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December 12, 2007
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Home / Issue Archive / 2007 / September #9 / Editor's Letter

№ 9 (September 2007)

Editor's Letter

Criss-Crossing Russia on the World’s Longest Long Haul Domestic Flight

Pat Davis Szymczak

I’m back in Moscow after two weeks on the road that took me to Yuzno-Sakhalinsk a stone’s throw from Japan, back to St. Petersburg and then on to Chelyabinsk in the foothills of the Ural Mountains.

September is conference and exhibition time in Russia’s most important oil centers. Oil&Gas Eurasia still has Tyumen and Surgut to travel to, and then in October, I’ll be on the road again to Almaty and KIOGE. But even now, I can share something with you regarding the pluse of the Russian oil and gas industry as it stands in early autumn 2007.

First, let’s visit Yuzhno – something you need to do at least once to get a feel for how big Russia really is. If you fly out of Moscow you’re in the air for nine hours without ever leaving the country. I’m told it’s the longest non-stop domestic flight in the world. I traveled there for the annual Sakhalin Investment Conference. I was surprised to see that Oil&Gas Eurasia was the only oil and gas magazine distributed there, despite claims of other “marketing partners” of the organizer. Our offshore supplement, Eurasia Offshore, went like hot cakes in Yuzno along side the newsletter, Pacific Russia Oil&Gas Report out of Washington state, and the industry newspaper Upstream. If you advertised in anything else hoping to be seen on Sakhalin, you got conned. 

Yuzhno is a city of paradoxes. On the one hand, it is the center for some of the most cutting edge Arctic offshore engineering projects in the world. You’ve seen the reviews of Sakhalin-1 and Sakhalin-2 in global trade media, which always include a laundry list of the largest this, the heaviest that, the longest whatever – simply one world-engineering record after another. On the other hand, the “international” airport is something out of a 1950s movie set in the Third World. I advise you not to use the hole in the floor that passes for a toilet (if you can avoid it) while you wait for your baggage for two hours, as I did (though there was only one airplane to unload!).

This sort of welcome had me sympathizing during one conference session week with one local Sakhalin official, a communist, when she argued during Q&A with another government official over the sorry state of the federal road system on the island. Apparently, if I understood right while quizzing locals in Yuzno, there is a perception that taxes paid by these world class oil projects  don’t get plowed back by officials into much needed public works projects on the island.
As for those oil projects, journalists did report some news, but not much of it was really new (if you catch the nuance.) Sakhalin Energy’s CEO Ian Craig gave an upbeat presentation despite his lame duck status. (That’s an American political term for a leader who will shortly leave office and so can’t really launch anything new.) Craig (from Shell) noted that he expects to be replaced by Gazprom management eventually (as if we didn’t know.)

News reported by the wires and by quoted Vladimir Kozlov, head of Gazprom’s Sakhalin office as saying that  ExxonMobil would be required to sell its Sakhalin-1 gas to Gazprom for domestic consumption under the government’s new plan to develop the Russian Far East. ExxonMobil has been fighting this for some time and claims to be "still negotiating." Project economics were built around pipeline gas to China at a market rate.
But if you forget the politics, Sakhalin and the Sea of Okhotsk generally, is a jewel in the crown of the international oil industry. The problem is, even nine hours flying time from Moscow you can’t get away from politics  – or the bureaucracy. Take development of the Kamchatka Shelf for example.

You’d think that, as a state oil company, Rosneft would have the connections to get the right message to the right officials about changing backward regulations from Soviet times that are crippling even state oil company efforts to develop Russia’s riches on behalf of the state. As one speaker explained, Russia has no body of legislation governing maritime traffic for peaceful oilfield development. Rather, it has Soviet era, Cold War regulation focused on military ships and messy customs rules. The result: a supply ship can’t bring bananas to the crew of an offshore platform without first clearing customs on the mainland. If Rosneft can’t fix this, who can?

Rosneft and BP steered clear of discussing details of results of exploration drilling on Sakhalin-5. So far results have not been encouraging but it wasn’t quite clear if the project might be viable under a different taxation regime. Sakhalin-5 is not eligible for PSA status. And again, even Rosneft speakers complained about limitations in development imposed by tax policies.

Back nine hours flight to Moscow and a six hour train ride to Russia’s former imperial capital, St. Petersburg, and I was at the Russian Arctic Offshore (RAO). Sakhalin was represented there as well but most participants were interested in the latest developments in the Barents Sea. Here France’s Total found itself the center of attention considering Gazprom’s recent announcement that it had chosen Total as its partner on the giant Shtokman gas and condensate field, which will supply LNG to the United States as well as supply gas to domestic customers and to feed the North European Baltic subsea pipeline (a Russian-German venture).

The Total deal is for a feasibility study with a final investment decision to occur in the second half of 2009. First gas deliveries would occur in 2014. Two years ago, Gazprom’s chief negotiator with the U.S. over LNG deliveries  was  saying  that to sell gas to the United States, Shtokman would need to be in delivery mode by 2011. Though I asked around, no one seemed to have an answer to this basic market question – has Russia missed the window for concluding long-term contracts to ship Shtokman LNG to the United States? Also, while Total says its agreement with Gazprom will enable it to book reserves, the exact mechanism by which that will happen is yet to be decided. Total will not be a license holder.

For the most part, RAO’s technical sessions consisted of long, number-filled recitations of the findings of exploration surveys made in Soviet times; all of it 2-D. As I’ve been told, there is one 3-D vessel operating in Russian waters, run by Sakhalinmoreneftegaz (SMNG). It worked this summer in the Barents Sea and has now been dispatched to the Caspian Sea. On the flip side, I heard a number of excellent technology oriented reports, and I did listen to a number of excellent reports in a session on the Ob and Taz Bays offshore Yamal. One stand-out was of a new technology for extended reach drilling offered by researchers at Moscow’s Gubkin University. An observer in the audience from Gazprom asked the young researcher and his professor during the Q&A period why the technology hasn’t been made available to the industry. No money, the professor shot back.

And this brings me back to my original thoughts about the state of basic infrastructure. Foreigners doing business in Russia always praise the quality of the Russian workforce, particularly in terms of their scientific education. So why aren’t state oil companies, developing projects for the good of the Russian state, putting a priority on investment into R&D at Russian universities to commercialize laboratory advances?

In coming months, Oil&Gas Eurasia will be taking you to Russia’s regions, particularly to Tyumen, where this is actually taking place. And we’ll also be going o Chelyabinsk where we visited the opening of Carbo Ceramics' new proppant manufacturing plant, a 100 percent American-owned factory in the heart of Russia, run by Russians. Yes, things are happening for those who have patience. Meanwhile, can anyone tell me which government official I can lobby to get Yuzno-Sakhalinsk airport a new toilet?

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