US-Russia summit: Independents prospering with small Russian projects

While big international companies seek production-sharing agreements (PSAs) for billion-dollar oil and gas projects in Russia, smaller companies are prospering with smaller projects.

Bob Tippee

HOUSTON, Oct. 3 -- While big international companies seek production-sharing agreements (PSAs) for billion-dollar oil and gas projects in Russia, smaller companies are prospering with smaller projects under other business structures.

On the second and last day of a high-level Russia-US energy summit in Houston, executives of three small companies said the risks of operating in Russia have been overstated.

And in the closing plenary, the head of a supergiant Russian company said his country might not need participation of international majors insisting on secure PSA frameworks.

Top executives from three independent companies described Russia as a country with, as Howard Cooper, president and chairman of Teton Petroleum Co., put it, "plenty of room for small guys to go in."

Teton's experience
Publicly traded Teton, Steamboat Springs, Colo., recently raised gross production from Eguryak field in Western Siberia to 6,500 b/d with completion of its 12th well. It holds a share of the Eguryak license through 50% ownership of Goltech LLC, which owns 70.59% interest in the Russian licensee, Goloil (OGJ, June 3, 2002, Newsletter).

Production began in 1997 but was intermittent until Teton started up a 40 km pipeline to supergiant Samotlor oil field in June 2001.

In Russia, independent producers can acquire reserves cheaply and without having to assume the risks of exploration, Cooper said. Oil reserves are available in Russia for 75¢-$1.25/bbl, he said, compared with about $6/bbl in the US.

Cooper told OGJ he expects Eguryak field to produce more than 15,000 b/d. He wants Teton to enter three or four similar projects in the next 5 years and eventually to produce 100,000 b/d, all in Russia.

Projects manageable by companies Teton's size are available, Cooper said, "because the big companies want elephants."

He had this advice for independent producers working in Russia:

-- Identify manageable, proved reserves.

-- Find "reliable" legal counsel to thoroughly review title and secure ownership of assets.

-- Rapidly establish cash flow. "Don't get caught up in modeling."

-- Seek Russian partners "willing to invest side by side" in the project.

-- Build a management team that mixes Russian and western talent.

Urals Energy
William Thomas, chief executive officer of privately owned Urals Energy, described Russian opportunities as "simply overwhelming."

A Moscow subsidiary of Urals Energy, Urals KNK, produces 30,000 b/d from 27 wells in the Komi region of the Timan-Pechora basin.

Calling Russia "overexplored and underexploited," Thomas said independent producers can succeed by using "off-the-shelf technology" to increase flow rates and recovery factors of already-discovered fields. He estimated Urals KNK's direct operating costs at $1.80/bbl.

Opportunities for small companies will multiply, he said, as Russia's large integrated companies finish consolidating, focus on profitability, and divest assets.

Thomas disputed the views that "predatory" regulatory agencies make Russian investments risky and that costs in the country are high and well productivities low.

He also addressed worries about Russia's oil-transportation system.

"Transneft (the state-owned pipeline) is one of the most reliable systems in the world," Thomas said. He said Urals KNK pays about 80¢/bbl for transport of its crude to Russian refineries and $1.50/bbl to Central Europe.

He also rejected the idea that only huge companies working on megaprojects can make money in Russia, saying, "There's plenty to do without working on the big stuff."

His recommendations for small and medium-size companies interested in Russian projects:

-- Focus on profitability.

-- Use mostly Russian management and labor.

-- Question prevailing wisdom.

-- Keep direct operating control of assets within a clear ownership structure.

-- Be vertically integrated to the extent possible by using outside services "only for very specialized needs."

-- Remain "fiercely protective of your independence."

Richard Moncrief, chairman of Houston-based Moncrief Oil International Inc., focused on how the Russian industry has changed since the 1990s, when his company helped arrange financing for a Russian project.

At the time, Russian companies were mainly competing for assets. With ownership now settled, Russian companies have to protect and make money with what they own. That, Moncrief said, makes Russian companies "real participants in the international oil community" and joint ventures with them a "realistic avenue" for foreign firms to Russian investments.

"Russian companies are doing fine without PSAs," he said. "Can we not thrive with them in carefully selected projects?"

PSA need questioned
At the Houston summit, attended by the US secretaries of energy and commerce and the Russian ministers of energy and of economics and trade, large companies repeated their calls for a secure PSA framework (OGJ Online, Oct. 1, 2002).

They said they need stability, especially for the mammoth investments needed for Russia's frontier projects.

Mikhail Khodorkovsky, chairman and chief executive officer of Russian supergiant OAO Yukos, characterized their insistence of the need for PSAs as "old thinking."

By refusing to invest without the stability of a PSA framework, he said, international majors have missed opportunities, citing Priobskoye field, from which the former Amoco Corp. withdrew after it and Yukos couldn't agree on participation terms.

Khodorkovsky also said PSAs aggravate corruption because of the bureaucratic handling they necessitate. He said, "If US companies don't (pay bribes), their Russian partners do."

And he said political pressure for a stable PSA framework neutralizes efforts to stabilize the Russian tax regime overall, "including with respect to existing PSAs."

Khodorkovsky said foreign investors have overestimated Russia's country risk.

"Western investors are deluding themselves," he said. "Russia is a stable place."

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