Russia needs to establish favorable oil taxation and exportation rules as incentives for independent exploration and production companies, speakers said at the second annual Russian-US energy summit sponsored by Strategic Research Institute LP in Houston late last month.
"While the vertically integrated companies in Russia continue to thrive, small enterprises there have suffered difficulties due to their continued inability to gain capital and support," said Elaine Kleiner, president of Houston-based consulting firm Elite Sources Inc.
Kleiner said small Russian oil companies offer unique investment opportunities for independent oil producers from the US, Canada, and Europe.
Investors from outside Russia can provide capital and establish themselves as Russian oil players, she said.
Currently, there are about 150 small and midsize Russian oil companies, and their portion of total oil production is gradually increasing, she said.
"Between 1995 and 2002, the production by those entities has doubled. They have accounted for about 9% of the total annual production in Russia. The forecast is that by 2015 they will have an annual production of almost 100 million tonnes [700 million bbl] of oil," she said.
In 1994, small and midsize Russian oil producers created an association called Assoneft.
Recently, the association had 70 members and continues to grow. It has brought the problems of its members to the attention of the Russian government, Kleiner noted.
About 45 Russian independents receive financing from both Russian and foreign investors, she said.
Problems facing independent oil producers in Russia are inadequate taxation incentives, inadequate access to the main pipelines, and unfavorable deals with the refineries, most of which are owned by Russian integrated oil companies, she said.
Harvest Natural Resources
Houston-based Harvest Natural Resources Inc. Pres. and CEO Peter J. Hill told the summit that Harvest has $138 million to "acquire and develop quality Russian assets."
Harvest's Venezuelan operating subsidiary, Benton-Vinccler CA, operates the South Monagas Unit in Venezuela.
"We're a small, financially stable, international niche player recognized for value growth potential," he said. "We don't explore. We just take on discovered hydrocarbons in Venezuela and Russia."
He agreed with Kleiner's comments about independents' difficulties created by the lack of their own refining capacity and by limited access to existing refineries.
Regarding taxes, he said that equal taxation treatment with integrated oil companies (IOCs) has resulted in a heavier tax burden for independents.
"We're not able to mount an equal lobbying effort as compared with IOCs. The bottom line is we cannot compete," he said.
Solutions to Russia's oil export constraints would involve construction of new export pipelines, he said, noting that pipeline capacity growth parallels crude production growth.
"Urgent export incentives or tax breaks for independents are going to be needed through 2007," he said, adding that he is optimistic about the future for small to midsize oil companies doing business in Russia.
Harvest's goal is to grow its reserves in a prudent, paced development, he said.
"There is a lot of liquidity in Russia today, and we are negotiating with a number of parties right now," he said. "There is nowhere else on this earth that has the opportunity sets that Russia has."
OPIC
Rashmi Nehra, senior investment insurance officer for Washington, DC-based Overseas Private Investment Corp., said that she is seeing more small and midsize US companies coming to OPIC for help in financing projects in Russia.
"You do have a lot of legal reform taking place [in Russia], but enforcement is problematic and arbitrary," Nehra said when asked to outline the challenges facing US oil companies wanting to do business in Russia. She emphasized the importance for US companies to find quality Russian partners.
"It's still a pretty risky environment but maybe not what it was 10 years ago," she said of the political risk for US companies doing business in Russia. "For oil and gas companies, it's still high risk—particularly for small to medium size companies."
