At first glance, this article seems to be reporting good news:
Russia is working on a host of new legislation and framework changes to allow foreigners to more easily explore for oil and gas as Moscow moves to unlock its vast Arctic hydrocarbon resources.
The initiatives are intended to simplify the process of applying for exploration licences and allow international companies a greater opportunity than before while at the same time keeping state control over offshore projects.
Here’s why I think it isn’t.
What is said in Russia by government officials and what actually happens are two entirely separate affairs. We are forever hearing about the grand plans of the Russians to develop their vast oil and gas resources, and there is no shortage of bold announcements and lofty ambitions, but these seldom translate into action on the ground and the tough decisions required to make them happen don’t get made. There are probably several reasons for this, and identifying all of them would require substantial guesswork as to the murky machinations of those holding the levers of power in Russia. But whether these plans are genuine but fail in the implementation, or are merely words for which there is no intention to follow up with action, doesn’t really matter. What matters is that Russia’s oil and gas developments are progressing at a snail’s pace, and nobody can say with any certainty what the actual situation is in Russia at any given time, let alone predict what is going to happen.
I wrote in August of this year about the Russian government’s flip-flopping over the Yamal development where foreigners were courted, Total signed a deal with tacit approval from Putin before the Russian party decided it did not need a foreign partner just over a week before they announced they were looking for one. Then the deal got scuppered anyway by the environmental regulator, who could not be bothered to provide a reason. This doesn’t tally up too well with this latest announcement, does it?
But that’s probably down to internal squabblings and power struggles, which have always been a root cause of the failure of Russian national policies on pretty much anything. To view the bigger picture we have to step back to April 2008:
Russian state-controlled giants Gazprom and Rosneft have been handed monopoly rights to all hydrocarbon developments on the Russian shelf.
Two and a half years later, they’re saying:
Russia is keen to get foreign expertise to help explore its Arctic plays where historically there has been little activity. The ministry said that private exploration investments in the country this year would total 28.3 billion roubles ($898 million) but only 100 million roubles was earmarked for the Arctic compared to 21 billion roubles for Russia’s Far East.
So what’s changed? Did the Russians in 2008 mean they did not want foreigners at all, even minority partners, or were they just looking to safeguard the operatorship? They didn’t say, but looking at what took place over the previous year would strongly suggest the latter. And that’s the problem: they didn’t say, and what they’re saying now is unclear. If the Russians selected a strategy and told everyone what it was and why it was, companies and investors could make decisions of their own accordingly. And if the Russians subsequently change their mind on something, they should say why. In two and a half years they’ve gone from passing laws keeping foreigners out of their arctic developers to passing legislation aimed at getting foreigners in. Was it a good idea then but a bad idea now? Or was it always a bad idea, which is now being corrected?
The Shtokman project is providing a good example of the effects of this failure to communicate:
The operator of the first phase of Russia’s Shtokman gas and condensate field in the Barents Sea, Shtokman Development, hopes its board will rule on the lengthy dispute on the subsea pipeline transportation solution by the beginning of February.
Shtokman Development general director Alexei Zagorovsky said the company expects the results of studies into the matter this month. The studies, ordered by the company, are considering the pros and cons of two different transportation solutions.
The first is the originally approved method proposing to bring gas and condensate to the shore from Shtokman in a single pipeline, the so-called “two-phase approach”. It is heavily backed by first phase foreign partners — France’s Total and Norway’s Statoil — that say the processing of gas and condensate on board the production vessel is hazardous.
At the heart of Gazprom’s optimism on an FPSO solution, is its long held belief, frequently aired in public, that this type of floater would do away with the need for separate 36-inch, 550-kilometre pipelines to take the the field’s gas and condensate to shore as well as an onshore processing plant.
Instead, liquids would be processed onboard the FPSO, offloaded into shuttle tankers and shipped to markets.
Gazprom’s support for a phase one FPSO was underscored last week when WorleyParsons was handed a front-end engineering and design contract covering an FPSO for phases two and three, that would have to handle 70 million cubic metres per day of gas plus liquids.
Project watchers said switching to an FPSO for phase one would need a lot of the current project to be re-engineered which would involve significant costs and delays.
Aside from re-designing pipelines and risers, a well-placed source said the vessel’s mooring system would also have to be reconfigured while icebreakers would be needed to ensure that ice-class shuttle tankers can navigate the Barents Sea safely.
If Gazprom persuades its partners that an FPSO tender process needs to be undertaken, it is unclear if the same two consortia fighting to build the FPU would be invited to bid or whether Shtokman Development would go to the market afresh.
One project watcher suggested if little progress is made on Shtokman before Russia’s presidential elections in March 2012, then it would not reflect well on Russian President Dmitry Medvedev, the former head of Gazprom, if he decides to run. One source said the Shtokman FPU is a “very, very expensive” piece of kit, suggesting it would have a price tag of more than $3 billion, but stressing that an FPSO would cost at least as much.
The total weight of the FPU is currently about 110,000 tonnes, including about 40,000 tonnes of topsides. An FPSO would require a bigger deck load and significant safety issues.
From what I can gather (and I am only going off information in the public domain here), the Russians brought on Total and Statoil to provide the technical expertise to overcome the challenges of developing the Shotkman field, which lies far offshore in artic waters. Statoil was selected particularly for its expertise in offshore arctic environments, about which Gazprom knows next to nothing. The Total/Statoil solution, which was agreed upon some time ago, is to produce the gas, carry out some basic processing on a vessel, and send the gas down a pipeline to shore for further processing, possible liquification, and export. Then rather late in the day, Gazprom came winging in with a far more complex proposal which would involve a greater degree of processing offshore and the ability to ship the gas directly from the production vessel. Total and Statoil now appear to be being pushed into considering this solution instead of their own. This may be all well and good, but there appears to be no justification why Gazprom favours this different, more complex solution which will cost a lot more and cause considerable delays. Do they not trust the judgement of the foreign partners they brought in for the specific purpose of providing the technical solutions? Or is this an ego thing, whereby the Daddy of the project must be seen to be making the big decisions regardless of whether they are sensible ones? Or is there something else afoot?
Speculation abounds. One of the more amusing theories you find in the comments of the Russian-centred blogs from the pro-Russian crowd is that the failure to progress any of Russia’s oil and gas developments is a deliberate – and naturally extremely clever – strategy in response to a decline in demand for gas. Whereas in 2007-8 all the talk was of how Russia doesn’t need any help in becoming the world’s energy provider, immediately the financial crisis hit and the projects ground to a halt the chatter switched seamlessly to Russia realising that it is not in its interests to develop any more fields. Personally, I’ve always thought this a bit of a convenient excuse. For sure, it is far easier to pretend incompetence and foot-dragging is part of a deliberate strategy, but I have yet to hear of an oil and gas development – whose lifespan is a minimum of 25 years, usually up to 40 – being based on the current demand. Yes, it is quite common for projects to be canned or postponed due to current prices, as the Canadian oil sands projects are notoriously known for, but never have I heard of a major development of conventional resources being postponed due to the present demand figures. The whole thing smacks of desperation from those who, having cheered Russia’s resource nationalism when implemented in 2007, now have to explain to themselves why nothing has happened since.
I have two theories as to why Shtokman is being subjected to such indecision, none of which is substantiated. The first is what I mentioned already: somebody either in Gazprom or the Russian government does not want a foreigner determining the development strategy. This might be an ego thing, hardly uncommon in Russia. It might be that it is always assumed that foreigners will first and foremost be looking to damage Russia, and hence can never be trusted. Such paranoia is hardly uncommon in Russia either. More likely, somebody somewhere stands to benefit personally should this new solution be adopted. Perhaps somebody has an interest in a shipyard somewhere, or a rival has an interest in a pipelaying operation? Personally, I think a combination of these three is the most likely reason. But there is another, provided by that ever-reliable source: a Russian bloke I know, who worked for a while in the Shtokman Development Company. What’s more, I drink with him. Anyway, he thinks the Russians are turning away from LNG (not that they ever really understood it enough to embrace in the first place) and want to concentrate all efforts on maintaining or expanding their pipeline monopolies. With LNG, Russians are at the mercy of the spot price and the ability of customers to buy from elsewhere, something they are on record as not being too happy about. With pipelines, the Russians can switch off the gas or demand higher prices at will, and the customer has far less room to manouevre. Perhaps realising that its own business practices are not going to favour their competing on the open LNG market, the Russians are now looking to maximise its pipeline market share whilst they still can. In throwing a spanner in the works of Shtokman by instructing the foreign partners to develop a far more costly and lengthy solution, it is perhaps giving the Russians an opportunity to cancel the project, citing increasing cost projections (which will no doubt be blamed on the foreigners) and thus saving face.
But whatever the reason is, this is not the actual problem. Indeed, perhaps a good argument could be made for Russians sticking to supplying gas by pipeline and staying clear of LNG. And maybe an argument could be made that by the time Shtokman comes online, shale gas might have made the project commercially unviable. No, the problem is that no reasons are given for anything. No clear strategy is being presented with subsequent decisions being made to reflect that. It is all announcements which contradict those made earlier, reversing legislation that was only recently passed, vague statements followed by inaction, and the usual threats and unrealistic ambitions dealt out in equal measure.
As a penultimate example, once again from the original article:
Most of Russia’s exploration success dates from the Soviet era, with only six fields having been discovered since 2005 – five of these were in the Caspian and one in Russia’s Far East, [director of the Department for State Policy and Regulation at Russia's Ministry of Natural Resources, Denis Khramov] told a seminar at Osea 2010.
But who remembers this from my August post?
As part of a plan to feed the energy-hungry economies of Asia and move dependence away from sales to Europe, Russia is trying boost oil production in East Siberia.
But investors in major East Siberian oil producers have been spooked by a tug of war among senior officials over re-imposing an oil export duty on 22 oil fields in the province.
So one senior official is expressing concern over the lack of development progress, whilst another lot are unable to convince investors that they won’t get burnt doing so.
And finally we have this, from last October:
Russian authorities have dealt a further blow to the ambitions of potential foreign investors in the country’s oil sector, despite recent encouraging noises by its leaders that the rules should be fair for everyone.
In a move reminiscent of the rigged privatisation auctions of the mid-1990s, the Rosnedra subsurface agency has rejected applications by domestic players Lukoil, TNK-BP, Gazpromneft and Nord Imperial, representing India’s ONGC Videsh, to participate in the upcoming auction for the Trebs and Titov oilfields in the Nenets autonomous region.
Rosnedra cited errors and missing information in the applications submitted by the four companies as grounds for refusal.
However, industry analysts in Moscow said these reasons are insignificant and cannot justify refusing applications from such established market players.
So how does this tally with what the original article was reporting?
The problem lies not with the oil and gas development strategy that Russia has selected, it is the fact that nobody, including the Russians in charge of implementing it, has the faintest idea of what it is.