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Interview

with Viacheslav Urmancheev, General Director, ArktikMorNefteGazRazvedka

07.06.2010 / Energyboardroom

The history of FSUE “Arktikmorneftegazrazvedka” (AMNGR) is long and prestigious. Could you start by telling our readers about the period when the company was created. Was the development of oil and/or gas fields in Russian Arctic essential for the country’s future development?

In 2009 Federal State Unitary Enterprise “Arktikmorneftegazrazvedka” celebrated its 30th anniversary. Although AMNGR was founded in 1979, it was not until 1982 that the development of Arctic shelf began. It was at this time that the company purchased its first drilling ships “Valentin Shashin” and “Viktor Muravlenko”, built in Finland. Moreover, jack-up «Kolskaya» was built at the same shipyard. Later, three semi-submersible drilling rigs «Shelf-4», «Shelf-8» and «Shelf-10» were purchased from the Vyborg Shipyard. In 1990 a fleet of drilling rigs replenished with Jack-up “Murmanskaya”, built in Vyborg. Therefore, in the 80’s of the past century FSUE “Arktikmorneftegazrazvedka” operated seven drilling rigs of different class (drilling ships, jack-ups and semi – submersible rigs), more than fifty special -purpose vessels, including two passenger ships, a firefighting ship, a rescue ship, three small tankers, and more for its Arctic operations. AMNGR also included an array of enterprises: two drilling enterprises- one for geological exploration works on the shelf and other on the Kolguev Island; marine fleet, transport and communication enterprises, experimental construction and assembling management for development of offshore potential areas, construction and assembling management for oil field development, as well as its own scientific subdivision- complex thematic expedition.

However, the planned economy was replaced with a free market economy in the 1990s, which meant that in 1993 the company lost its state financing. The enterprises should survive and fit into the market all alone. That was rather complicated period of mergers, sales and companies worked hard to define their spheres of interest. That turbulent process showed up onshore mostly where a production took place.

There was no production on the shelf and works to be carried out before production required huge financial investments, which the company could not bear by itself. It is clear that there was no interest for these.

Today it is clear that the Russian Shelf is a treasure trove of natural reserves, but exploration activity has been extremely limited in comparison to other offshore shelves around the world. Only one well per 26,900 km2 has been drilled in the Barents Sea, one well per 8,800 km2 in the Pechora Sea and one well per 80,300 km2 in the Kara Sea. On the Russian shelf, the density of geophysical works carried out is only 0.4 km per 1 km2, whilst on the Norwegian shelf this figure stands at 5 km per 1 km2. Norway has drilled over 500 wells on its sea shelf; Russia has only drilled 58.

How did your former success and experience help during the transition to a market economy?

As I said, in 1993 the state unwound the funding. Because industrial production offshore is so expensive, the only company ready to invest in the offshore regions was Gazprom, who employed AMNGR’s experience and services for drilling operations in the Barents Sea and Obsk Bay.

As for the experience, it is necessary to refer to the human essence. Planned economic system has got the human into the habit that everything is predestined and that did not help during transition to a market economy. Earlier, the task of AMNGR was to take the investments bestowed on it by the state and use them to our best abilities. When the change to a market economy took place, our business had to shift instead to look for places to find investments, and save as much of them as possible. The company’s former business model had no place in this economic environment and put brakes on the company’s development. Expectations, that one day the state will come to its senses and proceed financing of drilling in the Arctic seas, compelled the company’s management to keep the structure, proved itself in the Soviet times, without transformation it to the market conditions. In principle this strategy is clear because for the state enterprise task No.1 is to complete tasks of the state. However, the expectations remained unfulfilled and the other task was placed on the agenda- to look for a work by itself, minimize expenses and make profit for the enterprise’s development.

Companies like Sevmorneftegeofizika and MAGE found work with Western companies at that time. Did AMNGR do the same?

Our companies are in different situations. Jack-up «Kolskaya» was operated in the North Sea and FSUE «Arktikmorneftegazrazvedka» got freight revenue. Russian crew did not meet the requirements for work abroad (knowledge of foreign language, training and certificates). Moreover, our semi-submercible drilling rigs did not meet the international standarts and were sold.

Except for well drilling, working experience on external market was required, where Vneshtorg held a monopoly. Previously, foreign affairs were under control of Minvneshtorg and the contracts were examined and approved by the Price Institution of Vneshtorg. When the monopoly on external trade was cancelled in 1990, many companies entered into external market, including amateurs as well.

2009 was a time when many companies in the oil and gas sector were facing a very difficult period…

When I took office on March 7, 2009, I did not realize the true depth of the crisis. The team was being reshuffled, at a time when we had to scrutinize the company’s expenses and draw up a strategy for solving problems and cutting costs. One of our drilling rigs, Murmanskaya, was in Malaysia (Johor), when the client went bankrupt and we had to conduct very difficult negotiations with the operator. We took a part of the equipment and tools and delivered the rig to Vietnam for repair. It took AMNGR three months and 163 million rubles to bring the rig in order. However, as a result, the company collected its crew and signed a contract with VietSovPetro at a normal rate.

AMNGR has also optimized the works on Kolguev Island (Peschanoozerskoye field) and cut expenses by 77 million rubles. We also cut production expenses by 44.5 million rubles and transport expenses by 15 million rubles. However, we have approached 2010 with reduced expenses on the above items, but repair expenses have grown up.

In 2010 we plan to complete the repair of our JU “Kolskaya” and modernization of JU “Murmanskaya” that is connected with large financial investments. Repair of other support vessels is in the project as well.

Seven among 25 of our vessels, including jack-ups, are under operation worldwide, in Africa, Singapore and Mediterranean Sea.
One of the key current objectives is corporatization. It is extremely difficult to manage a Federal State Unitary Enterprise. All contracts have to be agreed with Rosnedra (Russia’s state agency for natural reserves) and Rosimuschestvo (the state agency for property). After the corporatization 100% of shares will be transferred to the state-owned Zarubezhneft.

What aspects of AMNGR will best complement Zarubezhneft?

It’s a win-win situation: Zarubezhneft is not experienced enough in order to operate on the Russian shelf. AMNGR has no financial assets. After the merger, AMNGR will immediately gain access to licenses and shelf operations, but most importantly to facilities, equipment and staff.
Our company already has practice of such cooperation. We have drilled one well offshore Vietman without any failure, started to drill the second one.

Wide practical experience gained by FSUE AMNGR’s personnel, when operating under complex environment on the Arctic shelf, material and technical resources and complete professionalism of the specialists allow the enterprise to solve different tasks for development of oil and gas potential of the Russian shelf, as well as foreign countries.

Development of the Arctic shelf is one of the world’s most interesting large-scale projects, in particular on the Kolguev Island. This is a unique experience from the geographical point of view. What partnerships do you envisage for the development of the Arctic?

I’m always surprised when people talk about the extensive experience that Norway has in the harsh conditions of the Arctic. Don’t forget that the Gulfstream runs there which makes the conditions a lot milder – unlike Canada and Alaska. Canadians and Americans have a much larger experience of operations in the Arctic, in particular Canadians have developed a thermocase technology which makes it possible to work under permafrost conditions. Moreover, it was an American company that drilled the most northern well in Norway. I was shown a presentation about that as early as in 1988.

I would not say that the conditions on Kolguev are that extreme to produce oil. The only technical difficulty is permafrost and practically the night continues for half a year, and occasionally the temperature is – 400 C, but thanks to the gathered experience the operations on the Island are carried out all year round in a normal mode.

Does that mean that the American and Canadian readers can rest assured that the work in Russia will seem easy after their experiences in the North?

Well, the only two challenges on Kolguev Island that I can think of are permafrost and sometimes polar bears.

Having worked for about a year in AMNGR, what are the projects that you plan to carry out in the nearest future and what are the goals that you want the company to achieve?

I would like to see the company prosper. For this purpose we need to get free from the fleet that will never be in demand, because we have been operating the vessels more than 20 years. As a drilling contractor we shall have the modern drilling rigs. Sixth generation rigs used to cost $600-700 million USD, but today they are much less expensive. AMNGR has no free assets to buy them, but Zarubezhneft does and it is required to buy the equipment for the projects of Zarubezhneft. We need to renew the fleet of drilling rigs because the outdated rigs are an unnecessary load for the company, and hope that the Russian offshore market will develop. The current high costs of energy resources have forced the world to turn to alternative sources of energy, such as the development of shale gas in the USA.

Russia is also facing the issue of shelf gas production. Norway, traditionally an agricultural country, is becoming an industrial oil country formed by service companies and is very interested in the development of Shtokman field. But just fifteen years ago the Norwegian oil companies were not present on the international market!

Russia also has big onshore gas reserves; this is why there is a lot of debate over whether shelf gas development is feasible. The Murmansk region is interested in big projects, investments and employment opportunities.

The feasibility of offshore projects in Russia is hotly debated. Will AMNGR need to look for new opportunities or do you have a sufficient amount of operations on the Arctic shelf?

I’m convinced that it’s no use waiting, but at the same time I realize that as a specialist that there’s no place for us in future projects. We did our job – we discovered the oilfields – and now other companies have arrived there. Out of the fifteen discovered offshore fields only two are ready for operation – Prirazlomnoye and Shtokman – and their exploration still needs to be finished. The other fields need to be developed, i.e. to drill prospecting wells and we can do this.

There is a large scope of works on the Arctic shelf for our company but its practical realization depends on the state policy. In particular, how the state will allocate the licenses. In 2009 we have applied for a license to perform independent works on one of the offshore area and are waiting for decision on the application. For other organizations having licenses AMNGR can work as a drilling contractor.

Your final message to the international audience of Oil & Gas Financial Journal?

I would like to wish everyone stability in our complicated time in order everyone can execute its plans and let good success attend you. I wish you health and personal happiness!

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