Moving Beyond the Legacy

Exploration of Trebs and Titov oilfields - courtesy of Bashneft

In September 2011 Russia attracted global headlines following the signing of a historic deal between ExxonMobil and Rosneft for exploration of the Kara Sea on Russia's Arctic shelf. The deal marked the latest stage in the march of Russia's oil and gas industry away from its legacy assets and towards challenging new frontiers of production demanding new partners and new capabilities.

As the world's leading net energy exporter, Russia's economic fortune is inexorably tied to the oil and gas industry. The World Bank calculates that two thirds of Russia's export revenues and 46% of the country's federal budget derives from the oil and gas sector. Yet production in this vital sector of the economy has for years relied on the legacy assets of Russia's Soviet past with oil production from regions like Khanty-Mansiysk, Tyumen and the Komi Republic and gas production from Yamal-Nenets.

But with significant organic depletion in Russia's West Siberian oil producing basins, which are responsible for 6.5million bbl/d out of Russia's 10.34million bbl/d of oil production, the Russian Federal (RF) government as well as leading industry stakeholders now recognize that the industry must change substantially to ensure production growth and maintain production above 500mt/a.

In a governmental effort to boost E&P operations, the largely private oil industry received a number of positive signs in 2011. Producers were given a more stable and more profitable fiscal environment to allow them to better finance ambitious new E&P projects through the "60-66" tax reforms and the Ministry of Natural Resources made proposals to end Rosneft and Gazprom's monopoly on Arctic production and allow new companies onto Russia's traditionally highly-restricted offshore shelf.

Balancing the Ups and Downs

On 1st October 2011 the fundamental math of the oil and gas fiscal environment was redesigned with the introduction of the Ministry of Finance's "60-66" reforms. In effect the 60-66 reforms reduce the export duties on crude export from 65% to 60% and harmonize export duties on refined products to 66%, raising the tax rate on dark/heavy products from 46.7% whilst lowering the rate on light/secondary refined products. In sum, this system essentially transfers the burden of taxation from upstream to downstream and increases the overall net-back from a barrel of oil to $5.

Alexander Korsik, president, Bashneft

Previously, Russian majors were capitalizing on their downstream business with minimal upstream profitability. However the fiscal system was based on an extremely low capex for a barrel of oil and as this level of expenditure has increased due to the increasing difficulty of oil extraction, the attractiveness of upstream investment has fallen. At the same time, despite high profitability Russian majors failed to make investments in their downstream infrastructure – indeed Prime Minister Putin has criticized the downstream industry for letting their ageing refineries fall back to 1950s levels and failing to produce sufficient gasoline for domestic consumption. Moreover, many Russian refiners had been producing non-standard products at a low price which were then being refined by Eastern European refineries to produce lighter fuels and additional margins.

The 60-66 reforms are designed to address both the problem of upstream investment and the lack of modernization in Russia's downstream. Alexander Korsik newly appointed president of Bashneft, one of Russia's top 10 oil producers, outlines his perspective on changes in the fiscal environment: "From the point of view of the country, the shift in the tax burden to downstream is a good move because currently 1 ton of primary oil products created from Russian crude costs less than one ton of crude. This does not make sense for Russia's upstream business". However, for a company whose downstream capacity significantly outstripped its oil production capacity at 21mt refined against 15mt produced, this shift will negatively impact on Bashneft's profitability.

To protect its downstream business, Bashneft is engaging in an ambitious modernization program for its refineries aiming to increase the percentage of light products to 73.4% by 2016. The other effect of this change in fiscal environment is to push the company to invest in its upstream business, indeed Korsik claims he predicted this tax reform as early as 2009 and that Bashneft had already reoriented its future growth around upstream production. Bashneft has now begun to venture beyond its fields in Bashkortostan in West Siberia, which have been in production for over 80 years and invest in new E&P operations outside of the republic, in effect transforming the company into a national player in Russia's oil industry.

The move aligns Bashneft with other Russian majors now shifting away from their legacy assets to new frontier regions whether that is TNK-BP going to Yamal and East Siberia, or Rosneft expanding in East Siberia and launching ambitious new ventures in the Arctic. All of this movement sets a new paradigm in Russian oil production where Russian majors are no longer fixed to one production area, but instead compete and collaborate in new production basins.

For Bashneft, winning the production license for the Trebs and Titov fields at the end of 2010 represented a major achievement for the company. These fields located in Timan-Pechora constitute a $316 million investment for the company and Korsik understands that there are "heavy risks because these fields are new and located in extreme and harsh arctic conditions".

To address the challenges presented by these new greenfields, Bashneft has teamed up with Lukoil through a production sharing agreement whereby Lukoil will receive 25% of production from the field. Korsik said it was important to have an experienced partner like Lukoil on this project and that Bashneft will also be able to use Lukoil's regional infrastructure such as oil terminals, exploration wells and electricity supply from Yuzhni Helchai field. As a result, Korsik hopes to develop these fields much faster and set a date for first production in 2013 with peak production by 2018.

Sergei Shmatchenko, general director of Geostroi, one of Russia's main planning and exploration institutes and Bashneft's chief engineering contractor for the pipeline survey and design of the Trebs and Titov fields explains, "in comparison to other Russian regions, this is a very complex region, with the hardest climactic conditions, complex geology and difficult accessibility". Geostroi has worked in the Timan Pechora extensively, carrying out orders for Lukoil, Rosneft, Zarubezhneft, Alliance Oil and other clients. Shmatchenko explains that "Geostroi today is unfortunately one of only a few planning and exploration organizations who are seriously engaged in work under frozen conditions. Whilst new technology for boring geological boreholes and our own laboratory for researching long-frozen earth are important, the main aspect of this work is cooperation with science. For many years already we have had an excellent relationship with the Geocryology department at Moscow State University". Geostroi is now making use of its extensive experience in the region on the construction of the 130km gas pipeline from the Trebs deposit to Lukoil's Yuzhni Helchai field.

Sergey Shmatchenko, general director, Geostroi

Considering the higher risks associated with production in these harsh environments, risk-sharing partnerships such as the one between Bashenft and Lukoil have become more commonplace. Another example would be TNK-BP and Gazprom Neft joining forces to develop the Messoyakha field on the extremely challenging Yamal Peninsula on the northern coast of Siberia. High-risk production environments also demand significant investment with one report estimating that production from the next generation greenfields belonging to TNK-BP, Gazprom Neft, Bashneft and Surgutneftegaz would equate to around $70 billion in capex.

Naturally, global oil prices standing at $118 per barrel at the time of writing, provide an impetus for new E&P operations. However, Atle Loge, vice-president of drilling and evaluation at Baker Hughes suggests that the improvement in the fiscal environment will have an even greater impact on Russia's upstream. Loge asserts: "Activity in Russia is not as closely related to oil prices as in other global markets. The current tax structure and incentives offered by the State seem to have a larger impact on our customer's economics based decisions".

Prior to the 60-66 reforms, tax exemptions on new greenfields such as Rosneft's gigantic East Siberian Vankor field were the principal incentive mechanism for new production. Yet on 1st May Rosneft lost this exemption. Ultimately the effect of the tax reforms has been to create greater stability in the investment climate allowing operators to expand their E&P operations and invest in their technological capabilities.

Whilst the private oil industry has received fiscal incentives, the largely state-controlled gas industry moved decisively in 2011 to increase production with Gazprom investing $40 billion in new projects and infrastructure, just shy of the global annual spending record for a company. This investment program seems to be paying early dividends for the company, which exceeded its production plan by 7.5 bcm of gas and expanded its reserves to exceed production by more than 33%.

Trickle Down Modernization

The strong upstream investment climate in Russia has led to optimistic projections for Russia's drilling market - expected to hit $28 billion by 2014. Whilst this industry has in the past been sluggish to invest in new technology with around 70% of Russia's drilling rigs being over 25-years-old and obsolete, upstream growth is allowing drilling contractors to upgrade their assets. And with the industry moving to challenging new production environments in Timan-Pechora, Yamal and Eastern Siberia and eventually to the offshore Shtokman project (now predicted to begin production in 2017) these upgrades are becoming a necessity.

IDR's Lucky Horseshoe

Vitaly Martynenko, general director of Industrial Drilling Rigs, a top 5 Russian drill rig manufacturer, highlights that "between 1965 and 1990 the Soviet Union exported around 1,000 drilling rigs to 27 countries around the world and represented the main international producer of drilling equipment. The Soviet Union had 57% of the international market share in drilling rigs with this figure rising to 90% in some parts of the world" But these times are long gone and he regrets that especially in the light of new competition from Chinese drilling rigs producers, Russia cannot compete on price or even lacks the specialists to compete on the level of very high-tech rigs. "Special rigs with a load capacity greater than 200 tons require specific steels in their construction and unfortunately Russia lacks the specialists who can design rigs for these load capacities…This is why IDR engages in collaborative design with prestigious international companies like Bentec and Dietswell, in order to co-design rigs our rigs".

Vitaly A. Martynenko, general director, Industrial Drilling Rigs

The company's calling card is now based on a collaborative project with French company, Dietswell to design a unique offshore semi-submersible rig for Total's operations worldwide – its patented "horseshoe design". IDR has already been working with Total in Indonesia for many years and is now seeking to close major deals in South America. With this type of international collaboration as well as the one they established with German rig producer, Bentec, Industrial Drilling Rigs hopes to not just be more competitive on the Russian market but to extend its work in the international arena.

Atle Loge vice-president of drilling and evaluation at Baker Hughes saw potential for increased sales to drilling contractors: "there has been a lot of change in just 2011 related to the economic acceptance of value-added new technologies...This is a tendency that we are observing now with some of our clients not just in greenfields but also in brownfields". One drilling contractor now upgrading their equipment is the National Drilling Company (NDC). Its general director, Dmitry Naumov, describes how the company had been built on what he termed the "small drilling market' in West Siberia. The company was essentially targeting marginal fields where large-scale drilling projects were less attractive. NDC acquired cutting-edge technologies from international companies like Baker Hughes to work on brownfields where so-called "big drilling" had already reached its peak, but where there was all the necessary infrastructure and where in order to produce each ton of oil it was not necessary to invest the same expenses as those made by a company developing greenfields".

Dmitry Naumov and Mikhail Ivanov, general director and the first deputy general director, National Drilling Company

In a time of increased investment in E&P projects and a new generation of greenfields, NDC is now revising its business model and investing in a new set of technologies such as cavity drilling rigs. Deputy General Director Mikhail Ivanov says "Our company is one of the vehicles for the most advanced and innovative technologies into Russia and we want to use only the best that there is in the market". Ivanov says "The next step will be entry onto the ‘big drilling' market. Firstly we are mobilizing our drilling rigs. Also a series of work is going into renewing our equipment. We are counting already in 2012 on entering the big drilling market and working on greenfields".

However, despite the increase in overall drilling E&P operations, the drilling market has become a space of intense competition for Russia's drilling industry. Ivanov notes that "Undoubtedly within the last 10-11 years the Russian market has become extraordinarily packed and the competition is very serious". This competition is also driving the modernization of Russia's drilling market.

In March 2011, Gazprom divested its drilling division Burgaz to add a new drilling player to the Russian drilling services market. Historically low levels of competition in the service industry as a result of integrated service companies relying on their internal service divisions had reduced the competitiveness of Russian service companies. However in the first decade of the 21st century Russia's producers began to divest their drilling service divisions leading to a process of fragmentation, subsequent consolidation and ultimately a more competitive drilling market.

In 2004, the Siberian Service Company was formed from Yukos, whilst Eurasia Drilling Company acquired Lukoil's drilling assets and in 2008 TNK-BP sold its drilling divisions to Weatherford. Jeff Allen, general manager, of Tesco Drilling Corp explains, "The divestment of the drilling divisions is primarily because they are asset and labor intensive; therefore if there are any inefficiencies they are costly to run. The specialist drilling companies which are spun off from the Russian majors are highly conscious of efficiency". It is these companies which are now leading to the modernization of Russia's drilling industry.

Re-evaluating the Legacy

Two Russian companies hoping to make the most of Russia's improved upstream investment climate are TNG Group and Pangea. Both still see huge opportunities in enhanced oil recovery from Russia's mature fields. Rinat Kharisov, general director, of TNG Group says, "Currently, 10-20% of the layers are being exploited in order to extract oil. This can be increased up to 45%...Even if we only gain 1% in production from existing fields it is already the yearly quantity of oil produced in Russia".

TNG Group, which was founded in 1953, carried out work on Romashkino, the largest oil field in the Volga-Ural region and works on TNK-BP's fields in West Siberia such as Samotlor. Kharisov considers that significant increases in production can come from the application of advanced technology and TNG-Group has been highly active in the process of innovation. One of the technologies that the company is particularly proud of is TNG-Group's world-leading nuclear-magnetic logging tool. This is something that TNG-Group is now looking to develop for international markets with Kharisov seeking to develop international ties to "collaborate in the technological field demonstrating our nuclear magnetic logging tool".

Rinat Kharisov, general director, TNG Group

TNG group has therefore established a joint venture with a local company in India and ties with Chinese geophysics companies which in TNG Group's perspective is more about "developing a greater understanding of international markets as the company has no scope to enter the Chinese geophysics market which is already packed". Kharisov sees the future of his company connected to further innovations coming from the field of nanotechnology.

Valentin Kolesov, general director, Pangea

Valentin Kolesov sees a similar opportunity in the field of geophysical analysis, however he states that unlike other services in Russia's upstream industry, geophysics was moving away from being an open market. He said producers were decreasing their tendency to outsource in this segment: "In Russia the service market of process, interpretation, modeling, resource accounting will disappear in several years because of the strengthening of government-linked companies who wish to do everything themselves". This move will eventually force Pangea to reorient more of its business overseas.

Pangea is now using its experience with companies like Gazprom and Statoil as well as its principal innovation: Multi-Dimensional Imaging software as a passport to go abroad. Kolesov describes how Pangea's technology has already been used to improve recovery in India on its largest field: Mon Bahai which at one time produced more than 40% of all Indian oil with over 900 wells drilled there since 1994. However, the company has never sought to mass manufacture standard solutions until now. Kolesov compares the company in its transition from a pharmaceutical company into a hospital – able to provide all types of standardized services and not just one specialized one.

Stirring up Icy Waters

Production from Russia's shelf had never before made sense given the easily accessible resources onshore. But with increasing expenditure necessary for EOR on Russia's legacy fields or for development in Russia's challenging Siberian fields, offshore production has become a more interesting prospect, especially given the scale of the resources in the region. The dramatic search by Rosneft in 2011 for an international partner for E&P operations in the Kara Sea illustrates the great interest in developing Russia's offshore industry. Following a dramatic legal dispute that saw BP ousted from an initial deal with Rosneft after complaints from the Russian component of BP's existing local joint venture, TNK BP, ExxonMobil was chosen for this production partnership. ExxonMobil will receive 33% of the production revenues from arctic production and in return Rosneft, will be able to produce from some of ExxonMobil's strongholds such as the Gulf of Mexico. Through increased international cooperation, it is hoped by the Russian state that the 90-100 billion tons of reserves in the Russian arctic shelf can be developed faster.

As early as 2008, the formation of Shtokman AG already marked the first step for Russia's acceptance of international companies on its arctic shelf and in 2011 the Ministry of Natural Resources proposed liberalizing Russia's arctic shelf by removing the 5-year offshore experience requisite for companies to hold a production license on Russia's shelf. This measure indicates an understanding that Rosneft and Gazprom cannot develop Russia's offshore assets alone.

Yuri Melekhov, general director of Arktikmorneftegazrazvedka (AMNGR), the pioneer of Russian offshore E&P and the company which discovered the Shtokman field in 1988 explains the importance of offshore deposits: "Hydrocarbon reserves on the Russian mainland are decreasing rapidly whereas the untapped potential awaiting us on the Arctic Shelf is enormous. There can be no doubt that the exploitation; processing and delivery of these Arctic resources will make a very significant contribution to the energy security not just of Russia, but of the whole world".

Yury Melekhov, acting general director, AMNGR

Melekhov's AMNGR has 30 years' experience operating in Russia's arctic waters discovering more than 15 fields on the arctic shelf out of 23 that have been discovered in total. However, Melekhov explains that in the 1990s and 2000s the company had seen a drop in the level of business being generated in Russia and therefore looked to projects abroad. "Thus during these years, rigs and other equipment belonging to AMNGR began operating all over the globe including on the Brazilian Shelf, African Shelf, South Asian Shelf and in the Persian Gulf".

Towage of JUR Arkticheskaya by AMNGR's vessels Neftegaz-51 and Neftegaz-61

However, 2011 marked a shift in AMNGR's strategy where the company realigned its focus back onto the Russian shelf. Melekhov explains that in 2011 because, "AMNGR became a daughter company of Zarubezhneft, the latter will gain the right to attain a license for exploitation of the Russian shelves and in so doing will become a third player in that market" – after Gazprom and Rosneft. Yet the challenges of operating in these environments are significant. Although the most experienced Russian offshore E&P operator, in December, AMNGR suffered a disaster with the sinking of its Kolskoye platform in the Sea of Okhotsk off the East Coast of Russia with the loss of 53 of its crew.

Fortuna, part of MRTS fleet

The scale of Russia's offshore challenges is something that Russian shipbuilding company Sevmash has recognized in the creation of the world's first ice-resistant offshore fixed gravity platform, "Prirazlomnoye" in August 2011. This $800 million offshore investment with a field life of 50 years is designed to confront the harshest environments when it begins production for Gazprom Neft. It is an achievement that the company's general director, Andrei Dyachkov, explains was not easy: "The environment is characterized by heavy ice, freezing temperatures and great seismic activity. Serious studies were conducted concerning the stability of the platform on the ground, considering all types of effects ice could have on the platform, taking into account cross-ice, flat fields, piles, and icebergs. Additionally an entirely new set of studies were carried out concerning construction's working capacity in low temperatures using cold-resistant steel".

Alexander Kolikov, executive director, MRTS

Alexander Kolikov general director of MRTS, Russia's leading offshore service supplier and subsea pipeline construction company agrees that one of the main challenges is the annual freezing over of Arctic waters. This restricts MRTS's operations to 4-5 months. Although this time frame limits the amount of work MRTS can carry out, Kolikov reckons it is exactly this seasonal challenge that has made MRTS a highly efficient company. He explains that the narrow work window and difficult surface conditions means that it is vital not to lose any work days during a project: "on the Baydaratskaya Bay project, MRTS had in total between 70 and 80 working days to work on this project and we needed to organize in such a way we did not lose one day or even one hour through supply shortages or other reasons. Over the course of this period MRTS lost just 24 hours".

MRTS defender pipelay barge

With this level of logistics expertise and the valuable experience gained through partnerships with Dutch dredging companies like Van Oord, Royal Boskalis and Jan de Nul or more recently with companies like Saipem on the company's project on the Kirinskoye Field at Sakhalin 3, Kolikov is hopeful to expand projects overseas to countries in South East Asia like Korea and Singapore to overcome the dead time in their work year.

The Consortia Effect

In a 2010 interview with Focus reports, Nikolai Tokarev, president of Transneft, Russia's monopoly pipeline operator, emphasized the role of Russia's export pipeline infrastructure in Russia's movement away from its legacy assets. He stated in reference to the ESPO oil pipeline: "We're already witnessing the booming development of the regions adjacent to the pipeline: construction of roads, electricity transmission lines, new settlements, and, most importantly, development of new oil fields".

Nikolay Tokarev, president, Transneft

However, what became apparent in 2011 was the role of international consortia in developing these export pipelines and simultaneously, encouraging international collaboration in the Russian market. In October Nord Stream AG, a consortium consisting in Gazprom, Wintershall E.ON, GDF Suez and Nederlandse Gasunie finally began transport of gas through the pipeline which will by 2012 be delivering 55bcm to a gas hungry Europe.

TDW Eurasia: Following the Pipeline

TDW Eurasia, subsidiary of TD Williams inc. one of the most recognized names in pipeline equipment and services, initially found it challenging to gain traction in Russia. It was cross border pipeline projects such as the Caspian Pipeline and Gazprom's gas pipelines between Central Asia and Russia which first allowed the company into the Russian market.

Kondratieva points out that imposing new technologies and especially those connected with ecological preservation is challenging but the market is improving. She says: "I believe that Russia's industry awareness and mentality was not the same as elsewhere in the world. Russian companies did not really appreciate environmental concerns or the value of the oil and gas wasted during pipeline repairs. Cost and resource savings were not factors in their thinking. This mentality has changed in the Russian industry and resource saving is now the reason companies use our services".

Olga Kondratieva, general manager, TDW Eurasia

TDW Eurasia's technologies such as freeze plug solutions mean that pipeline operators do not have to drain gas minimizing the environmental impact and preventing the need to flare. Kondratieva points out that "For a company to repair its pipelines it must decommission the content and either dispose of it or store it somewhere. Gas is often released into the atmosphere and oil has to be placed into storage or burnt". She says that the Russian market is split between early and late adopters and that Gazprom have been ahead in using their solutions with a specially adapted SmartPlug® currently being used on the North Stream project. Kondratieva is now aiming to win acceptance from Russia's oil pipeline monopoly operator, Transneft.

The international consortia now present in the Russian market, whether Nord Stream, Shtokman or the Sakhalin projects, all owe their origin in one project in particular. 2011 marks the 10th anniversary of the Caspian Pipeline Consortium (CPC). According to Nikolai Platonov, president of the CPC, the consortium controlling the pipeline transporting Caspian oil from the Tengiz field to the Novorossiysk-2 Marine Terminal on Russia's Black Sea coast, the CPC paved the way for international collaboration in the Russian market back at the start of the new millennium. He explained, "as one of the most successful joint enterprises in the energy sphere across the former USSR, the CPC certainly acts as a kind of showcase for large-scale international projects, as well as providing a model of how to operate within Russia and in Kazakhstan".

CPC Marine Terminal Shore Facilities, nearby Novorossiysk, Krasnodar krai, Russia

This unique shipper owned pipeline is now undergoing an expansion project with a budget of $5.4 billion aimed at doubling revenues for its governmental (Russia, Kazakhstan) and private shareholders (Chevron, Transneft) from $1.1 billion/annum to $2.3 billion/annum by 2015. Platonov recognizes that the main challenge of course is reaching compromise and using the huge variation in the mentality of shareholders (government vs private, small vs big, upstream vs midstream) to the consortium's advantage. For example, one innovation of this consortium was the "ship or pay" principle stating that payments would be levied on shippers if they did not supply enough oil to fill the pipeline.

Pavel Kuznetsov, general director, Starstroi

Anatoly Shatalov, deputy general director of Starstroi and the deputy minister of energy at the time of the launching of the CPC explains how the CPC demanded the creation of a special constructor company in the Russian market capable of working with internatinoal consortia. Shatalov explains: "A special company was founded which was capable of fulfilling this work to become the chief contractor and bring together construction companies which could build the pipeline". To this day Starstroi continues to work with the CPC but its activities have branched out considerably.

Sakhalin pipe laying - Starstroi

Starstroi's experience in fulfilling the EPC requirements of international companies operating in Russia naturally propelled it into work on the Sakhalin I and II projects – both involving international consortia of Rosneft and Gazprom alongside companies such as Exxon Neftegaz and Shell, Mitsui, Mitsubishi respectively. Starstroi has conducted many projects from commissioning and start up of the gas pipeline system from pipelines to Sakhalin 2's LNG plant to the construction field supervision on the oil pipeline from the Chayvo facility to the DeKastri Oil Loading Terminal.

Vyacheslav Tropillo, general director, Kuznetsky Most

In recent years the company has tended more towards maintenance operations than full EPC and Starstroi's present general director, Pavel Kuznetsov is seeking to bring this competency back to the company. Kuznetsov explains, "Currently, Starstroi is very strong in the maintenance of pipelines and this is a core activity which will continue. The company used to be strong in EPCM and this is a direction that we seek to restore. We have worked on Sakhalin projects and we will seek to undertake similar projects in the future". Through a program of diversification into related technologies such as telemetry and telecommunications Kuznetsov aims to become a comprehensive provider to the consortia operating in Russia.

Another space of growing international cooperation within the construction industry lies in financing. Kuznetsky Most whose name refers to Russia's oldest bridge, currently buried under a road of the same name in the heart of Moscow – indeed one of the company's side projects will be to unearth and restore this bridge – works in the rapidly expanding financial leasing business. The company acts as a financial bridge between Western equipment suppliers, Asian and especially Chinese financial institutions and Russia's construction industry. In an effort to diversify its financial assets, the company has been expanding its international presence particularly in Asia and Hong Kong, establishing a local office, HKM Holding, and building a partnership with Jardine Lloyd Thompson, the subsidiary of one of the largest trading companies in Asia.

Kuznetsky Most's general director, Vyacheslav Tropillo, explains that the construction companies are looking, "to diversify their financing resources so that they are not dependent on a single source of financial backing. They seek to reduce the extent of their risk exposure by having various financial means and creditors". As a company which prides itself on building strong and friendly business relationships, Kuznetsky Most is now using its international connections to better provide for its construction clients from Stroygazmontazh to LenGazSpetsStroi.

Grime and Punishment

With the decline of easy production the RF government is increasingly motivated to explore mechanisms for better energy efficiency and within the RF government's 2030 Energy strategy, released in 2009, efficiency was a core concept. Currently Russia has the 3rd highest energy intensity in the world and recent figures suggest that Russia was flaring an estimated 20bcm/year of gas and responsible for 26% of global gas flaring, the next highest being Nigeria with 11%. Russia was described by the International Energy Agency as the "Saudi Arabia of energy efficiency" because the country has immense reserves of energy stored up in the waste that it emits and burns.

Genadi Man, president, Man Oil

Government reforms play their part in generating change and 2011 was the sandwich year between a $300 million government investment in 2010 promoting energy efficiency and punitive measures imposed in 2012 for any company engaging in activities from gas flaring to dumping oil waste. Oil producers will now need to utilize 95% of associated petroleum gas or risk losing the license for that field. The government is also increasing the financial penalties for depositing oil waste with $3.5 billion already paid last year.

However, according to Genadi Man, president of Man Oil, the hardest thing in Russia to change is commonly accepted norms and standards within the industry itself. Man states, "In Siberia, large oil companies are happy if their sludge is less than 10% of their hydrocarbon production. This is clearly unsatisfactory. In Europe where standards are higher, companies produce about 4,000 parts per million and some companies are hovering around 400 parts per million". Russia has not yet been calibrated to think in terms of efficiency.

Around 3mt of oil waste is produced every year and according to Man "It is precisely because of Russia's former resistance to finding environmental solutions that we are here. The sheer scale of the environmental problem connected with sludge in Russia creates a huge opportunity for us". Man Oil has patented a sludge processing mechanism which greatly increases the speed of the process with a previous successful deployment on a project for TNK-BP in Ukraine. Speed of processing is vital in areas of Siberia where the window for bioremediation is temperature-dependent allowing sludge processing companies only a 3-4 month window. Confident that their successful experiment with TNK-BP in Ukraine will be duplicated with other Russian majors, Man holds strong hope for the expansion of the Russian market in the coming years and is investing $5 million in Russia in 2012 for research and development.

As Man notes, it is the changing norms within the industry itself, rather than top-down reforms which generate change in Russia. Man remains optimistic saying "Once the shift of mentality in Russia finally converges on finding quality then there the industry will produce results like the Sukhoi fighter jet. It is the overall changes of mentality within people at all levels which really creates an effect".

Whatever the real effect of government measures and whether they will be enforced fully is too early to tell but the RF government has no doubt assisted in creating a market for equipment providers selling energy efficient solutions.

Karl-Heinz Mommert, general director, Netzsch Pumps Rus

Netzsch Pumps Rus, local subsidiary of the German-based pump suppliers Netzsch Group, established itself in 2005 with the rationale of making smaller orders profitable by being able to sell in rubles. As general director, Karl Mommert says: "Netzsch was interested not just in large contracts for $3300 to $33,000 but in contracts for $250-400". However in 2011 Netzsch Pumps Rus was able to close $1.3million and $1.2million deals with TNK-BP and Lukoil respectively. For TNK-BP, Netzsch has installed three large multiphase pumps which represent one of the company's chief innovations. These pumps offer production companies a solution to deal with the issue of Associated Petroleum Gas (APG). Mommert explains: "Using our pipes a company can transport gas and oil together from the well to the separation facility and there is a lot of investment from oil and gas companies going in this direction".