A handful of upstream oil and gas joint ventures (JVs) with foreign partners has begun field operations in the Commonwealth of Independent States.
But continuing legal chaos in Russia, the C.I.S. republic with the most petroleum reserves and potential, is causing confusion among partners in active projects as well as among prospective investors.
Partners in JVs registered before last Jan. 1, several of which are producing oil, cried foul after Russian officials this year issued a series of edicts proposing taxes that could radically alter the economics of their projects.
Until Russian leaders resolve uncertainty about tax liabilities of the JVs and their employees, several foreign partners plan to delay investments beyond the level needed to meet existing commitments, officials say. In addition, some partners in active projects are postponing negotiations for new JV areas or expansions of work in existing JV areas.
Many officials of companies trying to win approval to develop Russian reserves expected Russia's law covering development of subsurface resources, adopted in February 1992 and taking effect in April, would help settle the turmoil by establishing a uniform procedure for granting exploration and production licenses.
But the Aug. 15 publication of underground resources regulations in an unofficial publication caused confusion about when Russia's Committee for Geology & Use of Underground Resources (Geolkom) was to begin implementing the new rules. Moreover, the subsurface resources law requires Russian officials to award licenses to develop natural resources through bidding tenders or auctions, throwing into doubt the status of pending joint ventures currently negotiating deals via other approaches.
Licensing rules for upstream ventures could change again later this year or early in 1993, when Russian leaders adopt the federation's long awaited oil and gas law.
Proposed changes have occurred so frequently and unpredictably that one adviser of foreign companies trying to set up deals in Russia said, "The legal environment is evolving sideways, as opposed to ever upward."
While Russia's new legal system has continued to evolve, several JVs involving U.S. independents have advanced field operations on joint venture acreage.
In western Siberia, the White Nights JV has three Russian drilling rigs operated by Russian crews running 24 hr/day and more than a dozen service rigs working over wells in West Varyegan and Tagrinsk fields.
White Nights has drilled about 100 wells since beginning operations in early 1991 and worked over several hundred wells. Altogether, remediation and drilling have netted White Nights about 8,000 b/d of incremental oil production. White Nights is owned 43% by Phibro Energy Inc., Greenwich, Conn., 7% by Anglo-Suisse Inc., Houston, and 50% by the Varyeganneftegaz (VNG) production association. White Nights is choosing candidates for a 10 well fracturing program this fall on JV acreage.
In Tatarstan, Tatex JV hopes by yearend to have another 14 vapor recovery units (VRUs) operating in Romashkino field. The new units are to arrive in Tatarstan about Oct. 20.
Tatex is a joint venture of Tatarstan's Tatneft Production Amalgamation and Texneft Inc., a unit of Global Natural Resources Inc., Houston.
Texneft Pres. Don Ellison said the new VRUs will increase to 22 the number of Tatex units operating in Romashkino, enabling Tatex to recover about 10,000 tons/month of previously lost hydrocarbons.
Texneft Vice Pres. John E. McFarlane said if all goes as planned, Global expects next year to start manufacturing VRUs in Tatarstan.
Benton Oil & Gas Co., Oxnard, Calif., has begun a 16 well development drilling program under its Geoilbent Ltd. JV with Russia's Purneftegasgeologia Industrial Association (PIA) and Purneftegas. Geoilbent, approved in December 1991, focuses on exploring, producing, and marketing hydrocarbons from the North Gubkinskoye field area of western Siberia (OGJ, Feb. 17, p. 38).
At yearend 1991, Benton had proved reserves of 8.1 million bbl of oil attributed to North Gubkinskoye field. The phase one program, designed to achieve oil production of 5,000-10,000 b/d, includes installation of production facilities and construction of a 25-30 mile pipeline. Benton has a commitment to fund about $7.5 million for Geoilbent in 1992. Benton has a 34% interest, and each Russian partner 33%.
CANADIANS IN SIBERIA
Canadian companies were among the first foreign companies to start JV operations in the former Soviet Union.
Gulf Canada Resources Ltd. launched a joint venture, KomiArcticoil, with British Gas plc, London, and Russian partner Komineft Production Association in 1991. The partners have outlined a $200 million (Canadian), 20,000 b/d initial phase of their project in a 276,000 sq m territory in the Komi area, 930 miles north of Moscow. Gulf reports production began from Upper Vosey field in late 1991 and has more than doubled to 10,000 b/d since December. Gulf gets a net 25% of production and exports its share for sale. The JV had completed work on 16 wells by the end of August-eight new wells and eight workovers. The partners hope to double production from the field to 20,000 b/d by early 1993. The Upper Vosey project has a work force of about 55 foreigners and 150 Russians.
Canadian Fracmaster Ltd., Calgary, which blazed the trail for Canadian joint ventures in Siberia, has picked up several major Canadian partners.
Canadian Fracmaster launched its first major joint venture in 1989 with the Royal Dutch/Shell Group and the former Soviet Ministry of Oil to conduct workovers in Siberian fields near Nefteyugansk (OGJ, Apr. 24, 1989, p. 22). Shell has a 25% interest, Fracmaster 25%, and the ministry's Russian successor 50% in the venture. Production target for the 20 year project is 100,000 b/d, up from a current level of more than 10,000 b/d.
Fracmaster joint ventures with PanCanadian Petroleum Ltd. and Norcen Energy Resources Ltd., both of Calgary, are at the production start-up stage. PanCanadian, the energy unit of Canadian Pacific Ltd., signed with Fracmaster in mid-1991 for a project in Samotlor field in the Tyumen region of Siberia. Samotlorneft Oil and Gas Production Division is the Russian partner. The JV calls for spending as much as $150 million (Canadian) in 5 years with Canadian partners spending $75 million. The tentative production target from well stimulation and workovers is 35,000 b/d.
PanCanadian Vice Pres. Helmut Rath said results are exceeding expectations. The first frac jobs were conducted in February, and the project is now in a second stage involving workovers, fishing jobs, and restoring wells with mechanical problems.
A JV involving Fracmaster, Norcen, and two Russian partners announced in March is under way. The two Canadian companies are teamed with Vakhneft Oil & Gas Production Division and Tomskneft Production Association for a development project in Vakh field in the Tomsk region of Siberia about 1,426 miles northeast of Moscow. The Vakh Fracmaster joint venture began well stimulation and workover programs in late July. Fracmaster and Norcen each have a 25% interest in the joint venture.
CONOCO NEARING START-UP
Several other Russian joint ventures with foreign partners have completed registration and are nearing start-up of field work.
Charles L. Bare, headquarters operations manager of Russian exploration and production for Conoco Inc., said Conoco's Polar Lights joint venture partners have commenced operations in the Ardalin complex of the Timan-Pechora basin with an eye to start-up in late 1994. Polar Light joint venture areas include Ardalin, Kolva, and Dyusushev fields in the Ardalin complex and a northern area including Khilchuyu, South Khilchuyu, Yareyusk, and Inzerei fields (OGJ, June 29, p. 30).
Polar Lights partners Conoco Timan-Pechora Ltd. and Arkhangelskgeologia (AAG) in June began shipping arctic grade pipe and stanchions to the city of Arkhangel from Malaysia. Work planned this year focuses on Ardalin field and includes constructing wellpads and laying a 37 mile, 40,000 b/d oil pipeline from Ardalin field to Komineft pipeline in Kharyaga field. Komineft pipeline is to transport Ardalin complex oil 154 km to Usinsk for delivery into a southbound trunkline for export to world markets. Initial Ardalin field work also will require drilling as many as 24 wells and installing a central processing facility.
A joint feasibility study of Polar Lights' northern fields will be completed by yearend. The JV's northern fields reserves are estimated at 1 billion bbl, based on analysis of delineation wells drilled in the area.
In addition to Polar Lights project, Conoco has completed feasibility studies on Shtockmanovskoye gas field north of the Arctic Circle in the Barents Sea and on areas surrounding Sugmut and Kharampour fields in western Siberia and has reviewed deals in Kazakhstan and Azerbaijan.
KAZAKH JOINT VENTURES
Chevron Overseas Petroleum Inc. (COPI) expects to begin JV operations early in 1993 on about 4,000 sq km in Tengiz and Korolev fields and several untested exploratory prospects northeast of the Caspian Sea in Kazakhstan.
Espy Price, vice-president of COPI's C.I.S. business unit, said the JV will become an operating reality after prospective partners wrap up an operating agreement, complete plans for an export pipeline, and work out details of crude oil exchange and long term export arrangements.
Chevron and Kazakhstan plan to set up a 50-50 venture to develop a combined Tengiz-Korolev resource estimated at 25 billion bbl of oil in place. During the 40 year life of the project, operator Chevron expects to receive an average 20% of project net revenues and Kazakhstan about 80%.
"Within 5 years of signing the agreement, we hope to get production to 250,000 b/d," Price said. "That level will be tied to completion of an export pipeline."
The project's program calls for a $1.5 billion investment in the first 3 years and $20 billion during the life of the project. Primary recovery is estimated at 6-9 billion bbl, with production peaking at about 700,000 b/d in 2010. Price said Chevron expects to build eight processing plants in two configurations to handle growing Tengiz and Korolev production. Currently, two processing trains of KTL-1 plant each is handling 65,000 b/d of throughput. Output from each train is averaging 60,000 b/d of oil, 6,500 b/d of liquefied petroleum gas, 84 Mcfd of dry gas, and 1,300 tons/day of sulfur. A third processing train under construction nearby is to begin operating in 1993. About half the plants the JV will build will be the same size as KTL-1 and cost about $500 million each. The rest will be about twice that size at a cost of about $1 billion each.
ECONOMIC SUCCESS
Like other C.I.S. JVs, to be economically successful, Tengiz and Korolev developers must earn hard currency by selling oil at near world market prices. Thus, the project's pipeline configuration is very important.
The port of Novorossiisk on the Black Sea is the favored export point of an existing pipeline grid in the area.
A 40 in. pipeline has been laid from Tengiz around the northern and northwestern tip of the Caspian Sea to within a few kilometers of Grozny on the Caspian's western shore near the Russian-Azerbaijan border. A 28 in. pipeline also is being used to transport petroleum products to Grozny and Baku through Tikhoretsk from the Black Sea. For the Tengiz project to achieve its oil export potential, the existing 40 in. line would have to be extended from its present terminus near Grozny about 460 miles to the Black Sea or partners would have to negotiate the use of existing pipelines. Partners would need 4-5 years to lay the 460 mile, 40 in. extension at a cost of about $700 million. In addition, the 28 in. line would have to be reversed for all Tengiz and Korolev production to reach the Black Sea.
"In the meantime, the JV agreement calls for crude produced at Tengiz to be exchanged for a Urals blend delivered at Novorossiisk," Price said.
The governments of Oman and Kazakhstan in June signed an agreement to form a group to build and operate a separate oil export pipeline. That group since has been joined by Russia and Azerbaijan, and Price said Chevron has signed a memorandum of understanding indicating its interest to join the consortium.
ELF IN KAZAKHSTAN
Elf Neftegaz, a unit of Ste. Nationale Elf Aquitaine, began preparations for a seismic survey of acreage including Kazakhstan's Volga and Temir fields. An Elf-Kazakh exploration-production sharing agreement (EPSA) on the acreage took effect in July.
Elf and Kazakh officials on Feb. 18, 1992, signed an EPSA application for the Volga and Temir acreage. Elf also has an EPSA pending on Volgograd/Saratov acreage in Russia. The two permits together cover about 37,000 sq km, all in the pre-Caspian basin.
Elf, as operator of the Kazakh and Russian EPSAs, has laid out tentative 5 year work programs covering both permit areas. However, the company expects no results from its exploration programs before late 1993 in Kazakhstan and mid-1994 in Russia. Once both projects are up and running, Elf expects exploration spending of $200300 million on the two EPSAS, more than a fifth of its hydrocarbon division's current exploration budget.
STATOIL-BP COMBINE
A combine of Den norske stats oljeselskap AS and British Petroleum Co. plc is pushing development of Chirag oil field in the southern Caspian Sea off Azerbaijan.
A heads of agreement has been signed with the government of Azerbaijan to carry out a feasibility study on Chirag, which has estimated reserves of 1 billion bbl. The study will take 2 years, at which point the decision on stakes in the venture will be made. It is likely to be a 50-50 split between the combine and the Azeri government, with Statoil taking one third and BP the remainder of the combine's share.
Statoil will operate the project and all other Statoil-BP combine projects in Azerbaijan. Statoil sees Chirag as a test case for combine ventures in the C.I.S. Because the field is offshore, the company believes it can draw on the expertise it developed off Norway.
BP operates in the combine's other two C.I.S. target areas, Russia and Kazakhstan. BP-Statoil also has a 9.9% stake in Azeri field off Azerbaijan, where operator Amoco Corp. plans field development studies and is negotiating commercial arrangements. Azeribaijan holds a 50% interest in the field, with the other half split among western companies.
OTHER C.I.S. JVS
Among companies marking progress in upstream C.I.S. joint ventures:
- The MMM Group-Marathon Oil Co., Mitsui & Co., and McDermott International Inc. -conducting a feasibility study of developing Piltun-Astokhskoye and Lunskoye oil and gas fields off Russia's Sakhalin Island recently expanded to include units of Royal Dutch/Shell Group (OGJ, Oct. 5, p. 29) and Mitsubishi Corp. (OGJ, Oct. 12, Newsletter).
- Panoco Inc., Nyon, Switzerland, and Tatneneft Oil & Gas Association registered the Blue Kama joint venture in August and held first organizational meetings early last month. Blue Kama will develop eight oil fields in a 78,461 acre area by drilling about 2,770 wells in a 14 year period (OGJ, Sept. 23, 1991, p. 69). Plans also call for working over 31 wells the first year.
- Petro-Hunt, Dallas, is waiting on notification of exemption from export duties for its Khantymansiysknefte-Hunt JV (OGJ, Mar. 23, p. 28), which Russia has approved.
- Anderman/Smith Operating Co., Denver, and Chernogorneft Oil & Gas Enterprise may be the recipient of the first loan to Russia from the U.S. Export-Import Bank. Moscow's Itar-Tass reported the first credit of $44 million is tentatively allotted the combine to help fund its $250 million project to develop Chernogorskoye oil field in Tyumen by drilling more than 100 wells during the next 5 years (OGJ, Feb. 25, 1991, p. 32).
- British Gas plc and Agip SpA have signed a protocol and are negotiating development of Karachaganak oil and gas/condensate field in Northwest Kazakhstan, where they expect to invest $3 billion each the next 10 years and $10 billion in the 40 year life of the field (OGJ, Sept. 28, p. 30).
- France's Total is waiting on final approval for its production sharing agreement (PSA) with Komineft to develop two of seven producing zones in Khariaga field in the Timan-Pechora basin, Nenets Autonomous Region, where reserves are pegged at 250 million bbl (OGJ, June 1, p. 33). Development is to begin in about 2 years.
- Total began exports in July of the first oil produced by its Tatolpetro JV from Romashkino field. Incremental production of about 400 b/d is expected to reach 12,000 b/d soon. Tatolpetro is a JV of Total and the Tatarstan regional oil company Tatneft.
- Equity Oil Co., Salt Lake City, and Coastline Exploration Inc., Houston, expect early next month to sign a PSA with Eniseygeofizika and Eniseyneftegasgeologiya covering1. 1 million acres in the Krasnoyarsk area of Russia (OGJ, May 25, p. 20).
- Germany's Deminex is waiting on ratification of a JV agreement with the former Soviet Ministry of Oil & Gas Industry covering exploration around Volgograd, for which a heads of agreement was signed in 1990 (OGJ, June 18, 1990, p. 20).
- Cana-Kaz Global Oils Inc., a group of five Canadian firms in a JV involving Uzen field in Kazakhstan, is to begin a workover program this fall on 160 wells and expects to work over at least 1,200 wells.
- Hurricane Hydrocarbons Ltd., Calgary, joined Wega D. Geophysical Ltd. for a JV in Kazakhstan with a production target of 30,000 b/d. Wega D, Calgary, was one of the first companies to establish a joint venture in the C.I.S. in a mid-1991 deal with officials of Kazakhstan and earlier technology transfer agreements with the Soviets.
EXPORT TAX EXEMPTIONS
The economics of active Russian JVs with foreign partners became doubtful early this year when Russian officials announced they would begin collecting a tariff on oil and gas exports.
JV operators, claiming the export tax would harm project economics by wiping out future profits, called on Russian leaders to honor the agreements under which the JVs were created. After months of wrangling, Russian officials in June began offering assurances that Russian ministers would grant export tax exemptions to any enterprise registered before Jan. 1, 1992, or to any JV registered later that could prove the tax would make it uneconomic.
Polar Lights, White Nights, and Tatex joint ventures were assured they qualified for the exemption. Without the exemption, the Polar Lights project would be uneconomic, Conoco officials warned.
But by early this month, the Geolkom committee formed to review JV documents and formally award export tax exemptions had failed to take action on any applications,
Based on earlier assurances, White Nights finally exported a crude oil shipment of more than 1 million bbl, mostly through Novorossiisk-its first lifting since Russia disclosed plans to levy the tariff. To export the shipment, White Nights had to put up a bank guarantee equal to the possible value of the export tax.
"To get our bank guarantee back, we need to get our exemption formally approved before the middle of November," said Gil Labbe, president of Anglo-Suisse. "That's a severe annoyance, because we have 60 days to resolve this problem or the government could go ahead and try to cash that guarantee, which we would strongly resist."
Continuing regulatory uncertainty also has prompted Anglo-Suisse to delay conclusion of agreements with VNG on Golden Mammoth and Northern Lights JVs covering other prospective oil and gas areas in western Siberia.
"Without the regulatory uncertainty, we could close the Golden Mammoth deal inside of 2 months," Labbe said.
Texneft officials said they decided to send more VRUs to Tatarstan to meet their commitments to Tatex. But they blamed delayed receipt of formal export tax exemptions for delaying Tatex plans to expand vapor recovery operations into fields near Romashkino.
"If the export tax stays in place, we'll have to revisit the projects to decide whether we can economically do them," Ellison said.
Labbe said the Russian government, by appearing to allow haphazard progress of federation laws and regulations, is its own worst enemy.
"We can't and we won't go ahead with investments-nor will our partners-until all these kinds of things are resolved," he said.
Ellison and McFarlane said it is reasonable for Geolkom's committee to want to review JV documents to ensure all laws are interpreted properly.
"If the committee finds something is not right, I think the government probably will give us a chance to correct it," Ellison said. "But I never consider what happens over there as a routine situation."
Since Russia's legal and political turmoil is likely to continue, he said, "JVs will have to build extensive efficiencies into their operations to have the ability to adjust as the situation changes."
Benton in August received a copy of Russian Federation Regulation No. 1375, under which oil and gas JVs that have foreign participation of at least 30% and were registered before last Jan. 1, are exempt from paying duties on oil and gas exports until payout.
Based on an export tax of about $5/ bbl and an anticipated initial production volume of 5,000-10,000 b/d in 1993 from first phase development, Geoilbent projected its export tax payments would have been $800,000-1.5 million/month. Peak production rates of 60,000-75,000 b/d would have spawned export tax payments of more than $10 million/month.
OBTAINING A LICENSE
John F. Sheedy, an attorney in the C.I.S. practice of Coudert Bros. law firm, New York, said obtaining a license to develop oil and gas is the biggest issue created by Russia's subsurface resources law for companies yet to register a Russian JV.
A variation of that issue is whether deals registered since the first of the year are valid if negotiated through means other than tenders or auctions.
"Most deals so far have been made through one on one negotiation," Sheedy said. "That is expressly deemed invalid under the law on subsurface resources."
Sheedy said Geolkom head V.P. Orlov, in an undated letter made public early in September, ordered Geolkom territorial agencies to start implementing subsurface resources regulations published in August, adhering only to the new regulations and not granting mineral rights as allowed by older rules. Orlov's letter specified that a local committee could impose additional conditions if more than one contender satisfies tender requirements, even suggesting the size of an upfront payment could be used to select the winner of an upstream license. But there was nothing in the letter saying local officials could override the requirement of going through an auction or tender for companies that either acquired or still were negotiating for upstream development rights after adoption of the subsurface law, Sheedy said. If the subsurface law was the last word, and companies were to abide fully by its requirements, it could signal the time has ended for direct negotiations of upstream oil and gas ventures. But Sheedy said that is not the case.
"First, most companies simply are going ahead with negotiations," he said. "Laws change so rapidly in this country that people aren't going to throw away millions of dollars of accrued fees, time, and studies just because of a law that might change next month."
As long as Russia's legal system is evolving, uncertainty will reign.
"Many times in Russian law, you can read up to a certain point, and then there's an abyss and you just don't know what's going to happen next," Sheedy said. "It's possible the law on oil and gas, when passed, could radically change the licensing system."
RUSSIAN OIL AND GAS LAW
George Hardy, who for more than a year headed the University of Houston's Russian oil and gas law project, said Russian lawmakers likely will adopt the new oil and gas law sometime early next year, probably with more flexible upstream licensing guidelines.
Hardy said the issue of allowing upstream development rights through direct negotiations was volatile during debate over the subsurface resources law. The petroleum law will propose a licensing system that is more familiar to western companies.
"Whether members of Russia's Supreme Soviet are willing to reopen that question and reconsider changing it is difficult to predict," he said. "But the overall petroleum legislation effort, either in the oil and gas law itself or as an amendment to the subsurface law, will seek to permit the award of oil and gas licenses through direct negotiations. It will vary enough to make the system more comfortable for foreign investors."
A meeting has been scheduled in Houston in early November in which Russian lawmakers will present their draft of the proposed oil and gas law to industry. Then, about mid-November, the Russian delegation will carry those reactions to the Russian Supreme Soviet.
"They could slip a little bit, but they're definitely going to present something pretty quickly, at least in the area of licensing," Hardy said.
He said western oil and gas companies will continue to be unwilling to go to Russia in significant numbers if they have to ask for special favors to get tax concessions, negotiate separate deals, and then be at the mercy of the Russian bureaucracy.
Only very small enterprises or large multinational combines of elephant hunters-"one group being willing to take inordinant risk, the other being able to insure themselves against risk"-might succeed under those circumstances.
So whatever else is dealt with in the oil and gas law, Hardy hopes proposals will be forthcoming about taxation.
"Tax uncertainty is the biggest problem they've got," he said. "If they don't straighten that out, nothing else really matters."
Copyright 1992 Oil & Gas Journal. All Rights Reserved.