined him on a tour of several bars and clubs during which no more than two words of English were spoken all night; it was all Russian, along with a couple of pitchers of margarita and countless gin and tonics.  A few nights ago he showed up around our apartment with a large bottle of whisky and a six pack of Singha beer, which we put a good dent in, and – as anybody knows – helped me to understand most of the conversation.  Then last night I went out with him and his two mates, with me being the only English speaker in the group, and spent four hours discussing everything from the state of the various ports around Sakhalin to being a pioneer in the USSR.

I love it.  There is something liberating – especially when you’re a Brit tourist in a place like Phuket – about being able to converse with a group of people for several hours without using your native language.

And of course, I love hanging out with Russians.  You’d strangle them in an instant when you have to deal with them in a bank or governmental authority or company HR department, but meeting a Russian socially is always going to be a hoot, especially one they learn you’ve lived in Russia and can speak a bit of the language.

I worried when I left Sakhalin that I’d start to forget my Russian and I’d have to (horror!) speak it with my wife.  Not a chance.  I’ve spoken more Russian here than I did in any two weeks of my last year in Sakhalin, and the way this condominium is slowly being populated, it looks as though I’ll be required to speak an awful lot more!

There’s no escape.

April 2008:

Russian state-controlled giants Gazprom and Rosneft have been handed monopoly rights to all hydrocarbon developments on the Russian shelf, Natural resources Minister Yuri Trutnev has confirmed.

September 2009:

Russia will consider relaxing laws regulating foreign participation in offshore projects in a bid to attract investment from abroad, Natural Resources Minister Yuri Trutnev said.

…

“We will look into this issue (laws regarding foreign investment) first of all in relation to offshore exploration. We believe that state regulation creates many obstacles for exploration,” Trutnev told Reuters on the sidelines of an economic forum.

The minister also blamed state-controlled energy giants Rosneft and Gazprom , which are the only two players carrying out offshore exploration in Russia at the moment, for underinvestment.

Underinvestment?  Here’s what I said in April 2008 when the new law was announced:

Without a doubt, Russia will still attract inward invesment, enormous amounts of it, and much of this will be into its oil and gas sector. But this investment will come at an increased cost, be it in the form of upfront payments or reimbursable terms on major projects, higher interest rates from banks and financial institutions, or more stringent guarantees and performance criteria. At a time when Russia is going to be shopping around for $2.6 trillion of investment, it could probably have handled things better this last few years.

Perhaps Mr Trutnev has been reading this blog?  Or has economic reality just bitten?

Upstream Online reports of a new development in the Russian oil and gas sector under the headline “Putin offers surprise deal to Shell”:

Russian Prime Minister Vladimir Putin moved again to ease his government’s clasp over the energy sector at the week-end, capping off a week of foreign energy deals with a surprise offer for Anglo-Dutch supermajor Shell.

Weaker oil prices, now half of what they were a year ago, have persuaded Russia to scale back its resource nationalism. Moscow now looks to be balancing the dogged protection of its energy wealth with the need to have foreigners invest in it.

This should come as a surprise to nobody.  Last November I suggested that the supermajors’ Russian prospects had improved as a result of the global economic crisis taking its toll on the ability of Gazprom and Rosneft to finance their development plans, and concluded the post with:

But the fact remains that somebody needs to fund Russia’s development plans, and western oil companies are not only well suited to do this, but also – despite all – eager to gain greater access to Russia’s gigantic reserves.  Might we see the Kremlin once again warm to BP, Shell, and Exxon as the financial crisis takes hold?

It appears that we are seeing just that.  The major question outstanding, with the Sakhalin 2 debacle fresh in their memories, is what form of guarantees will the likes of Shell be asking from the Russian government before investing billions into a new oil and gas development?  Expect to see either the western majors asking for internationally-held bank guarantees, or prepare for another round of blubbering and hurt feelings in five years time.

There is a particularly self-destructive aspect to Russia as a nation, albeit no means unique to Russia, whereby outside forces are always to blame for their own predicament and no responsibility whatsoever lies at home.  Even today Russians speak about the Soviet Union as though it was imposed on them instead of readily adopted by enough Russians to enable the system to stay upright for 70 years.  Today the Russian government is complaining about the high costs of capital borrowing and the effects it will have on their oil and gas developments:

Russia warned today oil could soar to $150 a barrel if the global economic crisis continued to curb investment in capacity by top producers.
Moscow’s top energy policy official also warned output from Russia could be hit unless borrowing costs fell for its energy giants and called for a move away from trading oil only in US dollars.

…

“If capital investments do not recover then the recent forecast of the Saudi oil minister, when he said in Rome that oil prices could be $150 (per barrel) in 2-3 years, could become reality,” Reuters quoted Deputy Prime Minister Igor Sechin as telling the St Petersburg Economic Forum.

“I can tell what we think is needed for us – we need not less than $75,” said Sechin, one of Prime Minister Vladimir Putin’s most trusted advisers.

…

The economic crisis hammered confidence in Russian corporate borrowers – who owe $400 billion to foreign lenders – and some major Russian companies have said they are finding it too expensive to borrow in Western markets.

Now there is some truth to what he is saying: borrowing has become more difficult with the onset of the global economic crisis, and lenders have become much more risk averse than a year or so ago.  But that Russians should be finding it extremely expensive to borrow money from foreign financial institutions should surprise nobody.  Having embarked on a deliberate policy of forcing foreign companies to cede ownership of oil and gas projects to favoured national champions, the Russian government can hardly be surprised that investors now consider Russia to be a risky place to do business now that spare cash is more scarce.  Back in April 2008, when the oil price was still well over $100 a barrel, I concluded a post on Russia’s oil and gas developments as follows:

Without a doubt, Russia will still attract inward invesment, enormous amounts of it, and much of this will be into its oil and gas sector. But this investment will come at an increased cost, be it in the form of upfront payments or reimbursable terms on major projects, higher interest rates from banks and financial institutions, or more stringent guarantees and performance criteria. At a time when Russia is going to be shopping around for $2.6 trillion of investment, it could probably have handled things better this last few years.

Who’d a thunk it?

Compounding this problem is Russia’s failure to maintain its own output, which has everything to do with Putin’s policy of putting all Russia’s hopes and dreams into just two nationalised companies – Gazprom and Rosneft – whose development plans never looked realistic from the outset.  I wonder how Russia’s output would be looking if Yukos was still a going concern?

In September 2007 I reviewed the events that had taken place in the Russian oil and gas business and predicted that this period would be cited as the point at which Russia made the decisive turn in the direction the country would take.  Almost two years later the consequences of that period are being keenly felt, and not in a good way for Russia, its people, or its government.

This amused:

Sechin, who is considered one of Russia’s most powerful officials, called for oil markets to find a way to insulate themselves from the decline of the US dollar, which has led to a rise in the nominal US dollar price for oil.

“We need to protect the oil market from risks on the currencies market,” Sechin said. “As far as a peg to one currency is concerned there are no simple answers that could replace the existing system tomorrow or a day after tomorrow,” he said.

“But without work in this direction oil markets could become hostage of decisions of the government of one country.”

A Russian complaining that energy markets could be held hostage to the government of one country?!!  I suspect his real complaint is not that a government might hold an energy market hostage, but that it is not his own government doing so.