Watching the World: Russia's running PSA tribulations

April 30, 2001
sThe red thread running through the presentations made by western oil companies at the recent Russian Economic Forum in London spelled out three letters: PSA.

The red thread running through the presentations made by western oil companies at the recent Russian Economic Forum in London spelled out three letters: PSA. The issue of a Russian-model production-sharing agreement was at the heart of speeches by Scott Kerr, CEO of BP PLC's Russia-Kazakhstan unit, and Rein Tamboezer, president of Shell E&P Services unit in the Russian Federation. Both executives anticipated another Royal Dutch/Shell man's undisguised views on this central stumbling block obstructing foreign oil industry investment in Russia.

To unlock Russia's vast undeveloped hydrocarbon reserves and modernize its infrastructure, said Royal Dutch Petroleum Co. Pres. Jeroen van der Veer, the federation needs "massive" investment. But the level of expenditure that would come from international oil companies committed to the "long haul," in turn calls for sealing a national PSA scheme anchored in a stable legal and fiscal regime (see related article, p. 42).

Migratory investment

Without a set-in-stone PSA model, said van der Veer, Russia will have a consistently hard time winning capital investment in an era when "funds will migrate to those areas that offer the best trade-off between risk, return on investment, and long-term strategic goals."

"Russia must compete for her share of direct investment, because international oil companies have real choices about where they invest," he stated.

Van der Veer suggested the so-called "grandfathered PSA" deal formulated by the Sakhalin II partners and Russia to progress the $8 billion Sea of Okhotsk oil and gas development off Sakhalin Island serves to show "how much can be achieved" once a project's legal and fiscal foundations are laid.

Wintershall AG's head of E&P, Reinier Zwitserloot, would likely take courage from van der Veer's belief in a eventual unclogging of the Russia PSA bottleneck.

In his E&D portfolio, Zwitserloot has a potentially giant Russian oil project in the Prirazlomnoye field in the Barents Sea, where reserves are put at "at least" 500 million bbl. But ongoing internal strife in the Duma over the final form of a national PSA model continues to tie his-and his Russian partner OAO Gazprom's-hands from moving this development ahead, despite Russian Pres. Vladimir Putin classing Prirazlomnoye as a "beacon project" for future foreign investment.

Longer term prospects

Though Prirazlomnoye is doubtless a technologically challenging project, Zwitserloot believes it will return investment-eventually-many times over. "If this project were a singled-out opportunity where there were no further prospects, we would never consider doing it," he says. However, not only are there "seven or eight more leads" around the field, but, moreover, Prirazlomnoye is in virgin exploration territory.

Van der Veer believes the onus rests with political leaders outside Russia "to do more to promote (the PSA) process and to translate the principle of partnership into practical change on the ground." Yet exercising political sway over Russia to speed up adoption of a fixed PSA will likely remain a onerous task. For on some psychological level, it will remain difficult for the former Soviet Union to embrace a production agreement traditionally associated with "developing" nations-a bitter pill to swallow for a country which, through most of the last century, advanced its particular industrial vision free from foreign commercial influence.