SOVIET UNION INVESTMENT OUTLOOK IMPROVES IN WAKE OF FAILED COUP?

The oil and gas industry weathered without incident last week's aborted coup in the Soviet Union.

Most prospective and current petroleum joint venturers operating in the U.S.S.R. reported little disruption to their operations or plans in the wake of a failed ouster of President Mikhail Gorbachev by a committee of top Soviet officials.

In fact, some industry officials reported a calm status quo even at the height of the crisis last week.

At presstime last week, it was still too early to form a clear consensus on how the week's events in the U.S.S.R. will affect prospects for foreign investment and ventures in that country. But reports of the coup's failure elicited generally positive views of the outlook for investment in the U.S.S.R. and a reaffirmation of the stance that the U.S.S.R. still desperately needs that investment.

COUP FALLOUT

How the defeat of Soviet hardliners will affect progress of foreign joint ventures is difficult to gauge.

Some industry officials speculated the outcome would be an acceleration of the processes toward economic reform and decentralization of power. Analysts last week speculated that one of the triggers for the Aug. 19 coup was Gorbachev's imminent signing of the all-union treaty with the Soviet republics (OGJ, Aug. 5, p. 14). Gorbachev returned to power Aug. 21.

Placing control of resources more directly in the hands of the republics, the thinking goes, would smooth the way for joint ventures in Soviet oil and gas with foreign companies. That in turn would help resuscitate the ailing Soviet oil industry with an infusion of hard currency and technology and ultimately restore plummeting oil production and exports.

Some company officials worry, however, that even a failed coup raises concerns about future Soviet stability and the related threat to foreign investment there.

But other Soviet watchers point out that no matter what the political situation in the U.S.S.R. is, the Soviets desperately need foreign investment and technology to turn around their oil industry.

Whether a marked turnaround will occur soon enough to avoid a jolt in world oil markets later this year isn't clear.

Still more troubling reports are emanating from Moscow on the reeling Soviet oil industry and bleak prospects for oil exports in the second half (OGJ, Aug. 5, p. 16).

MARKET EFFECTS

European oil market sources said Soviet exports of crude and products continued to flow throughout the days of the coup.

Much of the oil is shipped through the port of Ventspils, Latvia. Initially there were fears in the oil market that a crackdown on the Latvian independence movement by Communist hardliners might disrupt exports. However, the flow of oil supplies remained uninterrupted during the crisis.

But the prospect of an apparent Soviet oil supply disruption in the event of civil war jumped oil prices more than $1 the first trading day after news reports of Gorbachev's ouster.

On the New York Mercantile Exchange, the price of light sweet crude futures for September delivery rose to $22.47/bbl at closing Aug. 19 vs. $21.30/bbl Aug. 16. Nymex crude dropped to $21.55/bbl at closing Aug. 21 when Gorbachev returned to power.

U.S. COMPANY RESPONSES

Amoco Corp., in joint ventures to develop Azeri field in the Caspian Sea and projects in western Siberia, said Aug. 20, "We will not speculate on the outlook for Amoco's continued involvement in the U.S.S.R. While it is our intention to pursue our interests in the U.S.S.R., it is far too early to estimate how today's events may have changed business conditions there."

Most U.S. companies Oil & Gas Journal contacted said essentially the same thing.

Chevron Corp., whose negotiations with Soviet officials to add development of supergiant Tengiz oil field to its Soviet venture are on hold pending the all-union treaty signing, said it had no personnel in the Soviet Union at the time of the coup.

Mobil Corp. confirmed that its new production ventures group has bid for exploration and development rights off Sakhalin Island in the Soviet Far East. The bid package covers Piltun-Astohskoye oil field and Lunskoye gas field.

Before the coup Sakhalin authorities said the bidding results would be announced Oct. 5.

Bids also have been submitted by BHP Petroleum Pty. Ltd.-Amoco-Hyundai, Royal Dutch/Shell Group, Exxon Corp.-C. Itoh, McDermott Inc.-Marathon Oil Co.-Mitsui, Ralph M. Parsons and a South Korean group, Sodeco of Japan, and Idemitsu Oil Development Co.

A new slant on the bidding came from Japan's Ministry of International Trade and Industry. The Japanese newspaper Nikkei Weekly quoted MITI officials as saying any combine not including a major Japanese trading house will be in no position to market oil or gas to Japanese utilities, the prime customers for Sakhalin production.

EUROPEAN COMPANIES

Royal Dutch/Shell at the height of the crisis said its office in Moscow was functioning normally. Shell was the first foreign oil company to open an office in Moscow in the early 1980s. It has a staff of nine locals and two expatriates.

Shell also holds a 24.5% interest in the Uganskfracmaster operation in partnership with Canadian Fracmaster Ltd., Calgary, 24.5% and Uganskneftegas 51%.

The joint venture has an office in Moscow and an operating base in Nafteugansk in the Tyumen region of western Siberia, where it is undertaking a well stimulation program to boost oil production. The joint venture, with a staff of 275, was working normally last week. About 90% of the staff are Soviets, the remainder Canadian.

British Petroleum Co. plc has a Moscow staff of 20, including dependents. The office functioned normally, although contingency plans were made to fly dependents back to the U.K.

Norsk Hydro AS, Oslo, operator for a group that hopes to develop the 88.3 tcf Shtokmanovskoye gas field in the Soviet Barents Sea, said it still plans to proceed with an important production test of a new well early next month.

The well was drilled by the Soviets this summer with the Victor Muralenko drillship. The Norsk Hydro operation will be the first high rate production test of the Shtokmanovskoye reservoir using advanced western equipment.

Norsk Hydro, operating on behalf of Conoco Inc. and three Finnish companies, currently is loading Schlumberger and Halliburton test equipment onto a supply boat in Stavanger. The original plan called for the boat to proceed to the northern Norwegian port of Kirkenes, close to the Soviet border, and then to Murmansk for customs clearance.

There was an option to hold the boat and the four Norsk Hydro personnel and 10 contractor employees in Kirkenes if there were any problems on the Soviet side. The field is in 984 ft of water about 375 miles from Murmansk.

Currently, said Norsk Hydro, plans are for the test program to proceed on schedule, but as a result of the coup attempt there were doubts about the exact timing.

Some industrial unrest in Murmansk as a result of the call for a general strike was reported to Norsk Hydro. There were also demonstrations in favor of Russian Republic President Boris Yeltsin.

Ramco Alnas, a joint venture of the Aberdeen service company Ramco and the Soviets to manufacture downhole pumps in the Soviet Union for sale in western markets, remained unaffected by the aborted coup.

Messages from the Alnas manufacturing plant to Aberdeen said conditions in the area were normal. Fabrication of the second shipment of pumps for export was proceeding on schedule. The first shipment left the Soviet Union earlier and is in the Ramco Alnas marketing system.

CANADIAN COMPANIES

Canadian companies involved in joint venture deals were monitoring developments in the Soviet Union Aug. 20 and establishing contact with personnel there.

Gulf Canada Resources Ltd. said it is too early to tell whether last week's developments in the U.S.S.R. will affect its plans.

Gulf and British Gas plc each have a 25% interest with a Soviet partner, Komineft, in development of Voyez oil field, 932 miles northeast of Moscow. Gulf is scheduled to invest $50 million in initial development.

Gulf's Ash Bhafin called the situation "extremely fluid" early last week. Bhafin said he would be surprised if the Gulf project did not go ahead as planned, but political developments could cause delays in obtaining required approvals.

"No matter who is in charge, the Soviets still need western technology to develop their reserves," Bhafin said.

Ten Gulf employees assigned to the joint venture were en route to Moscow when the coup attempt was announced. They were in Finland at presstime last week.

Partec Lavalin, Calgary, said 30 employees in the Soviet Union were contacted, and the company was monitoring the situation.

Canadian Fracmaster was in contact with its 13 employees in western Siberia last week. They reported the situation as business as usual. Canadian Fracmaster has been involved in production stimulation operations in western Siberia fields for several years.

Wega-D Geophysical Ltd., Calgary, involved in several joint ventures, said its Moscow staff consists of Soviet citizens. Wega-D Pres. Werner Wenzel said his company was in indirect contact with the Moscow office, and operations there were normal.

Wenzel said the changes in the Soviet Union could make it easier to do business if they resolve jurisdiction problems between the republics and the central government over resource ownership. He said a new government will face the same development problems and will have to make strategic alliances with western economies.

SEISMIC COMPANIES

Companies offering seismic data acquisition and processing in the Soviet Union were keeping a close eye on oil company reactions. Most oil companies took wait and see attitudes, seismic officials said.

"They have so much invested there, and our plans depend on whether they stay the path or get skittish and pull out," one seismic company executive explained.

An official of Landmark Graphics Inc., Houston, said if large numbers of western oil companies pull out of the Soviet Union as a result of increasing social and political turmoil, the Soviet oil industry will have a difficult time coping with the lack of technological and financial resources.

"That's going to affect oil markets worldwide," said Jacek Gawron, Landmark director of international operations. "If the Soviet oil industry can't maintain its export capability, countries like Venezuela and Mexico will become increasingly important in taking up the slack."

Gawron said he also is worried Soviet turmoil might hamper transfer of oil industry exploration technology to nations such as Poland and Czechoslovakia.

As the political situation deteriorated in the Soviet Union, a delegation from the Soviet Ministry of Geology's Yakutskgeophysika received a warm reception from western oil companies interested in viewing a large package of geophysical and geological data about Yakut Autonomous Sovereign Socialist Republic. The data were presented by Safairg, a joint venture of Yakut A.S.S.R. and Fairfield Industries Inc., Houston.

INDUSTRY BOON?

Edward Gendelman, president of Wavetech Geophysical Inc., Denver, contends the outcome of the Soviet coup attempt will prove a boon to foreign companies pursuing business deals on a purely competitive footing in the U.S.S.R.

"These developments are extremely positive not only for oil but business generally," he said. "They have maintained the constitutional government and in one shot took care of key hardliners. Reform will move much faster now."

Gendelman contends the coup's failure demonstrates to foreign companies that change in the Soviet Union is irreversible. He expects more reform oriented people to assume key positions. He also expects a closer relationship between Gorbachev and Yeltsin.

Wavetech is in a joint venture with the Ministry of Geology's Vnigni to provide geophysical and geological data packages covering areas in the Turkmen republic that will be offered in the first competitive bidding for oil and gas acreage in the Soviet Union. The first such sale, covering acreage in the Amu-Daria area, is to proceed as scheduled Dec. 3, said Gendelman, with announcement of winners Dec. 5.

Field operations are expected to start shortly thereafter, because bids will be tendered based on set contract terms.

Wavetech also is working on a preliminary bidding round for the Timan-Pechora area in the Komi republic.

Gendelman contends political support for competitive leasing in the Soviet Union is growing in light of faltering individual negotiations.

Many Soviet officials are politically afraid to sign on one to one negotiations because they fear reprisal if joint ventures don't turn out to be a good deal for the Soviets, he said. In a competitive situation, that is no problem.

WHITE NIGHTS

Plans of two joint ventures in western Siberia involving Anglo-Suisse LP, Houston, appeared unchanged as a result of Soviet political chaos.

At the same time political upheaval was escalating in the U.S.S.R., White Nights, the first U.S.-Soviet upstream oil and gas joint venture, was spudding its first well in western Siberia.

Partners Anglo-Suisse and Varyeganneftegaz (VNG), the western Siberian oil and gas production association, said the White Nights joint venture spudded their 26-1 Vera vertical well Aug. 18 in West Varyegan seeking Lower Cretaceous-Upper Jurassic pay above 9,000 ft. It is the first well drilled in the area with western equipment.

Gil Labbe, president of Anglo-Suisse, said events in Moscow did not affect White Nights operations based in the city of Radujny.

Earlier, White Nights delivered its first "thousands of tons" of crude, reported Moscow newspaper Izvestia, which did not disclose the recipient.

White Nights began producing oil from reworked wells in the joint venture area early this year. Earlier this summer, the joint venture announced it was preparing to export some of that production (OGJ, June 24, p. 27).

The venture is developing Tagrin and West Varyegan fields in Tyumen province.

Anglo-Suisse has been running two workover rigs in western Siberia. A 2,000 hp Parker Drilling Co. rig is expected to start work this month. Plans call for spudding the venture's first horizontal well in the fourth quarter.

Golden Mammoth, a proposed joint venture of Anglo-Suisse Production (Cyprus) Ltd. and VNG, plans to drill 500 wells in four other western Siberian fields (OGJ, July 15, p. 34).

Labbe said the Soviet turmoil will not affect White Nights' plans to move more drilling equipment and materials into western Siberia.

White Nights plans eventually to drill several hundred horizontal wells in the joint venture area. The second or third location in West Varyegan will be the venture's first horizontal well.

"We always have kept in the back of our minds the idea that a backlash was possible by right wing Soviet leaders," Labbe said. "We had hoped it wouldn't happen, that the transition would be smooth.

"But historically, around the world, political transitions are rarely smooth and usually are accompanied by a certain amount of upheaval. I guess what we're seeing here follows patterns of other countries."

AILING OIL INDUSTRY

The Soviet Union's petroleum industry, ailing in all sectors before last week's failed coup, continues to face an accelerating decline without speedy reforms.

Shortly before Gorbachev's brief ouster, the forecasting branch of the U.S.S.R.'s Academy of Sciences predicted a huge gap between Soviet oil production and its needs at least through 1992.

It said without reforms, the nation's crude and condensate production probably will continue to fall next year while "fixed domestic requirements" and the volume of exports necessary to earn enough foreign currency to finance badly needed imports will continue to rise.

Prior to the coup, the U.S.S.R. Cabinet of Ministers under Gorbachev's direction announced emergency changes in petroleum industry financing designed to pump another 15 billion rubles into the oil and gas sectors. These reforms could enable the U.S.S.R.'s virtually bankrupt petroleum enterprises to retain more of their revenues to buy goods and equipment as well as receive additional central bank loans (OGJ, Aug. 12, p. 33).

While the emergency financial measures proposed by the Cabinet of Ministers might pull the Soviet petroleum industry back from the brink of disaster, they also entail serious risk. During the near term, at least, they could spur inflation, already climbing at a rate of more than 100%/year, and further hike Moscow's record budget deficit.

The coup's leaders indicated they favored a freeze of wages and prices. They had expressed skepticism regarding advantages of a market economy and accused foreign firms of attempting to steal the U.S.S.R.'s "natural riches," especially petroleum.

Under Gorbachev, the central government tried for more than 2 years to reduce capital outlays for basic industrial sectors, including fuels, while emphasizing expansion of food and consumer goods production. This contributed greatly to the unprecedented plunge in Soviet oil production since 1988 and to the smallest growth in natural gas flow since the end of World War 11.

Capital spending in the U.S.S.R.'s oil producing industry, which jumped 1213%/year during 1985-87, rose less than 5% in 1988 and only 1.3% in 1989. It is estimated 1990 investment in the oil producing industry was about 14.8 billion rubles, down from 15.5 billion rubles in 1989 and 15.3 billion rubles in 1988.

According to Izvestia, the Academy of Sciences' forecast shows crude/condensate production next year could fall to as low as 9.8 million b/d vs. a national requirement, including exports to maintain a required minimum infusion of hard currency, of as much as 14.1 million b/d.

Soviet oil production peaked at close to 12.84 million b/d in mid-1988 and has dropped sharply since then (OGJ, Aug. 5, p. 16). The academy projects second half average production at 10.2-10.4 million b/d.

YELTSIN OFFERS CONCESSIONS

Meanwhile, Yeltsin, who opposed Gorbachev's ouster, promised just a week before the coup major concessions to western Siberian oil workers to encourage greater production and prevent strikes. An independent Soviet news agency said signing the union treaty would confer to Russia, which produces about 90% of the U.S.S.R.'s petroleum, control of oil and gas produced from its territory.

The report said prices paid to producing associations for crude would triple, and limits on oil workers' wages would be lifted. District and local oil enterprises would be allowed to sell 10% of their production to Soviet customers outside the Russian republic or to foreign buyers, with the free market quota increasing to 30% in 1992.

Yeltsin rejected demands by western Siberian petroleum producing associations that 50% of their production be sold on the free market, according to the news agency. He was quoted as saying that granting this request would be equivalent to highway robbery.

"The government has robbed you in the past, and now you want to rob the government," he told western Siberian oil workers. "Both robberies must be prevented."

Immediately after the news agency's version of Yeltsin's speech appeared in the Soviet press, it was refuted in part by the official government newspaper Izvestia. The Moscow daily denied the price paid to producers for Russian crude would leap to 280 rubles/ton from less than 100 rubles/ton.

Izvestia confirmed Russian producing associations would receive substantially higher-but not tripled-prices for their crude. It quoted Russian Premier Ivan Silayev as saying consultations had started between the Russian and other Soviet republics regarding a transition to world prices in sales of raw materials, including oil.

Silayev said it was too early to announce a specific new price for Russian crude. He noted, however, that the wholesale price for oil on Soviet commodity exchanges had risen to 500-800 rubles/ton vs. Russia's official average wholesale price of 60-70 rubles/ton.

Izvestia conceded Moscow has for many decades paid extremely low prices to crude producers and kept almost all of the profits from oil exports. Recent cuts were made not only in funds to maintain oil fields but also money to repair disintegrating pipelines and to provide workers with decent living conditions.

Food supplies and goods and services for petroleum industry workers have averaged only 60-80% of requirements. Oil and gas industry enterprises were forced to resort increasingly to barter to meet urgent needs, were subjected to "ruthless exploitation," suffered growing deficits, and finally were compelled to threaten strikes unless Moscow provided relief, Izvestia said.

WORSENING SITUATION

The situation in Soviet petroleum production continues to worsen rapidly.

Only last month the number of productive wells idle in the U.S.S.R. for lack of equipment or unreliability of existing equipment was estimated at 20,000 (OGJ, July 29, p. 38). That figure was recently increased to 23,000.

Previously, Soviet officials had indicated the U.S.S.R. could struggle along with annual crude/condensate flow of 12 million b/d or even somewhat less. Now, according to the academy's research, the nation needs 11.2-11.4 million b/d for "fixed domestic requirements" in 1992 and at least another 2.7 million b/d for export to earn enough foreign exchange to boost total imports to the 1988-89 level.

According to the U.S. Central Intelligence Agency, the U.S.S.R.'s apparent domestic oil consumption peaked at 9.1 million b/d in 1982 and has fallen substantially from 8.9 million b/d in 1985-87.

Salomon Bros. now estimates Soviet domestic oil consumption will drop to 8 million b/d in 1991 from 8.4 million b/d in 1990 . A further decline to 7.8 million b/d in 1992 is predicted as the U.S.S.R.'s economy continues to weaken.

PROBLEMS STILL UNSOLVED

George Reese, Ernst & Young country managing partner in Moscow, believes the intended signing of the all-union treaty was the main thing that triggered the state of emergency, in addition to the faltering economy.

But regardless of who is in charge of the central government, Reese said, the Soviet economy will need large foreign investments to avoid continuing deterioration and deepening paralysis.

"The economy is in shambles, " Reese said. "Reverting back to a closed system is not going to solve any problems. Soviet leaders will have to find a way to get western investment in there. Certainly, the oil industry still will need foreign investment and technology to stop its production decline."

Reese said he thinks it unlikely lingering Communist social or political ideals will cause Soviet authorities to discourage western investment or other participation in Soviet business ventures.

"I don't see how they can turn inward and do what needs to be done," he said.

From a purely economic view, Reese said, foreign companies will continue spending in the Soviet Union because investment there will still be attractive. However, intangibles also can be expected to affect foreign investment and development decisions.

For one, he said, Soviet leaders must convince foreign investors and governments that human rights have high priority.

That would have proven difficult in view of early reports of measures the coup leadership took against the Soviet press and independence movements of the Baltic countries.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.