SOVIET BUSINESS CHAOS SEEN LASTING 5 YEARS

Companies seeking work in the collapsing Soviet Union can expect political uncertainty for another 5 years, say senior managers at Price Waterhouse, Houston.

"Your company will have to act first and ask about tax and monetary problems later," said PW's Ray Darnell. "All union and republic authorities will change the rules at least once after your agreement is final. God knows what you will be paid in."

PW discussed changes in the Soviet Union and offered advice on dealing with officials of the central government and Soviet republics at a recent meeting in Houston with executives of oil field service companies. That meeting preceded reports of the Russian federation, Ukraine, and Byelorussia agreeing to form a Slavic commonwealth.

CONCERNS

With final rules not expected anytime soon on business and tax issues, company officials must anticipate problems by carefully weighing effects of political and social developments on operations, Darnell said.

The company said most Soviets don't yet trust free enterprise and are unsophisticated businessmen, but are "very sophisticated bureaucrats."

So the most successful joint ventures will be based on mutually beneficial provisions taking into account full tax treatment by Soviet central, republic, and local authorities.

Service contractors that are logistically independent and offer a broad range of integrated services will be preferred business partners. Smaller service companies should consider forming strategic alliances to seek Soviet well remediation deals.

PW said service companies especially should be watchful of a 15% withholding tax, turnover tax on production or sale of goods, and a stabilization fund amounting to 20% of depreciation plus 11% of gross payroll and profits.

POLITICAL ENVIRONMENT

With starvation and economic depression sowing seeds of social unrest, PW said, Soviet authorities are emphasizing restoration of oil production to a level that will allow export of 2.5-3 million b/d to generate sorely needed hard currency.

"Even if government leadership changes, restoring oil production must be a priority," PW said.

Local spending and employment by joint ventures led by western companies will be very important to economies in some Soviet areas.

PW said the Soviet All Union government is dependent on the Russian republic for its existence because the Kremlin's power earlier this year was eroded by independence movements in its republics, particularly in the Ukraine and Baltic states.

The economic impetus for most Soviet republics to function as a unit probably means the central Soviet government will survive. However, the republics are likely to control natural resources within their borders.

The Russian republic controls 85-90% of the Soviet Union's oil and gas reserves. But Soviet republics are bickering among themselves over control of reserves and shares of oil and gas profits.

Bureaucracies in smaller republics such as Kazakhstan and Azerbaijan can negotiate joint ventures more quickly than Russia.

WESTERN COMPETITIVENESS

PW said companies willing to participate in early oil and gas joint ventures will have bigger payoffs if their deals are successful. They also likely will be preferred for later joint venture opportunities.

PW expects to see independent operators take advantage of the unstable political situation to cut early deals.

U.S. major oil companies have the technology, personnel, and the traditional role of joint venture partners to succeed long term in Soviet exploration and development. However, part of that competitive advantage is lost because majors must have relatively stable political environments to justify E&D investment. U.S. companies also are at a competitive disadvantage with other foreign companies that receive subsidies from their governments to operate in Soviet republics.

Companies that hire, train, and do business with local entities and agencies likely will have a better chance of success, PW said.

In most cases, political and social reforms have left control in the hands of the same individuals in the same trade unions, factories, agricultural co-ops, and local production associations.

Service contractors working on development and exploration joint ventures can expect to be paid in hard currency. Western joint venture partners at first will be paid through production or revenue sharing but eventually will be allowed to receive payments in rubles or dollars adjusted according to a contract rate.

Making the ruble convertible with the dollar will give it a trading value, and PW said foreign companies should learn to hedge against the ruble before it is traded widely on monetary exchanges.

REMEDIAL PROJECTS

Because so many Soviet oil and gas fields have been neglected and Soviet technology has been inadequate, PW said well remediation opportunities abound for Western entrepreneurs.

Remediation deals, such as Canadian Fracmaster's joint venture in western Siberia's Samotlor field, will be easier to negotiate than exploration or development deals, especially in areas where a local production association is in control.

Start up of workover programs generally will depend on foreign companies trying to set up the deals. Payouts could be very quick, because capital requirements are relatively modest and the Soviet Union needs to export crude, PW said.

Workover deals also will be speeded because many service companies have surplus equipment that can be moved into the field quickly and at relative low cost.

An oil field infrastructure is in place in most Soviet regions that would benefit from a coordinated well remediation program.

However, PW said service companies should not plan to rely on local logistical support.

DEVELOPMENT AGREEMENTS

Development joint ventures in medium to large fields will be within the investment range of independent companies seeking moderate reserves at lower risks. That should make development joint ventures easier to set up than exploration deals, PW said. Development drilling risks are moderate and geophysical/geological data adequate for making development decisions or, if not, inexpensive to acquire.

Development deals with republics will be easier to negotiate because not many foreign companies would be involved and republic officials are more cooperative than central Soviet authorities with the local production associations.

Start-up of development joint ventures is possible within 1 year of signing a definitive agreement, with payout possible in 3-5 years.

Development areas generally are accessible by road and most have pipelines close by. But field infrastructure is not up to western standards.

EXPLORATION DEALS

Major oil companies within the next 2-3 years can be expected to initiate large exploration projects with Soviet or Russian joint venture partners, PW said.

PW said major companies are likely to focus on exploration joint ventures in fields with reserves estimated at more than 200 million bbl of oil equivalent.

Exploration deals will be difficult to initiate, slowed by unwieldy bidding processes, and likely will cause squabbles for control between local production associations and republic officials.

Because of the large capital investments required, groups of major companies will be formed to spread risks. Involvement by several major companies could further complicate negotiations.

Lack of infrastructure and good geological/geophysical data means long lead times will be needed to start production. Most exploratory joint ventures will be in areas with poor or no roads.

Since operators likely will have to build field support infrastructure before initiating operations, long intervals must be expected for returns on investments, PW said.

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