Offshore accent predicted for C.I.S. projects

Oil and gas exploration and development in the Commonwealth of Independent States (C.I.S.) after the turn of the century will focus increasingly offshore.

So said Vladislav P. Chtcherbakov, first deputy chairman of Russia's Committee on Geology & Use of Mineral Resources, at the Offshore Technology Conference (OTC) early last month in Houston.

With 3.6 million sq km of prospective area offshore-from the Barents Sea north of the Arctic Circle around Bering Strait to the Sea of Okhotsk off Sakhalin Island-Chtcherbakov estimated potential hydrocarbon re- sources on Russia's Continental Shelf could exceed 100 billion tons of oil equivalent (TOE), most of it gas.

Yet officials of western companies who also spoke at OTC said major roadblocks remain to restoring vitality to upstream oil and gas activity in the C.I.S. despite the area's huge potential.

Describing the C.I.S. as one of the most enigmatic parts of the world, T. Don Stacy, chairman and president of Amoco Eurasia Petroleum Co., said capital spending by foreign companies this year on upstream Russian oil and gas projects will be relatively small. That's because many companies are waiting on clarification of production sharing legislation passed late in 1995.

"Although there is a dire need for stable investment in Russia's oil and gas industry, the production sharing agreement (PSA) law as it exists does not contain everything needed to encourage investment," Stacy said.

Meantime, K. Terry Koonce, president and chief executive officer of Exxon Ventures (C.I.S.) Inc., Moscow, said cumulative outlays needed to fund all upstream oil and gas joint ventures currently being pursued in the C.I.S. by foreign companies could amount to as much as $150 billion in the next 15 years.

If all projects being discussed publicly unfold as proposed, Koonce said, C.I.S. production by 2010 could be restored to the historic peak of about 12 million b/d. But if adequate technology and capital are not concentrated on C.I.S. exploration and development, production could continue to decline 3-4%/year, sliding to about 4 million b/d by 2010.

Noting that foreign oil companies in the C.I.S. are operating under eight PSAs, with terms agreed on four pending PSAs and 16 others in negotiations, Koonce said efforts to capture opportunities in the C.I.S. under commercially attractive terms show steady progress.

"But we do not underestimate the challenges that are ahead," he said.

Economic progress

Despite difficulties, Chtcherbakov said progress toward a market economy is visible in Russia.

Among recent positive factors, Russia organized 10 vertically integrated oil and gas companies for operations ranging from exploration through refining. But even those operations suffer because of Russia's lack of clear investment laws to the extent that state sponsored exploration has practically dried up, Chtcherbakov said.

Foreign investors have taken up some of the slack from lagging state spending, he said, but a lack of legal framework has stalled talks on many deals involving foreign partners.

Regarding Russia's offshore hydrocarbon resources, Chtcherbakov said about 70% of the country's offshore gas is in the western Arctic, while oil reserves are concentrated in the Barents, Pechora, East Siberian, Kara, and Okhotsk seas.

Despite high potential, Chtcher- bakov said, the only offshore 3D seismic data were collected in 1996 near Sakhalin Island.

Similarly, only 110 oil and gas wells have been drilled off Russia, including 66 at Sakhalin and 35 in the western Arctic. The vast area from the Kara Sea to offshore Magadan has had no exploratory drilling, but Chtcherbakov said existing data have revealed 40 offshore basins.

Offshore strategy

Chtcherbakov said Russia's strategy for offshore development includes attracting a wide range of private and foreign companies with competitive acreage tenders, providing state support for Russian companies, and promoting Russian businesses on- shore.

The most important development last year, he said, was discovery of a vast petroleum province in the Barents and Kara seas with total combined hydrocarbon resource potential estimated at 70 billion TOE.

The largest fields found in the Barents-Kara Sea region include:

Shtockmanskoye gas/condensate field, with Jurassic gas reserves estimated at 3 tcf.
Leningradskoye and Rusakov- skoye gas/condensate fields, each with Cretaceous gas reserves of 4-6 tcf.
Prirzolmnoye field in the Pechora Sea.

Chtcherbakov said Far East Russia's estimated 20 billion TOE could provide a base for significant economic development in the region. The main goal there will be to ramp up production in Sakhalin's northern offshore areas to about 25 million tons/year.

Secondary objectives in the Pacific region include exploration and development of offshore prospects in the North Priokhotye and Western Kamchatka areas. Chtcherbakov said offshore work at Anadyr and Khatyr must occur as exploration continues in the Chukchi and East Siberian seas.

Investment obstacles

Stacy and Koonce left no doubt that Russia must refine its PSA law before foreign oil and gas companies will significantly boost upstream spending, either onshore or off.

Koonce said the biggest barrier to investing in upstream oil and gas ventures in Russia is lack of a clear, stable legal framework.

The PSA law adopted in late 1995 was "a step in the right direction," he said, "but more work is required to provide the necessary framework for significant investment to proceed."

Foreign oil and gas companies have voiced dissatisfaction with the PSA law to the highest levels of Russian government. A process is under way to draft supporting rules and statutory amendments, based in part on advice from western companies.

Stacy said foreign companies' major concerns about Russia's PSA law include:

Resolving conflicts between the PSA law and Russia's Underground Resources law.
Adding a waiver for sovereign immunity.
Guaranteeing that the Russian government will not unilaterally alter oil and gas PSAs because of changed circumstances.
Allowing foreign partners in PSAs the unambiguous right to export their shares of production.
Interpreting the PSA through internationally accepted legal principles.
Assuring stable tax treatment for all parties to a PSA.

Koonce said the potential for a new administration to win Russia's upcoming presidential election further complicates efforts to complete the required laws and supporting regulations.

"We're confident, however, the need for new investment to offset Russia's production decline ultimately will lead Russia to adopt appropriate legislation and supporting regulations," he said. "The timing may well require considerable investor patience."

More barriers

Other barriers to upstream oil and gas investment in the most promising C.I.S. oil and gas regions include boundary disputes in the Caspian area. Given the area's long history of territorial conflicts, Koonce said, foreign companies can reduce political risk in the Caspian region by matching financial commitments with government guarantees of secure export routes from the area.

Another impediment to upstream oil and gas investment is the high cost of exploration and development in many of the C.I.S.'s most prospective oil and gas areas. Because foreign partners often end up working in remote locations, offshore or in Arctic environments, or in places lacking production and transportation facilities, Koonce said, "we must continually work to reduce costs by enhancing facility design and optimizing development functions."

In Exxon's areas of interest, he said, questions remain about reservoir quality and how it could affect project economics.

"Consequently, we'll need to ensure that state of the art reservoir appraisal occurs early, before major commitments are made to develop the resources," he said.

In the final analysis, Koonce said, developing practical working relationships with a wide range of other players and ensuring effective alliances between local and western contractors could become critical factors in western companies' efforts to implement projects in the C.I.S.