FSU megadeal action suddenly heating up

David Knott
Senior Editor

Although progress with former Soviet Union projects has proven slow, three new deals show western firms are not losing their appetite for investment there.

BG Exploration & Production Ltd. and Agip SpA have signed a production-sharing agreement (PSA) that will lead to full-scale development of supergiant Karachaganak oil and gas field in western Kazakhstan.

Separately, these two companies are part of a group that has secured a second PSA with the Kazakh government, which will lead to exploration and potential development in the northern Caspian Sea.

Meanwhile, British Petroleum Co. plc plans to take a 10% equity stake in Russia's fourth-largest integrated oil company, Sidanco, and Royal Dutch/ Shell Group has joined a group bidding for Russia's Rosneft.

Karachaganak

The Karachaganak PSA flashes a green light for redevelopment of existing production areas and development of new sectors in Karachaganak, which has estimated reserves of 2.4 billion bbl of liquids and 16 tcf of gas.

Frank Chapman, executive director of BG E&P, told OGJ that BG and Agip were first invited to bid for development of Karachaganak on an exclusive basis in 1992 (OGJ, July 13, 1992, p. 24).

"Progress has been slow," said Chapman, "because of a need to develop a transportation system for liquids to international markets and because of the need for evolution of the country's fiscal and economic network.

"We became concerned about the deterioration of facilities in the field, so we negotiated a production-sharing principles agreement. Under this, we proceeded with work to safeguard facilities and wells on a cost-recovery basis."

BG and Agip each spent $160 million on a program to make sure wells were secure and to improve field utilities. This investment will be recovered from production revenues.

"First work under the PSA," said Chapman, "will involve production and development work carried out in parallel. We will continue to enhance existing gas and liquids operations, and we will go out to bid for front-end engineering work and drilling operations starting in first quarter 1998."

Karachaganak produces 50,000 b/d of liquids today and has capacity to produce 80,000 b/d. Gas output is now up to 300 MMcfd. Output is sent north to Russia's Orenburg field for processing and transportation. BG and Agip aim to increase production to 170,000 b/d and 500 MMcfd by 2001 and to 260,000 b/d of liquids and 1.4 bcfd of gas through further development. BG and Agip will each spend about $640 million on the project. Karachaganak partners are joint operators BP and Agip each with 32.5%, Texaco Inc. 20%, and Russia's Lukoil 15%.

Key to the go-ahead for Karachaganak was an agreement secured in May this year for construction of a 160,000 b/d export pipeline to take liquids from Kazakhstan to the Russian Black Sea port of Novorossiisk. BG and Agip each will have 60,000 b/d capacity rights. With capacity to export 40,000 b/d to Orenburg already in place, Chapman said export requirements for Karachaganak are covered. Also, Lukoil is looking to secure capacity in other Russian export lines.

"Gas marketing will govern our ability to go to full liquids production," said Chapman. "Initially, gas will be reinjected or sent to Orenburg. There is a developing gas market in Kazakhstan."

Caspian Sea

Kazakhstan's second PSA will enable seven signatories, including state firm KazakhstanCaspiShelf (KCS), to explore and develop any commercial finds in 6,000 sq km of Kazakh Caspian Sea territory.

Under an agreement in 1993, KCS was operator of a project to conduct an extensive seismic survey of Kazakhstan's offshore area (OGJ, Jan. 30, 1995, p. 36). In March, the group completed acquisition of 26,000 line-km of 2D seismic data.

KCS's equal partners are BG, Agip, an alliance of British Petroleum Co. plc and Statoil, Mobil Corp., Royal Dutch/ Shell, and Total SA. BG said, "Today's PSA signing provides the basis for moving on to the exploration drilling phase and eventual development and production of any commercial discoveries.

"While the recently completed seismic survey and giant nearby onshore discoveries such as Tengiz indicate the potential to discover oil offshore, no wells have yet been drilled in the North Caspian. The first is planned for 1998."

The PSA calls for drilling of seven exploration wells and acquisition of a limited amount of additional seismic data. Water in the license area is less than 10 m deep.

Russian deals

BP's deal follows, but is not linked to, a recent decision by Russian President Boris Yeltsin to remove the 15% ceiling on initial purchase of shares in newly privatized companies by foreign firms.

BP bought a 10% stake in Sidanco from Russia's Unexim Bank for $570 million. This will initially add 40,000 b/d of oil production and 300 million bbl of oil reserves to BP's asset base.

In the longer term, the partnership will provide a strategic base for the two companies to develop a joint major exploration and production business in western and eastern Siberia, BP said.

At the same time, BP acquired a 45% share in Sidanco's 60% interest in Rusia, an Irkutsk-based operator with major oil and gas discoveries in eastern Siberia.

BP will earn its share by paying $172 million towards the cost of appraising Rusia's discoveries. BP and Sidanco will set up a joint venture to develop and operate the Rusia finds and new interests in the region.

Rusia's assets include Kovyktinskoye gas/condensate discovery, which has estimated reserves of more than 25 tcf of gas. Yeltsin recently identified the find as a potential source of gas exports to China early next century.

BP, Shell deals

The BP deal disclosure followed hot on the heels of an announcement by RD/Shell of a strategic alliance with Russia's Gazprom to create a 50-50 joint development company (see story, p. 32).

At about the same time last week, Shell disclosed it had signed a separate memorandum of understanding with Gazprom and Lukoil for joint bidding to buy a stake in Rosneft when the state oil producer is privatized.

Shell said the partners will bid for Rosneft privatization tenders on an equal basis. The sale of Rosneft shares is expected to be announced before yearend and be completed by mid-1998.

The coincidence of the Shell and BP announcements has spawned press speculation of rival bids for Rosneft shares. A BP official said the company does not yet know the conditions of sale of Rosneft shares: "If the conditions were right, we would bid with Sidanco."