May 12, 2012
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Home / Issue Archive / 2012 / April #4 / Gazprom Group’s PeterGaz Takes the Mystery Out of Joint Venturing in Russian Waters

№ 4 (April 2012)

Gazprom Group’s PeterGaz Takes the Mystery Out of Joint Venturing in Russian Waters

   In terms of its scale and complexity, development of oil and gas deposits on the Arctic Shelf can be compared to space exploration. The implementation of offshore hydrocarbon production  programs requires investments that exceed many times those necessary to implement projects onshore, with payback delayed as long as 12-16 years.

By Projects Implemented with PeterGaz Participation

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   Moreover, to develop such offshore fields, Russian oil and gas companies need new production processes and technology allowing them
to operate under complex ice conditions, in stormy weather and at great depths.
The implementation of such large-scale development projects requires consolidation of vast material resources and financial assets, which explains why joint ventures tend to be the more prevalent form of cooperation in the development of offshore projects. Despite the fact that operations in Russia potentially are highly attractive to Western investors, there exist significant barriers that make entry into the Russian market difficult. PeterGaz LLC General Director Oleg Sergeev shares his views here on what makes that entry difficult and on how such difficulties can be overcome.

Oil & Gas Eurasia: Oleg Nikolaevich, tell us please about the main lines of your company’s activity.
Oleg Sergeev: Today, PeterGaz is the only true engineering company (in the full sense of the word “engineering”) within the Gazprom Group. What explains it is the fact that, within Gazprom, the various companies mostly operate within their respective separate areas of principal activity such as production, transportation, processing, etc. Our own company, however, has a high degree of flexibility, something that allows it to unite, in its activities, a powerful design office and a customer for investment projects. Operating as it does on the engineering services market, PeterGaz gets itself involved, among other things, in the entire range of issues associated with front-end engineering design. Naturally, our principal area of specialization is the oil-and-gas sector, in general, and in offshore projects, in particular.

OGE: It looks like a pretty wide range of areas to address. But how does that work in practice?
Sergeev: Altogether, I would say we concentrate on the following three main areas of activity.
Let’s start with the first one where we operate as surveyors and design engineers. In all such projects that we implement in Russia, Gazprom acts as the investor and PeterGaz operates as its contractor. That type of arrangement is a familiar pattern. So, I won’t dwell on that at any length.
In our second area of specialization, we concentrate on the management of investment projects, among which is the construction of sports facilities for the Olympic Games. At the moment, we are in the process of developing a design for the expansion of the Unified Gas Supply System to ensure the supply of natural gas to the South Stream gas pipeline. Under the name of South Corridor, the project will be implemented in two phases by December 2019. PeterGaz will be responsible for the management of civil engineering projects and will act as project contractor. All of that will involve a great deal of work. To give you just two figures to gage the scope of the project, let me tell you that it will involve the construction of 2,500 kilometers of gas pipelines and 10 gas compressor stations.
And, finally, here is the third line of our activity, which has a particular relevance to the topic of our conversation.
In our projects in Russia and in cross-border projects, we also act as on-site project consultants, with international companies acting as project owners. Our more recent projects of that kind include Sakhalin-1 (project owner Exxon Neftegaz Ltd) and the Caspian Pipeline (project owner Saipem). Another major project, which we only recently completed, after having performed the designer’s supervision of construction, was the Nord Stream Gas Pipeline Project. In that case, too, the project owners were major Western companies.

OGE: What are some of the difficulties awaiting foreign companies that would like to participate in Russian projects?
Sergeev: In order to perform operations on the Russian continental shelf, international corporations need to adapt their production processes to meet the requirements of the Russian legislation. The equipment and processes used in the Western countries need to pass Russian state certification, their experts need to acquire appropriate certificates and the design specifications and estimates need to conform to the Russian standards. These are just some of the many possible peculiarities that make difficult the Western investors’ access to the Russian resource bases.

OGE: Is it true that foreign companies are not allowed, in an independent capacity, to conduct surveys and field development on the Russian continental shelf?
Sergeev: Yes, that is true. Under the Subsoil Law of the Russian Federation, only Russian state-owned companies having a minimum of five years operating experience have the right to conduct offshore production operations, which currently means the two companies, namely, Rosneft and Gazprom. Another company which has the possibility to perform offshore operations is Gazprom Neft, with Zarubezhneft expected to be given that opportunity in the near future. The total number of licenses issued to perform various types of operations on the Russian continental shelf currently stands at 65. Such government policies make it possible to ensure state supervision, something that is quite logical in the case of natural monopolies.
At the same time, it should be noted that, beginning in February 2012, the Russian Federation Government has initiated a discussion on measures aiming at the liberalization of legislation concerning offshore field development. The goal is to ease conditions governing private investors’ access to the Russian continental shelf, the development of which requires a much more vigorous involvement of foreign investors. The RF Ministry of Natural Resources is planning to allow their access to exploration activities and, in the event of deposit discovery, to guarantee them the right to participate in field development.
As things stand today, however, given their limited access opportunities, foreign corporations have to establish joint ventures with Russian state-owned companies, something that gives them the opportunity to participate in offshore field development. Among the examples of such joint ventures are Shtokman Development AG, Sakhalin Energy and some others.
Consequently, the issue of gaining access to the Russian continental shelf is not at all an unmanageable problem. Moreover, the establishment of joint ventures promotes the pooling of capital, technological capabilities and manpower resources to implement large-scale projects.

OGE: Given the need to adapt production processes to meet the requirements of Russian laws, would it be correct to say that foreign companies need an intermediary or a guide to enter the Russian market?
Sergeev: No foreign company, and that applies to the situation in all countries and not Russia alone, can just come to another country and start operating on the local market using that country’s national standards. Integration into a new regulatory framework and a new cultural-and economic space is a difficult and time-consuming process. Quite often, however, no such lengthy integration is required, given that, under such circumstances, the international project owners find it much more profitable, fast and efficient to rely on outsourcing parts of the project. In such cases, it is much easier to invite a Russian company which can do all the necessary things to meet the requirements. However, the process is not without its own complexities. Against the background of a great number of business entities involved in the process, there is the added importance of careful coordination of the processes performed. Therefore, in the early stages of any project and in the course of project execution as a whole, there has to be a high level of coordination of activities, which tends to take either the form of a consortium, with all participants having equal rights, or the form of subcontract operations. But, in any case, there has to be feedback, follow-up and adaptation to the standards and regulations of the host country.  
Another important aspect of these very complex and difficult relationships is a common understanding of the project’s overall concept. What needs to be emphasized is that certain approaches tend to differ between people from different nations already at the national mentality level. Our company’s rich experience of working with different foreign partners makes it considerably easier for us to approach the task of developing a common design concept, thus making easier the joint activities and laying down a constructive groundwork for the project’s design. In its own turn, laying the groundwork for the project has a lot to do with defining the project’s ultimate success.
There exists a type of approach whereby the project’s fundamental concept is elaborated insufficiently, something that tends to make uncertain just how much the project would succeed in adapting to the existing environment and regional infrastructure and how successfully it would work in that context. That is an incorrect approach, to say the least. Obviously, it would be much better to spend more time and resources on the preparation of the project’s design at its front end. It is where you have a pre-investment block that is exactly defined as a system and clearly elaborated that you can expect 80 percent of success of the whole project to depend on that part. That was the principle that we applied in our earlier work as contractors on Russian-only projects. And that is the practice to which we have adhered ever since paying, as we do, particular attention to the early-stage conceptual engineering in both our Russian and our international projects.

OGE: So why exactly is the FEED block so important?
Sergeev: At the construction project’s conceptual stage, the front-end engineering design block ensures that all of the project’s risks are duly identified and defines the algorithm guiding the conduct of work in a particular location. First, studies are conducted of the legislative framework governing a given region and then the local technological regulatory framework and the location’s physical and geographic features are considered. In that context, where onshore mineral deposits are concerned, the first two aspects concerning the local legislative and technological regulatory framework are given top priority attention, while, in the case of offshore fields, the location’s physical and geographic features are considered in the first place.

OGE: What is it that defines those differences of approach?
Sergeev: If you look at any two fields lying in close proximity to each other, you may find so many shades of difference between them that you will have to admit that each of them, as well as the project as a whole, is one of a kind.
Translating this into the language of technology, we would have to say: “Here we are ready to start construction, but we lack the necessary technical regulations.” Under the Russian law, where the existing regulatory framework does not contain sufficient provisions to start the engineering design work on a given facility in a given location, Project Specific Technical Specifications (PSTS) will have to be developed first. Once approved, such a document becomes another regulation of, let’s put it this way, the fourth and lowest order. It is a local-level regulation that is tied specifically to a given facility, project or technology concept.
Given that a chosen design solution directly impacts safety, the level of responsibility involved here lies with the state rather than with the project owner or even with the investor. That is why it is the state agencies that supervise the situation here and issue local-level regulations such as the PSTS, which, once approved, become local regularly documents governing a given facility.

OGE: Wouldn’t it appear then that the regulatory framework governing the offshore design and construction activities is made up of separate regulatory pieces, which, on top of that, may contain inconsistencies. How might this problem be tackled?
Sergeev: If you examine, for instance, some 5-10 PSTS relating to projects with similar initial conditions, you might chose 60-70 percent of them and develop a common regulatory document that could then be applied to the next 10-20 fields. On that basis, a common regulatory base could be developed in the future to cover all of the offshore fields concerned.
Every now and then, some international standards are developed by the likes of DNV, Lloyd’s and others. But, given that, on a global level, the production of hydrocarbons from offshore deposits is a fairly recent development. No single country has been able to develop a full-fledged regulatory framework regulating and systematizing all of the numerous requirements made on the development of offshore projects. Unfortunately, it will take more than just a few years to have such a framework in place. However, and this is the good news here, as an experienced design company having participated in numerous offshore projects, we have the capability independently to develop the PSTS, have them approved by government agencies and use them as a regulatory framework in the course of the project design development and construction. So, as far as we are concerned, the problem to which you have referred is not an issue for us at PeterGaz.

Projects Implemented with PeterGaz Participation
South Stream Gas Trunk Pipeline.
Expansion of the unified system of gas supply to South Stream Gas Trunk Pipeline.
Adler Automated Gas Distribution Station.
Dzhubga – Lazarevskoye – Sochi Gas Trunk Pipeline.
Nord Stream Gas Trunk Pipeline.
Bovanenkovo – Ukhta Gas Trunk Pipeline System.
Sakhalin – Khabarovsk – Vladivostok Gas Trunk Pipeline.
Integrated Development of Shtokman Gas-Condensate Field.
Integrated Development of Kirinskoye Gas-Condensate Field.
Modernization of gas compressor stations on the Privolnoye – Mozdok pipeline section of the Northern Caucasus Gas Pipeline System.
Pochinki – Izobilnoye – SSPHG Gas Trunk Pipeline integrated with Novopetrovskaya and Zhirnovskaya compression stations.
Blue Stream Gas Pipeline from Russia to Turkey Zapolyarnoye Oil & Gas Condensate Field to Novy Urengoi Gas Trunk Pipeline System.
Izobilny Gas Compressor Station – Nevinnomyssk Gas Pipeline.
North European Gas Pipeline Modernization of Krasnoturinskaya Gas Compressor Station on the Urengoi – Novopskov Gas Pipeline.
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