Gazprom’s Folly

I am embarrassingly late onto this story, and I blame a lack of internet connection followed by a lack of subscription to Upstream magazine in my new company.  Last month, Gazprom announced that it would not be looking for foreign partners to develop the enormous Shtokman gas field in the Barents Sea:

Russia Today television broke the news, quoting Gazprom boss Alexei Miller as saying that Gazprom had been unable to find suitable international partners for the liquefied natural gas project.

A Gazprom spokesman later confirmed the report.

Last year, Gazprom said that it shortlisted US supermajors Chevron and ConocoPhillips, Norway’s Norsk Hydro and Statoil and France’s Total to join it in the development.

Despite the companies presenting technical and business proposals on the the development of the field months ago, Gazprom has never selected two or three of them as its final partners for Shtokman.

This is not surprising.  The Russian government and many Russians feel that they are getting the raw end of the deal on its existing projects which feature a foreign partner, and believe that their massive gas reserves coupled with heavy demand from Europe, Asia, and the US and a high oil price puts them firmly in the driving seat.  And in all honesty, as with the Arabs and the oil, they are indeed.  They have the resources which the wealthy Europeans, Asians, and Americans desperately need.  I am sure that this decision to exclude foreign partners is a result of this renewed confidence and will be extremely popular with the domestic audience.

What is not so clear is that Gazprom or any other Russian company will have the faintest idea how to develop and operate a gas field of the size and complexity of Shtokman.  When left to their own devices, national oil companies tend to make an utter pig’s ear of running an oilfield, concentrating only on production with scant regard to efficiency, safety, the environment, or the long-term health of the reservoir.  Most of the older Russian oilfields are producing poor quality crude thanks to Soviet policies of pumping in water to increase immediate production at the expense of future quality.  And I have worked in one national oil company which was once refused permission from the government to shut down a leaking export line with the result that it caught fire, spread back to the nearby facility which in turn caught fire and was completely destroyed, killing a few folk in the process.

Gazprom are not a national oil company as such but they are state controlled, which means political interference.  The Shtokman gas project will be immensely technologically challenging due to the climate and offshore location.  They will almost certainly need foreign expertise in the engineering and construction phase and as this article shows, the Russians realise this:

Russia has not ruled out inviting foreign companies to work on its giant Shtokman gas project, President Vladimir Putin said today.

“Russia has decided to develop this field independently. We will be the sole subsoil user and owner of the field, but we do not rule out inviting foreign companies for joint work on development or doing part of the gas liquefaction process and marketing it in third countries,” Putin told Reuters after a meeting with German Chancellor Angela Merkel.

That is a very good idea, because if you do rule out using foreign companies to provide gas liquefaction or offshore technologies you’re going to be reinventing the wheel to the point that you’ll be at least 30 years behind current technology from the outset.  Indeed, it is certain that most of the engineering, construction, and commissioning will be carried out by foreign firms, perhaps in partnership with local outfits.  Quite how these foreign companies will get along on a project being managed by Gazprom, who have no large scale project management experience whatsoever, is open to question.  If Gazprom can keep the project free of political interference and corruption, and resist the urge to stand on the contractors’ necks just to show ‘em who is boss, the project will go just fine.  That’s a big if, and if ever there will be a test of whether Gazprom is ready to be called a world class energy giant, this will be it.

What is equally worrying is how Gazprom will operate and maintain a large and complicated LNG facility.  It is easy to say that they don’t need foreign expertise as they can simply buy the technology and manage it themselves, but not so easy to do in practice.  The Middle East is a fine example of that, whereby companies bought hi-tech oil and gas facilities and watched them deteriorate as they were either unwilling or unable to put in the time, money, and effort to keep the things working safely and efficiently.  Not for no historical reason does my previous company make its money helping companies to rectify 25 years of neglect.  Operation and maintenance is equally as complicated and important as building the thing in the first place.  You wouldn’t buy a Ferrari and run it with the same oil and brake pads for 10 years, would you?  Yet some governments think they can buy LNG technology and do all the servicing themselves, if they bother at all.  Next time a Russian tells you foreign oil companies have no business operating Russian fields, poke him in the chest and ask him how often the seats in the emergency shutdown valves should be replaced.  He’ll not have a clue, but more worryingly nor will the company he thinks should be operating the field.

What the likes of Gazprom lack is a corporate memory of running things to international standards.  Companies like Exxon, BP, and Shell have banks upon banks of historical data recording how often components fail, how often they should be maintained or replaced, and what material to use.  This has been painstakingly gathered over decades and turned into detailed procedures and specifications which determine exactly how a facility is run.  These have then been revised accordingly following accidents and other failures where the current procedure or specification has been found wanting.  Over time, and only over time, does a company develop a culture whereby the entire workforce from senior managers to lowly technicians follow the procedures and practices which have been proven to work.  It is not possible to simply purchase a lump of technology and the handbook containing the procedures and run a facility.  This has been tried, and it just doesn’t work.

Some governments have woken up to this, but being reluctant to hand over full control of their oilfields to foreigners have attempted a halfway house situation whereby they bring in a recognised company to install and implement their management systems without actually being in charge.  One of the subsidiaries of the Abu Dhabi National Oil Company recently brought Exxon-Mobil on board as a 28% stakeholder in an effort to implement its maintenance management systems across its crumbling assets.  This approach is usually better than trying to go it alone, but still leaves the company vulnerable to political interference or cronyism.  Often the success or otherwise of such a partnership depends as much on the individuals involved than the company brought in to help.

So what should the Russian government do instead?  Firstly, look around the world.  It will see that the only national oil company which operates safely, efficiently, and on a par with international standards is Statoil of Norway.  The rest range from being bloated and inefficient to startling unsafe and riddled with corruption.  Secondly, convince itself and the Russian population that a foreign oil company operating a Russian oilfield is not tantamount to theft of national resources.  Then it should carve up the field into licensed blocks, flog the licenses to the highest bidders, and tax the production from thereon.  Regulation should be enforced where it is needed, for instance on health and safety and environmental matters, but other than that it should stay well away from the whole shooting match.

And there’s a fat chance of that.

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3 Responses to Gazprom’s Folly

  1. Dave says:

    Absolutely spot on!
    Gazprom running Shtokman on their own? One must be joking!
    I was involved lately in the mayhem surrounding PDVSA’s ‘forced nationalisation’ of the Orinoco heavy oil projects. The foreign investors (mainly Total, Conoco and Exxon) built a world-class operation. Can one imagine PDVSA taking over running the facilities? The assets will lose edge and deteriorate in 2/3 years. Who will suffer the most? Venezuela.
    Yet, immediate nationalistic actions sloganeering are the call of the day and Chavez cannot, even once, look beyond the next election.
    The situation there is dire and future prospects almost nil, not to speak of the eventual cost of rectifying the damage done now at any future date.
    Gazprom should watch and learn!
    Will they? I doubt it. Look at the current Sakhalin2 travails and realise that the present reflects the future, at least as far as Moscow is concerned.
    Dave
    London NW3

  2. W. Shedd says:

    Hope the quake didn’t give you too many troubles.

    I wonder how reluctant foreign companies would be to cooperate with Gazprom and Russia in Shtokman, considering that they were left waiting at the altar. Plus, the incentive to provide certain engineering, planning, technological, and material expertise could be considerably less than when the foreign firms were getting a piece of the pie.

    “Convince itself and the Russian population that a foreign oil company operating a Russian oilfield is not tantamount to theft of national resources.” Fat chance, indeed. What is that old saying about knowing the price of everything, but the value of nothing? Russians see foreign oil companies making a profit, and see themselves as getting kopecks on the ruble, and imagine they (and their country) are getting screwed.

  3. Larry Barrow says:

    Sounds like you’ve researched the matter very well. However, the Russians should really consider bringing in an Engineering Consulting firm like ABS to do a study, which could assist them in solving their problems. Then I could come to visit you.

    Cheers,
    Larry

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