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№ 4 (April 2006)

From Submarines to Subsea Oil Tech

The Norwegian major Hydro is boosting its activities outside of Norway as it builds a global reputation as a leading player both upstream and downstream. So it is of no surprise that Russia – Norway’s neighbor on the Arctic shelf and the owner of huge undeveloped hydrocarbon reserves, is getting a priority ranking in the company’s international strategy.

By Nina Markova

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Regions in Focus

The Russian Government’s grand plans to develop the Arctic shelf and expand crude oil and oil products transportation will inevitably make Murmansk and Archangelsk, the largest sea ports in Northwest Russia, the supply base center from which future oil and gas exploration and production projects in this region will be implemented.
Murmansk is the site of one of Russia’s largest oil transshipment terminals. Also, because the port of Murmansk is the only Russian port capable of handling ocean-going tankers of up to 300,000 deadweight tons year round, the region becomes strategically important for the export to the West of crude oil and of LNG, especially exports to the United States.
Russia currently exports only symbolic cargos of energy resources to the United States because the mega-volume VLCC supertankers used to make trans-Atlantic shipments cost effective cannot be accomodated by Russian ports.
Murmansk is, however, the exception. Murmansk is deep enough to accomodate super tankers and it is ice free year-round. Supplies could flow as both pipeline throughputs from new production areas that Russia is opening onshore in its Northern Territories, and offshore production of crude oil and liquefied gas from the Barents Sea.
Moreover, because the legacy of Murmansk is that of a submarine building center, the industy infrastructure and the workforce is of a type that can be reinvented for the manufacture of oil and gas equipment and delivery of services.
Even now, Murmansk has transshipment facilities that can handle up to 20 mln tons of crude oil per annum, and according to one plan to develop the Murmansk transport network, throughput capacity could reach 47 mln tons by 2010.
The region has a significant industrial potential including operating dockyards, many construction companies and other enterprises previously engaged in the fulfillment of military contracts. The commencement of new hydrocarbon projects is guaranteed to create great opportunities for all of them. Murmansk Region Governor Yuri Evdokomov, has been quoted as cautioning Murmansk residents that while they are unlikely to see their city become a new Klondike, living standards are expected to "significantly improve."
Leading Russian oil and gas companies and some Western companies, of which Hydro has been a leader, are attracted by the potential and are actively working to facilitate these developments in Northwest Russia.
One major step in this quest occurred on Feb. 15, 2006 when Norway’s Minister of Foreign Affairs Jonas Gahr Stнre and representatives of the Murmansk Region Administration opened in Murmansk the Intershelf Center for the development of oil and gas sector suppliers for the Russian continental shelf. On the same day, Hydro opened its representation office in Murmansk, a first for any Western oil producer.
Then, less than a week later, on February 21, an Intershelf Center (for training and to promote technology transfer) opened in Arkhangelsk with the participation of Rune Osheim, General Consul of Norway in Northwest Russia. Petter Nore, President of Hydro in Russia, made this comment:
"Hydro has long-term interests in the development of its business in Russia, and in the future, the Northwest Region may become one of our main areas of operation. By setting up a Hydro representative office in Murmansk we expand our presence in Northwest Russia."
Hydro’s large-scale project for the development of an oil and gas service and supply base in Northern Russia was launched three years to fulfill a joint declaration signed by Russian President Vladimir Putin and Norway’s Prime Minister Kjell Magne Bondevik during their autumn 2002 summit in Oslo. Putin and Bondevik together recommended the implementation of joint projects in the oil and gas sector as a way of improving cooperation between Russia and Norway. Senior vice-president and former head of Hydro’s Russia Representative Office, Arvid Halvorsen, who conceptualized the project and orchestrated its launch, told Oil&Gas Eurasia: "Our objective was to build a partnership with the local industrial sector and administration. When launching the project, we were governed by the principle that the experience gained by the company on the Norwegian continental shelf could be used to prepare local companies for the development of the Russian Arctic shelf."
Projects that promote relations between businesses (b2b or business to business) are given priority. Thus, Norwegian Minister of Oil and Energy Odd Reger Enoksen stressed during a recent visit to Moscow that "cooperation between Russian and Norwegian oil and gas companies, as well as suppliers in the oil and gas sector is a fundamental aspect of ‘energy dialogue’ between Russia and Norway." Implementation of offshore projects in the Barents Sea, the Pechora Sea and the Far East (Sakhalin) ensures positive interaction between Russian and Norwegian companies. Many Norwegian companies supply goods and render services to the Russian oil and gas sector. Norwegian companies, for instance, obtained up to 25 percent of the supply contracts for the development of Prirazlomnoye field in the Pechora Sea.
The minister highly assessed Hydro projects in Russia: "Norwegian companies have extensive experience in the development of the local industry and are responsible for community development," he said. "At present, it is to a great extent considered to be a natural consequence of recognition and approval of principles of viable development. Long-term prospective of operations and commitments in the Barents Region; problems related to local and regional development are generally an elemental part of preliminary work for companies eyeing opportunities in this region." 
Hydro also gives credit to the political importance of implementing projects in Russia. Bengt Lie Hansen, the Company’s Vice-President for its Shtokman field project, considers that opening of the Centers is an important stage in the Company’s operations: "Murmansk and Arkhangelsk will play a key role in the future development of oil and gas industry in the Russian sector of the Barents Sea. Therefore, it is natural for Hydro to ‘put down roots’ just in this place. We hope to contribute to cooperation between our countries and the Russia-Norway ‘energy dialogue’ that is now actively developing."      
The outcome of Hydro’s activities targeted at enhancing contacts at the regional level with local businessmen and governmental authorities was the achieved mutual understanding which enabled the opening of the Intershelf centers. The Company’s management strongly believes that the projects aimed at the development of domestic suppliers in Russia will help Russian society to obtain maximum economic benefits from the development of natural resources.

Support of Russian Producers is the Tool

Development of hydrocarbon resources at the Russian continental shelf being one of the main future centers of world oil and gas production creates certain challenges to our country; the main challenge is to develop an efficient procurement system for such projects. In future, implementation of the Shtokman field and other large projects will require engagement of a great number of different suppliers and contractors. However, at present Russia has insufficient experience to fulfill such large-scale tasks.
Therefore, the main objective of Hydro, while setting up Intershelf centers, was to prepare the Russian industry by focusing on the production of equipment for offshore oil and gas projects. "Using our system for supplier development we are willing to assist in the formation and improvement of Russian suppliers and prepare them to fulfill future offshore projects," said Intershelf head Benedict Hendersen. The Hydro Intershelf Center will train specialists in details of offshore operations and will share Hydro’s expertise with Russian firms operating in this region. 
Since 2003, Hydro has been briefing Russian (regional) administration officials and local companies on what is required to supply goods used in Arctic oil and gas production. This has included world market expertise, traditions and standards, and international pre-qualification of producers including the inclusion of Russian suppliers into the Achilles system. Now, 11 Russian enterprises have been successfully qualified under this system and registered in the Suppliers Register in full compliance with the effective international standards. Such enterprises included the largest companies in the region, including the Murmansk shipyard, Arkhangelsk  "Onega" NIPTB and other enterprises.
The establishment of the Intershelf Center is one of Hydro’s projects aimed at improvement of Russian suppliers’ competence in marketing, management and technologies. Thus, these Development Centers for oil and gas sector suppliers shall become an instrument for raising the competitiveness of Russian enterprises.
In addition, the Hydro Centers in Murmansk and Arkhangelsk would like to become a site and place for arranging meetings and exchanging experience and skills between Russian and western oil and gas companies. All these goals will be achieved through advisory support and practical assistance granted to Russian companies – suppliers and contractors for oil and gas projects, as well as via early selection and pre-qualification of potential Russian suppliers.
Hydro seeks to render practical assistance to existing and potential Russian contractors and contribute to improving international cooperation in the oil and gas sector by creating new related businesses in the region. Hydro intends to extend the range of services provided by the Intershelf Center in different fields depending on changes in demand; however, for these purposes the company is going to be governed by its permanent principles of high quality, value and availability of services.
The company plans to take a number of practical steps: creation of information channel at; business visits of Russian specialists to Norway; development of training programs; cooperation with profile universities, and many others. The Center will organize business meetings and negotiations, carry out workshops, conferences and panel discussions. Experts from leading international companies and educational centers will be engaged in conducting training programs, exercises and theoretical classes.

Objective – Shtokman Project 

Hydro’s main objective in creating Intershelf lays in increasing the participation of Russian enterprises in supplying equipment and services to the Shtokman project. Hydro, being one of the largest industrial corporations operating in 40 countries, wishes to reduce project risks related to suppliers non-fulfillment or improper fulfillment of commitments under this project. 
Hydro has been involved for 17 years in various parts of the Shtokman development. Hydro was part of the original agreement between Soviet authorities and western companies penned in 1989. Hydro management believes that its engineering capabilities and experience in producing and transporting gas from its fields on the Norwegian continental shelf will be of great importance to the implementation of the Shtokman project which in Northwest Russia experiences weather and ice conditions similar to which exists on the Norwegian offshore. 
In 2003, Hydro developed a concept for field development based on sub-sea technologies which may reduce field development costs by 30 percent as compared with offshore platforms. Hydro based its proposal on its experience in developing the Ormen Lange gasfield in the North Sea. Hydro is reasonably proud of its implementation of large-scale projects. The $10 billiion Ormen Lange project is proceeding ahead of schedule and it will be placed into operation in 2007.
In December 2004, Alexei Miller, Chairman of Gazprom and Hydro President Eivind Reiten signed a Memorandum of Understanding providing for joint surveys of participation in oil and gas projects, analysis of future cooperation between Gazprom and Hydro in developing Shtokman field and in producing LNG. The parties reviewed opportunities of using sub-sea technologies that Hydro has used in the Ormen Lange field, analyzed supply chains and netbacks to determine costs and to better understand the market. Hydro hopes to obtain a 20 percent share in the Shtokman field development. The two partners are also studying opportunities for Gazprom to participate in Hydro projects including the Ormen Lange field. 
Bengt Lie Hansen said that in the near term, the Center and Hydro’s rep office would assist in organizing supplies to drill well No. 7. "We want Intershelf to make a positive contribution to offshore development in the Arctic," he said. "We believe that our having established the Center is evidence of our commitment to develop competitive suppliers in Russia. Using high-end offshore development technologies, having experience in implementing large projects, and being a socially responsible company, Hydro is eager to assist Russia in the development of natural and human resources. We are absolutely confident that the next 100 years of our history belong to Russia."

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