Russia Warms to the Supermajors

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.

The offer to Shell, which comes days after Russia struck major deals with France’s Total, is emblematic of the renewed openness, because Shell was the victim of Russia’s most aggressive drive to re-take control of its natural resources.

In 2006, under intense government pressure, it ceded control of the vast Sakhalin-2 project to Russia’s Gazprom. But on Saturday, Putin invited Shell to help develop the giant Sakhalin-3 and Sakhalin-4 projects off Russia’s Pacific coast.

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.

China and Russia Do Business

This is interesting, and will almost certainly get more so:

China has agreed to lend Russian oil companies $25 billion in return for supplies from huge new East Siberian oilfields that will power its economy for the next two decades, a source close to the talks said today.
Russia’s state oil champion Rosneft and pipeline monopoly Transneft signed a long-delayed deal to borrow the money from China Development Bank during talks in China, the source told Reuters.

Beijing has abundant cash that Moscow needs to access in the credit crunch as its government is running major deficits and some of its companies are finding it difficult to repay loans and borrow project finance on commercial markets.

“Rosneft and Transneft can’t borrow easily, so China steps in … with a lot of funds to lend because of China’s huge wealth funds,” said Leo Drollas, deputy director and chief economist at the Centre for Global Energy Studies.

“They have trillions of dollars of reserves and they’re saying ‘we’ll lend you this amount to develop the oil fields and the pipeline infrastructure needed’ and it will be paid for by deliveries of oil,” Drollas added.

In short, China has placed $25bn worth of expectation onto the shoulders of the Russian government.  If the oil flows as promised, it will be an agreement of great benefit to both parties.  But will Russia be able to deliver?

Maybe, but it might be tricky.  For starters, what any sum of money is supposed to get you in Russia invariably ends up being not enough.  Accept a bid of $20m and you end up spending $33m.  Budget a project at $10bn and the final cost comes in at $22bn.  Everyone in Russia knows that money does not go half as far as you think it does.  So where does it go?  Mostly navigating the myriad, often contradictory, laws, regulations, approvals processes, and bureaucracy which are deep rooted throughout Russia; rules which are changed arbitrarily and often, sometimes retroactively, and to top it all off, inconsistently applied.  Obtain MChS approval for the design of a building, build it as per design, and the same authority will refuse to grant you a fire safety certificate upon construction completion because the authorising individual has a completely different interpretation of the requirements than the bloke who approved the design.  Bring in a third party, and he’ll tell you they were both wrong.  Companies either spend millions on complying with Russian regulatory requirements, or they spend millions to avoid having to.  A handful of individuals get rich, projects cost twice as much as they should, Russia is all the poorer.

Of course, there is the possibility that this being a Russian-run project of significant national importance the usual regulatory and legal requirements will be waived and the project ram-rodded through to completion regardless.  But even this is doubtful.  Consider the two posts I wrote recently on doing business in Russia, particularly the second one where I list the 54 different bureaucratic hoops you have to jump through to get a warehouse built in Moscow.  An outsider would be forgiven for thinking these vast rules and regulations all stem from a single, monolithic government body which has complete control over the entire process, but the truth is that it is far more complicated.  Various government agencies and approvals bodies operate in quasi-independence from central government, and this is especially true in the provinces far from Moscow.  Often run as personal fiefdoms the agencies build, cherish, and protect the power and authority – and hence the revenue stream – that they enjoy.  As a result, they are often unwilling or unable to implement reforms or changes dictated from Moscow, and sometimes the applicable laws in the provinces are months and even years behind what the actual law is supposed to be.  Tales abound in the expat communities of the dozens or regulatory and state bodies which businesses must deal with implementing laws which differ from those which are officially in place.  Either deliberately or through poor management and communication, Moscow has only limited control over the dozens of provincial offices whose cooperation is essential to getting a project completed.

So in practice, even on a job which is considered priority for the government, the construction company – whether Russian or foreign – is faced with enormous delays and overspends as they try to negotiate through the approvals process at every point and turn.  It is true that the government could, and almost certainly will, intervene in certain areas to speed things up (for example, it is unlikely that the environmental consultation on the new gas pipeline being built from Sakhalin to Vladivostok by Gazprom was as lengthy and detailed as that for the foreign-led projects), but they cannot do so in every instance.  And even then their intervention might not speed things up.  A building contractor on Sakhalin told me that a recent law forbids any change orders on government construction projects: if something changes which causes a price increase, the entire job – even half complete – must be rebid.  So if a construction company arrives on site and find their piling estimate was too low due the the geotechnical survey being incomplete at the time of tender, the job gets stopped as they re-tender the entire project.  No doubt this law was brought in to try to mimise corruption on government projects, but if it is applied we can expect to see either 200% contingencies in bid prices or even simple projects dragging on for decades.  The sheer complexity of the laws and bureaucracy makes executing works in Russia much harder than it should be, and it is doubtful whether this has been fully considered – assuming it even could be quantified – when calculating what the Chinese $25bn is supposed to be buying.

In any case, we won’t have to wait too long to find out:

Also planned is a spur pipeline between China and Russia, which is part of the loan-for-oil agreement under which China will provide $25 billion to Russia’s Rosneft and Transneft in exchange for 300,000 bpd of oil imports from Russia for 20 years.

Russian Prime Minister Vladimir Putin said in early April that Transneft will finish laying the 67-kilometre East Siberia-Pacific Ocean oil pipeline from Skovorodino to the Chinese border within a few weeks, with work on the line expected to be complete in 2010 in time for crude to start flowing the following year.

The pipeline was originally due for completion last year but has been delayed due to political complexities and internal housekeeping issues with Russian suppliers.

What’s that?  Political complexities and internal housekeeping issues with Russian subcontactors?  That’s the diplomatic description of what I’ve just been talking about.  The Russians might want to consider the possible consequences of oil not arriving in China when it is supposed to after taking a $25bn loan to make sure that it does.

Speaking Too Soon?

From Upstream Online

Russian gas giant Gazprom expects liquefied natural gas exports from Sakhalin-2 to exceed 5 million tonnes this year, up from the initial plan of 3 million, export boss Alexander Medvedev said.
Reuters quoted Medvedev telling a news conference that Sakhalin-2, which also involves Shell and Japan’s Mitsui and Mitsubishi, would reach target capacity of 9.6 million tonnes next year.

Expect this statement to be rapidly retracted in the coming months.

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Russia Feels the Pinch

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.

Russia Does Irony

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.

Camping in Sakhalin

The weather in Sakhalin is warming up nicely, the evenings are still getting longer, the bears are hungry and out in force…which means only one thing: camping season.

Camping in Sakhalin is worthwhile for several reasons.  Firstly, there is the scenery…

…which, if you choose the right spot, can include the sight of early salmon leaping a waterfall.  I never saw this when I camped as an army cadet in the Brecon Beacons.

Secondly, camping in Sakhalin involves driving 4WDs laden down with copius amounts of “kit” which is to be shown off shamelessly to your male companions.  Americans are welcome as they have a habit of bringing along eye-boggling amounts of kit purchased from the USA for a fraction of what it would cost you in Sakhalin, assuming you could even buy it here.  Hi-tec electronic gadgetry from Japan is also popular, at least with the blokes.  Upon arrival at the campsite, all kit is dragged from the cars, unpacked, and assembled willy-nilly around a huge fire which consumes a small forest worth of logs throughout the night.

Thirdly, camping in Sakhalin is forbidden unless all involved (Egyptians excluded) get totally hammered on beer, vodka, coffee mixed with Baileys and Glava, all three in succession, or anything else you fancy.  The drinking is interrupted for half an hour or so whilst everyone gathers around the barbecue and throws on pile after pile of meat, most of which goes uneaten because the Russian Army never showed up to eat its portion.  With everyone fed, the drinking continues and the singing begins.  Usually somebody talentless and tuneless gets out a guitar and does a fine job of keeping the bears at bay.  Once a suitable late hour has been reached, fetching firewood involves going more than a hundred metres into dark forest, and everyone is plastered, those brave souls with tents crawl (or in the case of the Americans, stroll and head for the east wing) into their nylon pods and fall into a drunken coma.  Those who lack a tent or are too chicken to use it cheat their way through the camping experience by sleeping in the back of their Toyotas.  Next time I’m gonna be leaving tin openers with pots of honey around the campsite.

Finally, camping in Sakhalin, like most seemingly mundane activities in Russia, often presents bizarre spectacles which would go sadly unseen were we to sit in dingy bars, crumbling apartments, or remain in the UK.  On our last camping trip a car inexplicably burst into flames on the opposite side of the valley, producing a column of thick smoke.  The bewildered occupants would normally have been rueing the loss of their car and contemplating how to get home again…   

…had their blazing chariot not set fire to the entire hillside, causing the driver and his passenger to attempt to stamp out the flames with their sneaker-clad feet.  As the picture below shows, they were not successful.  This made for a fine afternoon’s entertainment for those, i.e. us, watching from a comfortable distance.

But the fun wasn’t yet over!  Just as we were packing up to leave, for no apparent reason a minibus owned and operated by a Korean seaweed harvester opted to drive across a river rather than simply take the road, and unsurprisingly got stuck.  For our entertainment he rammed the opposite bank a few times without success, before his mate turned up in a jeep to winch him out.

All in all, a fine weekend camping in Sakhalin.  May those to come be as entertaining and bear-free.

Doing Business in Russia – Part 2

A colleague forwarded this to me, sourced from here.  It describes the procedures, time, and cost to build a warehouse in Russia.

Data as of: January 2008
Estimated Warehouse Value: RUB 26,120,000
City: Moscow

No: Procedure Time to complete: Cost to complete:
1 Apply for an act of permission for use (АРИ) to the Department of City Planning Documentation Development at the Architecture and City Planning Committee of Moscow (MoskomArchitektura). 1 day no charge
2 Request and obtain situation plan of district and conclusion for a District Land Commission from the Architecture Planning Department (APD) 15 days RUB 43,680
3 Request and obtain a conclusion from Territorial Union of Land Use Regulation (TOPЗ) 15 days RUB 4,330
4 Request and obtain a decision by the District Land Commission on land plot provision and city planning regulation 30 days no charge
5 Request and obtain clearance of draft disposition of Prefect with the Architecture Planning Department (APD) 7 days no charge
6 Request and obtain clearance of draft disposition of Prefect with the local government 7 days no charge
7 Request and obtain clearance of draft disposition with the Territorial Union of Land Use Regulation (ТОРЗ) 7 days no charge
8 Request and obtain the disposition on preparation of an act of permission for use (АРИ) by the Prefect 7 days no charge
9 Request and obtain a conclusion on compliance of the proposed building with specified city planning and territory use regulations 152 days RUB 4,500
10* Request and obtain technical conditions from water and sewage services 45 days RUB 17,673
11* Request and obtain technical conditions for an electricity connection with MosEnergo 30 days RUB 5,490,520
12* Request and obtain technical conditions to connect to telephone line 30 days RUB 3,000
13* Request and obtain approval from MoskomArchitektura on engineering of the facility 14 days RUB 4,500
14 Request and obtain an act of permission for use (АРИ) from MoskomArchitectura 30 days RUB 6,700
15 Request and obtain disposition of Prefect on the inception of construction design (decision on construction) 60 days no charge
16 Request and obtain approval of design conditions by the Department of Well-Being of MoskomArchitektura 7 days RUB 53,300
17* Request and obtain approval of design conditions by the Department of Preparation of Project Approvals of MoskomArchitektura 14 days RUB 12,100
18* Request and obtain approval of design conditions by local government 7 days no charge
19* Request and obtain approval of design conditions by the Prefect’s Office 14 days no charge
20* Request and obtain approval of design conditions by the Emergency Situation and Civil Defense Department 14 days RUB 14,728
21* Request and obtain approval of design conditions by Moscow State Expertise 14 days RUB 7,364
22* Request and obtain an act of the Moscow Geological-Geodesic Department 15 days RUB 36,700
23* Request and obtain approval of design conditions by the Sanitary Services (Rospotrebnadzor) 30 days RUB 13,800
24* Request and obtain approval of transport routes from the Moscow City Transport Agency 30 days RUB 8,837
25* Request and obtain approval from the State Inspectorate of Road Safety (GIBBD) 30 days RUB 8,837
26* Request and obtain approval from the Department of Comprehensive Well-Being of the city 30 days RUB 4,600
27* Request and obtain approval from the Department of Nature Use under State Ecological Expertise 21 days RUB 29,455
28 Request and obtain Sketch No. 2 from the Moscow Geological Institute 30 days RUB 10,100
29 Request and obtain approval of Sketch No. 2 from the Moscow Architecture Committee (MoskomArchitektura) 30 days RUB 4,000
30 Request and obtain the construction passport from the Moscow Geological Institute 30 days RUB 8,837
31* Request and obtain approval of volumes of “outline of construction arrangement” and “GenPlan” from MoskomArchitektura 30 days RUB 6,500
32* Request and obtain approval of volumes of “outline of construction arrangement” and “GenPlan” from the Prefecture 30 days no charge
33* Request and obtain approval of volumes of “outline of construction arrangement” and “GenPlan” from the GenPlan Institute 30 days RUB 12,200
34 Request and obtain Regulation No. 2 and certificate of approval of Architectural City Planning Decision 30 days RUB 3,600
35 Request and obtain project approval by Moscow State Expertise 60 days RUB 58,000
36 Request and obtain permission for construction (building permit) 10 days RUB 11,460
37 Receive inspection by the State Inspectorate of Architecture and Construction Supervision during foundation construction 1 day no charge
38 Receive inspection by the State Inspectorate of Architecture and Construction Supervision during structure construction 1 day no charge
39 Receive inspection by the State Inspectorate of Architecture and Construction Supervision during engineering works 1 day no charge
40 Receive inspection by the Union of Administrative Technical Inspection (UATI) – I 1 day no charge
41 Receive inspection by the Union of Administrative Technical Inspection (UATI) – II 1 day no charge
42 Receive inspection by Union of Administrative Technical Inspection (UATI) – III 1 day no charge
43 Receive inspection by the Union of Administrative Technical Inspection (UATI) – IV 1 day no charge
44 Receive inspection by the Union of Administrative Technical Inspection (UATI) – V 1 day no charge
45 Receive inspection by the Union of Administrative Technical Inspection (UATI) – VI 1 day no charge
46 Receive inspection by the Union of Administrative Technical Inspection (UATI) – VII 1 day no charge
47 Connect to water services 30 days no charge
48* Request and receive inspection by the Energy Supervision Board 1 day no charge
49 Connect to electricity and sign an agreement with Energosbyt 14 days no charge
50* Request and connect to telephone services 5 days no charge
51 Request and convene the Approval Commission 30 days no charge
52 Request and receive the disposition on operation of building (occupancy permit) 10 days no charge
53 Request and receive plans from the Bureau of Technical Inventory (BTI) 30 days RUB 55,000
54 Register the building after completion 30 days RUB 7,500
* Takes place simultaneously with another procedure

54 different bureaucratic hurdles to overcome in order to build a warehouse.  And it should be noted that the costs listed are the official costs only, which the authority in question can legally charge.  Often before an authority will consider an application, the submitted documents must be checked and approved by a third party private company which is the only one the authority will recognise, and hence can charge what it likes.  I have seen these companies charge $30k for “pre-approving” what the governmental authority charges $200 for, and it is not difficult to understand where a big chunk of this additional fee ends up.  With so many authorities to satisfy the scope for corruption is enormous, and many of these approvals bodies have become industries in themselves offering lucrative careers involving little more than glossing over documents at ones leisure whilst accepting hefty backhanders either directly or via a third party company, which may or may not be owned by your brother.

This list should give you some idea of how difficult it is to build an LNG facility or an offshore platform in Russia.  Construction schedules in Russia are unlike anything you would experience in the west, which is made all the more difficult by the 4-month summer construction window (where groundworks are concerned) which exists in much of Russia including Sakhalin.  For the last part of 2008 I was involved with the construction of a two-storey office building, the type of which would be thrown up in six or eight weeks in the UK.  It took our Russian contractor over two years to complete, and still the building is not registered.  A good chunk of this time was spent sitting about waiting for various authorities to review documents, turn up for inspections, and stamp bits of paper.

If anyone wants to know why Russia remains poor despite a well educated population possessing impressive technical skills, looking at how long it takes to complete a simple construction project and what is involved is a good place to start looking.

(Doing Business in Russia – Part 1 is here.)

Doing Business in Russia – Part 1

Some of my long-time readers will remember the tale of my first ever visit to Russia back in February 2004, which involved a 3-day train journey from Moscow to Nizhnekamsk (or a town nearby, at least) in the Republic of Tatarstan.  On my return I published a lengthy account of my trip which remained online for a number of years before I thought it wise to take it down, a decision I have no intention of reversing.

Anyway, I recall being on the train crossing some godforsaken snowfield the size of Wales and a scruffy policeman coming into my carriage demanding to see my papers.  After handing them back to me he asked to look through my bags, and I remember him making me empty all my clothes onto the seat and explain the charger for my Canon digital camera.  Once I’d been told I could pack my stuff away, I asked him what he was looking for.  “Drugs, guns, bombs” came the answer.  I looked out the window where I couldn’t even see one of the collection of tumbledown wooden shacks which pass for Russian villages.  We hadn’t seen anything concrete in over an hour.  I asked him how long he had been doing his job, and he replied a number of years.  I asked him how many foreign tourists he had caught on a train in the middle of absolutely nowhere carrying drugs, guns, or bombs in their luggage.  Answer: none.

A rich seam of ludicrously pointless security checks runs right through Russia from the Baltic Sea to the Kamchatka Peninsular, and it does not bypass Sakhalin Island on its way.  I am currently working on a small building project of negligible significance to anyone outside the company who wants it done.  The location of the construction is on a flat piece of sand a couple of kilometres inland from Sakhalin’s east coast way up in the north of the island.  It is about as remote as remote can be.  It is a couple of hours by Landcruiser from the nearest railway station in Nogliki.  The nearest settlement of any kind is a half-hour drive away.  There is no structure or installation for miles and miles which does not form part of the facility which our construction is adding to.  A friend who worked there in 2005 said it was the closest he came to working on the moon.  I spent yesterday on the site, and it is as remote and desolate as anything Kuwait had to offer. 

The first part of the works involves carrying out a topographical survey, which is effectively a survey showing what hills, bumps, and structures are around the worksite.  It takes about 1-2 days to complete.  Before we can begin construction we must get approval from the authorities: fair enough.  The authorities insist we carry out a survey beforehand: also fair enough.  The authorities say the surveyors must be licensed: still fair enough.  The authorities demand that the results of the survey cannot be released to any foreign company without their first having been sent to the FSB for examination, which takes 30 days: WTF?!!  Yes, that’s right: no results of a survey of (from what I can gather) any kind taking place in Russia can be used by a foreign company without FSB approval, even if the survey is recording a few foot-high lumps of sand at the arse-end of Sakhalin Island a helicopter ride from the nearest sizeable town.

I suspect were I to ask the Sakhalin FSB chief how many nefarious plots hatched by foreign companies against Russian national interests had been foiled by the FSB taking a month to review construction survey results, the answer would be roughly similar, nay exactly the same, as the one my policeman friend gave me on the train to Nizhnekamsk.  Security, like so much else, rarely makes sense in Russia.