Polar Lights operation. Source: ConocoPhillips.
Houston based ConocoPhillips is deeply involved in Russian oil and gas projects and has been for a while: ConocoPhillips Russia.
Joint venture with Rosneft
In 1992 it formed the Polar Lights Company, 50-50 joint venture with Russian firm Rosneft, to develop the Ardalin oil field in the Timan-Pechora basin. The field began production in 1994.
PLC [Polar Lights Company - Ben] started producing oil from the Ardalin field in 1994 and has since developed three satellite fields to Ardalin. The first satellite, Oshkotyn, commenced production in 2002. The other two satellites, East Kolva and Dyusushev, achieved first oil in 2003. Today, PLC produces approximately 8.9 MMBO per year. PLC’s headquarters office is in Arkhangelsk with representative offices in Usinsk, Naryan Mar and Moscow. The PLC staff is comprised of more than 98 percent Russian nationals. (ConocoPhillips report)
Bruce Stanley reports on some of the challenges the joint venture had faced (as of early 2003): U.S. oil giants are slow to invest in Russia; laws, pipelines seen as big concerns.
Ownership interest in Lukoil; joint venture with Lukoil
More recently (2004) ConocoPhillips has taken a 30% share in the Naryanmarneftegaz joint venture with Lukoil to develop the Yuzhno Khykchuyu (YK) oil field in the same basin.
Map source: Barents Observer
Production began in August (Lukoil, ConocoPhillips' Yuzhno Khylchuyu field production begins):
OAO LUKOIL President Vagit Alekperov and ConocoPhillips Chairman and CEO Jim Mulva participated in a special ceremony on the occasion of the startup of the Yuzhno Khylchuyu (YK) field located in the Nenets Autonomous District....
Startup of the second stage of the YK field is scheduled for December 2008, at which time an additional 32 wells will be put into operation and a high-pressure compressor station and sulfur disposal and storage facilities will be completed.
The design oil production level in the field is expected to reach 7.5 million tons a year (more than 150,000 barrels per day) in 2009.
Oil produced at the field is transported by a 158-kilometer-long oil pipeline (530 mm in diameter) to the Varandey Oil Export Terminal located on the Barents Sea coast, with the capacity of 12 million tons per year, from where it is delivered, also through a floating storage facility in Kola Bay, by 70,000 ton deadweight tankers, for eventual sale to European and North American markets...
The Varandey oil terminal, which became operational in June, is something:
Varandey oil terminal. Source: Barents Observer.
Petroleum News describes it (Varandey oil terminal starts up):
The Varandey facility consists of an onshore tank farm with a total rated capacity of 325,000 cubic meters (11.5 million cubic feet); a fixed ice-resistant oil terminal 14 miles offshore, with a height of over 160 feet and a weight of over 11,000 metric tons, including living quarters and a mooring cargo handling system with a jib and a helicopter platform; two underwater pipelines, 32 inches in diameter, connecting the onshore tank battery and the offshore oil terminal; and an oil metering station, auxiliary tanks, pumping station and power supply facilities.
An auxiliary icebreaker and an icebreaking tug will be on duty in the vicinity of the terminal, according to Lukoil. The environmental safety system at Varandey has three levels of security and is fully automated. The terminal has been designed to operate with zero discharge, which means that all industrial and domestic waste is collected in special containers and transported onshore.
Oil shipments create environmental risks: Oil spills in Arctic ice: hard to clean up. Northern Crude posted recently on an oil spill exercise planned for the Varandey terminal: If an oil tanker crashed in the Arctic.
Why has the Naryanmarneftegaz joint venture been successful? ConocoPhillips CEO James Mulva explains:
...in 2004, we entered a strategic alliance with LUKOIL, and now hold a 20 percent ownership position.
Together with LUKOIL, we later formed the Naryanmarneftegaz joint venture, in which ConocoPhillips holds 30 percent interest....
There are a number of synergies between our two companies that have benefited the YK development.
For example, ConocoPhillips participated in its financing.
And we have been able to apply the technical and operational expertise of each company.
YK
has been a predominately LUKOIL-style development. But it has been
supplemented in key areas by the experience that ConocoPhillips gained
on Alaska’s North Slope.
These insights have, for example,
helped reduce the number of drilling pads needed from the originally
planned 10 to only three.
They also enabled us to double peak production capacity, reduce the environmental impact and improve the development economics.
Overall, this blending of expertise has resulted in more than $500 million in savings.
We are also working with LUKOIL to identify new opportunities – both here and in other countries.
These could include not only exploration and production – but also opportunities throughout the energy value chain.
For example, we recently sold 376 retail fueling stations in Europe to LUKOIL.
This illustrates the fact that our alliance is much more than just a financial transaction.
It is a truly collaborative relationship in which our objectives are aligned with those of LUKOIL and its other shareholders.
There is mutual respect at both the executive and technical levels.
There is also a common desire to improve both companies by sharing knowledge and best practices.
We are exchanging employees, with our people working side-by-side for months at a time.
More than 150 people have been involved in various activities between our companies.
They have facilitated the sharing of expertise on technology applications and business processes.
Another - and external - explanation of the payoff for ConocoPhillips (ConocoPhillips: find safety in energy)?
ConocoPhillips holds a 20% equity stake in LUKOIL, Russia’s largest producer of oil and the world’s second largest public company, next to Exxon Mobil, in terms of proven oil and gas reserves. Additionally, Russia is the largest non-OPEC oil producer, meaning that they are independent of any supply constraints that OPEC might decide upon, allowing them to benefit from the resultant higher prices. In short, Russia is a huge part of the global energy story and the only way for U.S. investors to gain significant exposure into their industry is through ConocoPhillips’ stake in LUKOIL, as the other major Russian oil and gas companies are completely nationalized.
In addition to providing excellent international exposure, the LUKOIL investment has paid off tremendously for ConocoPhillips. The 20% stake represents only 6% of ConocoPhillips’ assets, but this translates to a whopping 15% of net income. Because their effective tax rate on the LUKOIL investment is only 2.6%, this is and will continue to be a very profitable arm of their business. Although Russia’s geopolitical concerns may seem to increase the risk level to undesired levels, in actuality, LUKOIL’s near-nationalized state allows it to reap in many benefits from Putin’s arguably corrupt regime, including economic policies that lead to the vacuuming of smaller oil and gas companies under the wing of LUKOIL, and the maintenance of an unbelievably low tax rate at 28% to the Russian government (compare that to the U.S. rate at 45%). This over-exaggerated risk, coupled with Russia’s recent movements in Georgia, actually makes these assets undervalued in this market environment. Furthermore, the 20% equity stake includes a position on LUKOIL’s Board of Directors which requires unanimous approval for all major decisions.
Onward and upward (ConocoPhillips CEO says committed to Russian oil):
SOUTH KHYLCHUYU, Russia, Aug 28 (Reuters) - U.S. oil major ConocoPhillips (COP.N: Quote, Profile, Research) plans to stay in Russia for decades as it seeks new investment opportunities with partner LUKOIL and rival energy companies, its chief executive said on Thursday.
James Mulva told reporters that ConocoPhillips, the 20-percent-owner of the second largest Russian oil firm, LUKOIL (LKOH.MM: Quote, Profile, Research), would study the possibility of teaming up with gas export monopoly Gazprom (GAZP.MM: Quote, Profile, Research) and leading Russian oil company Rosneft (ROSN.MM: Quote, Profile, Research) in future.
"ConocoPhillips has made substantial investments in Russia and we hope to stay here for decades to come," Mulva said at the official launch of an Arctic oil field near Russia's Barents Sea coast.
The South Khylchuyu field is operated by Naryanmarneftegaz, a joint venture owned 70 percent by LUKOIL and 30 percent by ConocoPhillips, and will be the main driver of the Russian firm's expected production growth to the end of this decade.
"LUKOIL and ConocoPhillips are looking at other opportunities, both inside and outside Russia, to develop our relationships," Mulva said.
"We have special relationships with LUKOIL but it's not exclusive. We do look at opportunities through which we can make investments with Gazprom, Rosneft and other companies," he said, without giving any more details. (Reporting by Tanya Mosolova, writing by Robin Paxton, editing by Anthony Barker)
Failure to become partner with Gazprom in Shtokman gas field development
ConocoPhillips negotiated with Gazprom for a role in the development of the Shtokman gas field in the Barents Sea, but was ultimately unsuccessful:
- ConocoPhillips and Gazprom Sign MOU for Shtokman Development (Dec 22, 2004);
- Chevron, ConocoPhillips may lose out on Shtokman due to WTO fallout - report (Apr 4, 2006);
- Chevron decides against joining Gazprom led Shtokman gas project (April 13, 2007);
- U.S.'s ConocoPhillips confirms interest in Shtokman - Gazprom (June 3, 2007);
- Russia Dangles the Shtokman Field, Again (July 10, 2007);
- Bienvenue à Shtokman (July 12, 2007);
- Statoil-Hydro and ConocoPhillips will compete for Shtokman (July 16, 2007);
- Conoco has a change @ Shtokman (September 5, 2007);
- Gazprom awards StatoilHydro Shtokman prize (October 25, 2007);
- Gazprom, Total and StatoilHydro Create Shtokman Development Company for Phase One... (Feb 21, 2008).
Revised October 15, 2008: edits, added links to Gazprom and Shtokman negotiations.
Did they learn anything from the Shell and BP debacle. the strugle BP still has on its hands with their TNK business partners. The Russioian government is not an example of reliability. Would you trust Putin?
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