MORE UPSTREAM VENTURES ADVANCE IN FORMER U.S.S.R.

The former Soviet Union continues to attract new foreign players to the oil and gas industry despite lack of a clear legal and regulatory framework.

Here's a roundup of recent developments:

Enron Corp. and R.A.O. Gazprom teamed up to develop new markets for Russian gas in Europe's growing power generation sector.
Overseas Private Investment Corp. (OPIC) agreed to provide backing for Texaco International Operations Inc.'s Sutormin oil field project in western Siberia.
Two U.K. operators signed separate agreements to study development of off shore fields.
European Bank for Reconstruction and Development (EBRD) funded the first $4.3 million in development financing for the Chernogorskoye oil field project in western Siberia.
The Ukrainian government is marking progress in its move toward a Black Sea licensing round.
Ukraine registered a joint venture to develop and redevelop fields on the Kerch Peninsula.
Uralmash signed a joint venture agreement with Caterpillar Inc. and National Oilwell Inc. to design and build heavy drilling rigs.
The U.S. Trade and Development Agency granted $173,000 to Tatarstan to help boost oil output in the area.
A Colorado firm will join with Russia's Geophysical Research Centre to offer well log interpretation and geophysical services.

Despite the flurry of joint venture activity, Thomas M. Hamilton, president of Pennzoil Exploration & Production Co., pointed out that current investment levels fall far short of what is needed. He said if Russia is to attract enough foreign capital to halt or reverse its declining oil production, 70 years of mutual misinformation and mistrust must be set aside.

Meantime, Moscow newspaper Delovoi Mir (Business World) reported the Blue Kama joint venture of Swiss firm Panoco Inc. and Tatarstan's state oil company Tatneft was to be liquidated.

A. Akopdzhanov, Tatneft's deputy general director, said Panoco does not have enough money to fulfill its obligations to Blue Kama. Panoco had sought a delay of a month or two to raise the money it owed the venture.

But Tatneft's management asked the Russian and Tatar joint venture registration agencies to liquidate Blue Kama, established in June 1992 to develop seven small oil fields in the Kama River area between the Tatar cities of Almetyevsk and Nurlat (OGJ, Feb. 1, p. 16). Cost of the project was originally estimated at more than $1 billion.

ENRON-GAZPROM DETAILS

In a nonexclusive pact, Enron and Gazprom agreed, subject to preexisting commitments, to identify, evaluate, and/or develop European power generation projects that could be fueled by Russian gas.

Cooperation by Gazprom and Enron is designed to ease delivery of Russian gas through Gazprom trading houses and third parties to power projects.

The framework agreement calls for Enron to contribute its experience in identifying, evaluating, developing, contracting, financing, and negotiating gas sales and power purchase contracts for independent power projects. Enron is expected to take the lead in raising project financing.

Gazprom is to contribute its expertise in negotiating gas contracts in Europe and supply gas for projects identified for joint participation.

The agreement does not require either company to invest in the other but to jointly invest in new power projects and supporting infrastructure, including gas pipeline and storage construction.

Enron Chief Executive Officer Kenneth L. Lay noted lining up long term gas supplies at competitive prices is a key ingredient in successful power projects.

"Because of this relationship with Gazprom, we will go into a project knowing we have the gas supply and a partner who will participate by not only providing gas supply but will participate in the power plant projects, themselves," Lay said.

"It greatly strengthens our position in developing large power plants, particularly in Europe, and at the same time creates new, high quality markets for more of Gazprom's gas."

Gazprom Chairman Rem I. Vyakhirev said tapping largely undeveloped gas fired power generation markets in continental Europe will become increasingly important for both companies.

Officials said oil and gas reserves in eastern Russia could be developed effectively by foreign-Russian joint ventures, possibly jointly by Enron and Gazprom.

U.S. Energy Secretary O'Leary said the Enron-Gazprom agreement shows again there are opportunities for Russian and U.S. companies to form joint venture deals without a lot of aid or assistance from either government. But both nations need to create legal infrastructures to support such deals.

TEXACO PROJECT

Texaco's agreements with OPIC protect Texaco's investment in the Sutormin project by structuring a combination of political risk insurance and guaranteed loans, providing added support for its contract in Russia to restore hydrocarbon production.

Texaco in March signed an agreement with the Sutorminskneft oil and gas production association to restore production from idle wells in the Sutormin field, about 40% of which were idle (OGJ, Mar. 8, p. 22).

Texaco, which began production from the field last June, has restored production from nine idle oil wells, yielding more than 4,000 b/d.

First phase of the project, with an initial term of 2 years, is to generate net U.S. balance of payments of about $76.19 million and procurement of about $71.6 million in goods and services from the U.S., Texaco said.

OFFSHORE STUDIES

J.P. Kenny Exploration & Production Ltd. (JPK), London, expects to produce the first offshore oil in the Russian Federation, in announcing official approval to develop Inchke-More field in the Caspian Sea, off Dagestan.

Oil flow is slated for second half 1994, although a feasibility study is yet to be completed and reserves size is not determined.

JPK Expro will work with Rosneft, which is part of the Russian Ministry of Fuel & Energy, and other government bodies. Shareholdings in the project and capital costs await finish of the feasibility study.

The company plans exploration of well defined structures in adjacent areas, although Inchke-More is the only discovery on acreage licensed to JPK.

Hamilton Oil Co. Ltd., London, also announced a field agreement, this time involving evaluation of Prirazloninoye field in the Pechora Sea, in cooperation with Rosshelf and Gazprom.

Hamilton will assist in current drilling of the 3 Prirazlomnoye appraisal well. When the well is complete, Hamilton and Rosshelf will conduct studies to further appraise development of the field.

CHERNOGORSKOYE FUNDING

The Chernogorskoye oil field development program (OGJ, June 14, p. 18) continues to report progress.

St. Mary Land & Exploration Co., Denver, said EBRD agreed to fund the entire first phase of Chernogorskoye development with a loan of $11.5 million.

St. Mary affiliate Anderman/Smith Overseas Inc., also of Denver, is the manager of all western interests in the joint venture.

EBRD's funding triggers Itochu Corp.'s obligation to invest added equity of $3.5 million in the project and guarantee the project's initial $9 million bank debt, St. Mary said. That will reduce St. Mary's interest in the joint venture to 18% and its net capitalized investment to $2.5 million.

U.S. Export Import Bank requires a project incentive agreement from the Russian government before funding second phase development. St. Mary expects the agreement this month.

Chernogorskoye is the first Russian-American oil and gas project funded on commercial terms by either of the banks, St. Mary said.

So far this year, three original delineation wells have been placed on production, three development wells have been drilled, two of which have been completed. Production is 1,5002,500 b/d through temporary facilities. Construction of permanent facilities is under way.

St. Mary expects production of 25,000 b/d by late 1995 or early 1996 when development is complete.

BLACK SEA SEISMIC

The Ukrainian government agreed to reprocess seismic data and conduct more surveys in a step toward an offshore exploration licensing round planned for late 1994 or early 1995.

The Crimean regional oil and gas company Chornomornaftogaz (CMNG) of Simferopol hired Simon Petroleum Technology (SPT), Swanley, U.K., to help attract foreign investment.

CMNG is responsible to the Ukrainian government for exploration in territorial waters of the Black Sea and adjacent Sea of Azov.

Under Soviet rule the Ukrainian Black Sea was explored for gas. Two fields are on production, sending their gas to Crimea. SPT believes the Ukrainian Black Sea is prospective for oil, holding an estimated 1.5 billion bbl of oil in Tertiary plays alone.

CMNG and SPT plan an integrated technical report on the geology and hydrocarbon potential of the Black and Azov Seas to be published in first half 1994.

Geophysicist Dave Kenna said SPT is reprocessing about 6,000 line km of Soviet data from the Black Sea in association with Odesmorgeologia geophysical trust of Odessa. Work is scheduled for completion in November.

In first quarter 1994 SPT and CMNG plan to acquire 4,000-5,000 line km of seismic data on the Black Sea shelf. Industry sponsors will be sought, with participants to receive small data releases throughout the project period.

KERCH PENINSULA

Meantime, Ukraine registered a joint enterprise that contemplates oil development and exploration on Crimea's Kerch Peninsula.

HyTEXplor Houston Inc. and Krymgeogiya (Crimean Geology) Association will first redevelop Aktash field near the village of Shchelkino on the Kerch Peninsula's north coast near the Sea of Azov.

Development of other small fields in the area will follow.

The Krym Texas Nafta Ltd. joint enterprise hopes to produce 3,0007,000 b/d of oil by the end of the first year of operation. HyTEXplor plans to have a rig on site by November.

Moscow's Izvestia newspaper reported oil production began on the Kerch Peninsula at the end of the last century. But the deposits were described as "poor," and development languished until 1940-60.

Kerch fields were then taken out of production again because puny production rates made the wells unprofitable. Izvestia said only 25-30% of the oil in place could be recovered with technology available at the time.

Signing of the agreement with the Texas firm provides the opportunity to use modern technology and employ U.S. equipment, Izvestia said.

HyTEXplor believes Kerch fields hold larger reserves than estimated by Soviet geologists. It also is confident that well yields can be hiked substantially.

Following onshore Kerch Peninsula work, exploration and development may extend offshore into the shallow Sea of Azov, where the Soviets reported an oil field discovery.

URALMASH DEAL

The Uralmash-Caterpillar-National deal is part of Russia's move to produce petroleum industry equipment with foreign partners rather than remaining a major equipment importer (OGJ, Dec. 28, 1992, p. 26).

Three versions of the first drilling rig have been designed:

UNOC-5000/329DF, with lifting capacity of 320 tons and a drilling depth to 5,000 m.
UNOC-500DE, lifting capacity of 500 tons and drilling depth to 6,500 m.
UNOC-450DE, lifting capacity of 450 tons and drilling depth to 5,000 m.

The rigs will have circulation units and upper drives for horizontal drilling from National Oilwell, diesel electric stations from Caterpillar, and will use Uralmash's modular rigs with 10 m tall foundations.

Expected cost is $7.5-$9.3 million/rig.

The joint venture also plans to have a network of maintenance centers to service drilling equipment throughout the C.I.S.

TATARSTAN GRANT

The $173,000 grant by the U.S, Trade and Development Agency could lead to a $30 million project to increase oil production from the Volga-Ural area of Tatarstan.

EG&G Washington Analytical Services Center Inc., Morgantown, W. Va., and the Tatneft production association will each invest $44,500 to cover seismic work performed this year using advanced technology provided by EG&G. Total cost of the study is to about $600,000.

The grant is part of the $4 million in federal funds allocated by the U.S. agency to Russia to conduct various energy projects. Tatarstan has logged sharp oil production declines during recent years, mainly because large fields like supergiant Romashkino are near depletion.

GEOPHYSICAL SERVICES

Walt Whitman Software Inc., Lakewood, Colo., signed a joint venture contract with Russia's Geophysical Research Centre aimed at assisting Russia in redeveloping and enhancing current oil and gas production.

Walter W. Whitman, chairman of Whitman Software, said his company will work with major Russian oil and gas production associations to help them reevaluate well log data to identify bypassed hydrocarbon zones.

And Vjacheslav Spichak, director of the research center, said the two plan to develop new geophysical techniques, provide well log interpretation services, and cooperate in organizational well log interpretation services for oil and gas companies throughout Russia and other members of the C. I. S.

Whitman, a professor emeritus from Colorado School of Mines, Boulder, will carry out the agreement in conjunction with Mikhail Zhadanov, former department head of the Russian Academy of Sciences, and a visiting professor at the college.

Spichak noted the project will provide an opportunity to increase Russia's production with the least investment of time and money.

FUNDAMENTALS FOR RECOVERY

In an address last month in Moscow at a Society of Exploration Geophysicists conference, Hamilton estimated Russia needs added investment of $23 billion/year to stabilize oil production at its current levels, as well as an immediate injection of at least $25 billion and outlays of about $7 billion/year until 2000 to restore oil flow to 1988-89 levels.

"Considering that foreign investment has totaled only $200-300 million from more than 40 registered foreign petroleum ventures, Russia's oil industry needs and the country's seem to be in jeopardy," he said. "Unless present circumstances change, it is unlikely that investment will increase materially."

While Russia needs huge amounts of foreign investment to arrest its oil production slide, Hamilton said Russian leaders so far appear unwilling to yield enough control to attract investors on a meaningful scale.

As long as Russia continues struggling with day to day economic and political issues, he said, serious questions persist about whether much more foreign investment in its petroleum industry will occur.

"Given the present rate of contract negotiation, it seems unlikely that enough small projects could be negotiated to contribute significant (oil) volumes in a short period of time," he said.

If the future resembles the past, Hamilton said, no consistent energy policy will emerge, and leaders in Moscow will continue competing for power with regional authorities while foreign investors watch from the sidelines.

"Major companies are likely to be left waiting for large fields-those that Russia will be most reluctant to release," Hamilton said. "Unless they are willing to pursue smaller fields, they likely will have to relegate near term activity to higher risk, high cost exploration."

Riskier, more costly prospects could provide targets large enough for large companies to pursue without conflicting with objectives of local production associations.

"Of course, there would be no short or medium term benefits to the country," he said.

As Russia's oil generals gain access to more hard currency-and given the volume of shut in production capacity that could be brought back on line at low cost-foreign service companies will see growing demand for tubular goods and downhole pumps. Hamilton said major companies could consider playing a low cost positioning game by acting like smaller independent or service companies to make friends in a region.

Meanwhile, medium sized companies can continue to negotiate lesser deals with regional officials, then use the latters' help to get the deals approved in Moscow.

THE BEST ADVICE

Hamilton offered the following advice to foreign companies seeking Russian oil and gas deals:

Start small at the local level, not in Moscow. Become embedded in the social fabric of the local community.
Think long term by developing an open, trusting relationship with a savvy Russian partner and letting him take the lead.
Build solid relationships at several levels of government rather than relying on just one political sponsor.

Hamilton said struggles in Russia for political power must be set aside for the common good. His advice to the Russian government:

Continue working to develop a clear legal and regulatory framework for investors, including a consistent energy policy with incentives to attract foreign capital.
Delegate authority based on project size and clearly identify who is authorized to negotiate deals and sign agreements.
Make meaningful prospects available and be willing to speed development of one or two large projects "even if economic terms have not been maximized from your perspective."

Key ingredients for assuring adequate foreign investment in Russia include personal trust, mutual familiarity and respect, and confidence in Russia's institutions. Hamilton said neither side likely will get everything right at first, but the important thing is to get the process started and not be afraid to let both sides learn from their mistakes.

He said, "Russian and western companies have a lot to offer each other by combining the best the two industries have developed. Somehow, the barriers must be dismantled before that benefit can be recognized."