a special report from Oil and Gas Investor andGlobal Business Reports

THE RUSSIANENERGYSECTOR

Economic development of the Russian Federation dur-ing the past 15 years has been spectacular followingan overhaul of its entire socio-economic and politicalfabric. From a declining centralized economy built upon asclerosis-struck political system to a fast-developing,emerging industrial country, with a fledging democracy,many older Russians struggle to comprehend the changes.

Despite stalling after the 1998 financial crisis, Russia’sgross domestic product (GDP) has grown for six consecutiveyears, surpassing average growth in all other G8 countriesand achieving an impressive 7.1% in 2004. Although en-couraging, this growth cannot mask that there is still a greatdeal of room for improvement in Russia’s institutions, itseconomic diversification and the lot of its 145 million inhab-itants. GDP is $2,140 per person; a large number of Russianslive in poverty.

Most of the country’s economic development base andmooring lines to the market economy were provided by both

Russia’s large heavy industrial tool and by the Russian Feder-ation’s immense subterranean wealth. From steel to alu-minum and heavy machineries to aeronautics, Russia has along history of industrial excellence, featuring extra-largeproduction capacities and a recognized technological and sci-entific know how. But the real catalyst of the country’s fastrecovery from the abysses of the early 1990s has been its nat-ural resources, from precious metals to diamonds, coal, indus-trial minerals and, above all, hydrocarbons.

Exploited since the early 1920s, Russia’s oil and gas sec-tor—a pure product of the Soviet economic drive—has longbeen one of the world’s leaders in terms of production. In the1980s, the Soviet Union was the world’s largest producer,thanks to the combined outputs of powerhouses like Azerbai-jan, Western Siberia and the Ural region. With the demiseof the Soviet Union, the sector fell into disarray, facing de-pressed world prices, aging fields and production tools, andmurky privatization processes driven by prevarication and vi-olent dealings.

It took some years for the Russian sector to emerge fromthe shadows and regain its place on the global stage.

After ownership structures were streamlined, assets gath-ered under unified control, management control firmly es-tablished and the violence subsided, the sector began itsin-depth reform, applying progressively more modern man-agement techniques, accelerating the use of yield-increasingtechnologies and pushing production upwards.

Production was some 6 million barrels per day in 1996-97,down from a Soviet peak of 12 million in the early 1980s,

and 1.6 billion cubic me-ters (Bcm) of gas in 1995.The figures have soared to9.45 million barrels of oiland 1.73 Bcm of gas perday today.

Oil production seems tohave reached a plateau,triggering comments on thecomplacency of the Rus-sian energy sector, whichhas been pampered by highoil prices during the pastthree years. Nevertheless,the Russian Federation issitting on the world’slargest gas reserves (1,680trillion cubic feet or one-third of the global total)and oil reserves total 51billion barrels.

Moreover, the RussianFederation holds yet moreundiscovered potential—inEast Siberia, offshore Pa-cific (with the Sakhalin

THE RUSSIAN ENERGY SECTOR: AN INTRODUCTION

Growing PainsRussia asserts herself as a global player while retaining historical control.

This special report was prepared byLondon-based Global Business Reports. Theauthors are oil and gas journalists GillesValentin (gilles@gbreports.com) and AliceBourrouet (alice@gbreports.com).

Russian spring conditions: a drilling pad in the Siberian marshes

October 2005 ▪ Oil and Gas Investor R-3

Archipelago as a point in case) andalong its continental shelf, in its Arcticregions. These are besides the relativelywell-mapped reserves of WesternSiberia that make the bulk of Russia’soutput today, plus the reserves in theolder provinces of the Urals, Tatarstanand Bashkortostan, which are now indecline.

Future discoveries should acceleratedevelopment of the industry, which al-ready accounts for more than 20% ofthe federation’s GDP and, some years,provides more than 40% of federal rev-enue.

Entry opportunitiesToday’s picture might appear chal-

lenging to potential entrants. For themajors, the infamous Yukos affair is stillfelt outside of Russia in perception ofinvestment risk and business protec-tion. The many changes in the taxregime, subsoil laws, conditions of ac-cess to export infrastructure, and thegeneral erratic legal climate of thecountry can still be perceived as detri-mental to investment. Nevertheless,the world’s majors are jockeying for po-sitions and assets, and rumors of dealsare reaching climactic levels.

For independents, the situation isalso far from straightforward, as preda-tory Russian majors remain threaten-ing, access to capital is still far fromeasy, and operating conditions remainchallenging, from harsh winters to ex-port-pipeline access and an unforgivingtax structure.

For the service industry, the situa-tion is also peculiar—most of its com-ponents are either part of oil majors,providing services to their mother com-panies, or former parts that are trying toreinvent themselves and their markets.

This leaves some room for Westernservice operators, which have beenreasonably successful. The sector isnow initiating a very active concen-tration and restructuring movementthat should re-shape durably. This inturns opens many opportunities forpartnerships and acquisitions, and theRussian service sector should look rad-ically different in a couple of years.

Ultimately, the transitional Russianenergy industry is illustrated by changesunder way now and instigated by theRussian state itself. The legal regimeshould witness a major upheaval whena new subsoil law comes into effect atyear-end, further to its amendment bythe federation’s Duma (lower cham-ber).

The industry is waiting for a numberof key dispositions that should stream-line and simplify E&P, but very wary offorthcoming restrictions of access to“strategic reserves” for foreign in-vestors, a limitation that is being moni-tored with apprehension by the globalhydrocarbon industry. A possible re-vival of the production-sharing agree-ment law could boost levels ofgreenfield development, after the previ-ous law was scrapped notably on Yukos’former boss, Mikhail Khodorkovsky’s,injunction.

Meanwhile, Russia is busy trying tocreate a national oil company to pro-tect its sovereign interests. A stalledmerger between state-owned oil com-pany Rosneft and state-controlled gasgiant Gazprom paved the way for theRussian government to increase its di-rect participation in Gazprom, nowcontrolled 51% by the state, while Ros-neft, after having acquired on thecheap Yukos’ main production unit,Yuganskneftegas, has since been ru-mored to be in merger talks with Shelland fifth-largest Russian oil companySibneft.

Since then, Gazprom and Shell haveentered agreements to swap assets andthere are obvious indications that thepublic-owned oil and gas companies inRussia are there to stay, and will playvery central roles in the future develop-ment of the industry.

The movement towards reassertingstate control signaled by the onslaughtagainst Yukos and its subsequent dis-mantling is highlighted by the effortsexerted in developing state-owned op-erators.

It is further confirmed by thegroundbreaking projects nurtured bystate-controlled pipeline transportationmonopoly Transneft. A 4,130-kilome-ter (2,566-mile) pipeline to the Pacificwill transport some of Russia’s oilwealth to Asia and should provide amajor boost to the development of EastSiberia.

Meanwhile, gas pipelines to theNorthern Europe pipeline and to,again, China and Asia should increaseRussia’s role as the world’s largest gassupplier.

Turning pointAt times of skyrocketing oil and gas

prices, an inextinguishable global thirstfor energy, and uncertainties over Mid-dle Eastern energy supply, Russia ispoised to play an ever-increasing roleon the global energy stage. This callsfor a vigilant state presence, and forcontrolled development.

Should Russia go the right way,treading carefully between national in-terests and global responsibilities, thecountry will surely be the hot spot forthe next two decades. The risks ofbacktracking to an erratic, unsafe andunwelcoming environment are slim-ming, despite frequent hiccups involv-ing nationalism and protectionism.

The stage is set for a responsible, re-warding and secured development ofto-be-discovered reserves, and a respon-sible development of known resources.Russia, as so often throughout its his-tory, is at a turning point. The coun-try’s oil and gas sector is reaching acritical time in its life cycle, and seemsto be heading towards a conventionalmodel, opened to foreign investment,yet encompassing large state-controlledorganizations.

The dust has settled over the chal-lenging years following the demise ofthe Soviet Union. The global industryis carefully looking at what is emergingin this Eastern giant. Global BusinessReports met with Russian industryleaders to prepare this report. It is in-tended to present the challenges atstake. �

R-4 Oil and Gas Investor ▪ October 2005

Useful Contacts in theRussian Federation• Assoneft: The Association of Smalland Medium Oil and Gas Producers.Elena Korzun, General Director, +7095 937 5617, Assoneft.ru

• Soyugaz: The Union of IndependentGas Producers. Viktor Baranov, Presi-dent, +7 095 231 2962, Soyuzgaz.ru

• Paf: Petroleum Advisory Forum.Vladimir Konovalov, Executive Direc-tor, +7 095 956 3714, Paf.ru

• Russian Union of Oil Exporters. Eu-geney Samoilov, Executive Director,+7 095 230 0067

• The Union of Manufacturers of Oiland Gas Equipment. Felix Luba-shevsky, Co-Chairman, +7 095 9330621

• Nefteconsortium. Faris Valiev, Gen-eral Director, +7 (855572) 37 38 35

Useful DateJune 20-21, 2006: Russian Petro-leum and Gas Congress, 2006. Thisis the compulsory meeting of pro-fessionals from across the RussianFederation and the former SovietUnion.

As far as hydrocarbons are concerned, a third of theworld’s gas is held in the Russian Federation, while its51.2 billion barrels of oil reserves are the world’s eighth-largest geopolitical concentration.

The Sakhalin 2 project has long been the region’s show-case, as first oil was produced in 1999 and the first liquefiednatural gas (LNG) shipment should be steaming off to Asiaby summer 2008. Sakhalin 2 has reserves of some 150 milliontons of oil and 500 billion cubic meters of gas, and includesan LNG plant with 9.6 million tons of capacity, currentlyhalf-finished.

Costs have outstripped estimates (doubled to $20 billion)and jeopardized the development of the venture. To makematters worse, Shell, whose 50% stake is the largest, was re-cently informed by Russian gas company Gazprom of its in-tention to swap 25% of Shell’s stake in the project for a stakein its currently undeveloped Siberian Zapolyarnoye gas field,putting Shell in a questionable position.

Not to be outdone, Sakhalin 3 has also had an appetite forcontroversy. In January 2004, the Russian government can-celled the results of a 1993 tender, won by a consortium ledby ExxonMobil. State-owned Rosneft replaced the U.S.companies and now holds a 75% stake in Sakhalin 3, illus-trating the Russian will to keep a tight control of its moststrategic assets, as well as confirming the increasing influenceof Russia’s two national state-owned champions, oil com-pany Rosneft and gas giant Gazprom.

Russia’s minister of natural resources, Yuri Trutnev, hasindicated that Chevron and ExxonMobil would be given pri-

ority if they decide to bid again, this time for 49% of the pro-ject and to continue development, presumably with Rosneft.

“Having developed infrastructure in place, Chevron andExxonMobil have certain advantages,” Trutnev says.

Work at Sakhalin 4, a co-venture of BP (49%) and Ros-neft (51%), was shelved due to poor initial exploration re-sults, and Rosneft announced withdrawal from Sakhalin 6after poor results. In turn, Sakhalin 5, also featuring a ven-ture of BP and Rosneft, is a very promising block, and BP hasindicated it would invest up to $5 billion in the developmentof which more than $150 million will be allocated to explo-ration drilling through 2008.

The mixed picture of what was once presented as the newgas frontier is worrisome: costs estimates are surpassed, ten-ders are cancelled and poor exploration results are urging theglobal majors to approach huge upstream investments in theRussian Federation cautiously.

Asset developmentOne mega-project is Shtokman. In the Russian sector of

the Barents Sea and discovered in 1988, Shtokman is one ofthe world’s biggest gas fields, with reserves of 3.2 trillioncubic meters of gas and 31 million tons of gas condensate.Development plans include an LNG plant for exports to theU.S. and have been put under Gazprom’s close supervision.

Future potential partners have been queuing up to guaran-tee their participation. Recently, Gazprom announced thatNorway’s Statoil and Norsk Hydro, France’s Total, and theU.S.’s Chevron and ConocoPhillips have been short-listed

THE RUSSIAN ENERGY SECTOR: OIL & GAS PRODUCTION

Taming the BearTo say that Russia is richly endowed below surface is an understatement.

to “be invited to intense commercialtalks” with a view to select two or threecompanies to form a consortium in thefirst quarter of 2006 for field productionand transportation operations to theshore.

Yet, the final shape of and partici-pants in this $10- to $25-billion ven-ture are still unknown. What hasemerged in the last five years is the in-creasing role played by domestic state-owned operators Rosneft and Gazprom,now deemed unavoidable partners forany large-scale project and are very po-tent partners.

Gazprom is the world’s largest gasproducer and distributor, while Rosnefthas been beefing up its oil reserves andproduction through a string of acquisi-tions. The recent reinforcement ofthese two companies is a clear testi-mony that Russia is determined to holdon to its underground wealth and iswary of foreign access to its hydrocar-bons.

At the other end of the spectrum, in-dependents are treading water in somerough seas. Only the fittest have shownresilience and ambition, and havestarted reaping the rewards of their de-meanor. Following the demise of theSoviet Union, many small-scale opera-

tions sprung up, most notably inTatarstan, where voluntary policypushed by the republic’s presidency andthe local major Tatneft (Russia’s sev-enth-largest producer) created a havenfor independents.

Although most of the local minnowsbenefit either from Tatneft’s direct eq-uity involvement, or from the supportand stake-holding of the professionalassociation Nefteconsortium, they alsoenjoy a relatively free rein in their oper-ations. After experiencing a steep de-cline in production in the late 1980s,Tatarstan’s production has risen back to30 million tons per year, notably thanksto the work of the local independents.

Some 5 million tons of those tons willcome from 96 oil fields exploited byTatneft, and 36 fields developed by 28independents.

Nefteconsortium was created to hostthem under a single roof, and provideadministrative, technical and financialsupport.

“We believe Tatarstan is a very spe-cific oil province in the Russian Federa-tion, as there is a genuine local will tosee independents succeed, and there isalso a good understanding of what theirspecific needs are, after having seentheir birth and rise over the last 15years,” says Fanis Valiev, general direc-tor of Nefteconsortium.

Largest independentAn inspiring story is that of local

major Tatex and its successful venturewith Ocean Energy Inc. (now a part ofDevon Energy Corp.). Tatex is todayTatarstan’s largest independent, withexpected oil production of 491,000 tonsthis year from two fields.

“Where we contributed in the earlydays is from the capital side,” saysSergey Faerman, Devon’s Russia coun-try manager and also president ofTexneft Inc, Tatex’s U.S. partner.

“We made it possible to develop

October 2005 ▪ Oil and Gas Investor R-7

…Independents aretreading water in some

rough seas. Only the fittest

have shown resilience and

ambition….

these fields earlier than they wouldhave been developed. In addition toproviding capital and technology, wehave contributed to the image of ourpartner as being a company that is notafraid of being looked at as one of theprogressive leaders of the industry.”

Since inception, Tatex was the firstindependent to successfully implementdual completion works on its fields, hy-drofrac operations, as well as sell, installand operate vapor recovery units(VRUs) with more than 150 VRUsnow installed all over the Russian Fed-eration. This has helped this joint ven-ture to further epitomize the success ofinternational cooperation in the Rus-sian Federation.

Irek Khairullin, Tatex’s general di-rector, says the main achievements are“the fact that our company is now cash-flow-positive, has built a great infras-tructure and has been paying dividendsto the shareholders. These dividendsare being reinvested by the sharehold-

ers into the company’s development,which shows the respect and the trustthey place in this company. We nowhope to develop further, particularly ge-ographically.”

Other Tatar minnows are also grow-ing fast and following the integratedmodel of the majors. Sheshma Oil, es-tablished in 1998 with a license forthree fields yielding 30,000 tons fromunbalanced and underproduced wells,has increased production to 285,000tons of oil this year from 230 producingwells and plans 25 wells for drilling be-fore the end of the year.

With in-house well-workover ser-vices, enhanced-oil-recovery capabili-ties, an electro-chemical pipe-platingworkshop and its own constructioncompany, the company has strong po-tential.

General director Rustem Takhautdi-nov says, “At least 25% of the com-pany’s future revenue will be providedby service activities. It is a more diffi-

cult activity range than oil production,but the needs in this region are impor-tant, and we want to develop our abili-ties to serve others with what we knowthe best from our operations.”

Following the active lobbying of or-ganizations like Assoneft, Nefteconsor-tium and others, the minnows werefinally acknowledged as important ac-tors of the oil and gas sector’s dy-namism. Yet, until three years ago, thedevelopment of independents wasseverely hampered by a number of fac-tors. The majors’ appetite for assets firstaffected many independents’ survival.By limiting access to infrastructure,such as local pipelines, treatment plantsand export facilities, the majors in somecases kept a stranglehold on the min-nows, sometimes obliging them to givein and sell their assets.

London-listedIf examples of independents losing

the fight abound, there are also cases ofstruggling, yet eventually successful, in-dependents like Sibir Energy. A Russia-focused, London-listed company, Sibirhas been somewhat of an anomaly inthe Russian sector. Developing and pro-ducing its own oil fields in Siberia, thecompany has a stake in the covetedMoscow Oil refinery, has engaged suc-cessfully in trading activities and is in-volved in one of the most acclaimeddevelopments of the last two years.

Upon completion, this $1.25-billionproject, a 50-50 venture with Shellcalled Salym Petroleum Development(SPD), will be one of the largest foreigninvestments with foreign capital in theRussian energy sector, with 800 wellsdrilled and an expected cumulated pro-duction of up to 6 million tons per yearby 2010.

This success is very good news for thetwo stakeholders: Shell, whose Russianfortunes have been mixed, and Sibir,who has endured a decade of effort,fights and controversies.

Henry Cameron, Sibir chief execu-tive, says, “Sibir might be the only in-dependent company of this scale tohave survived in Russia. We are a bit ofan attraction, and there is now an ap-petite for investors to see Sibir succeed.We reap a lot of loyalty from our share-holders for all these years of work andeffort. Slowly but surely, as the projectsmatured, the knocks became less impor-tant and today, with the success ofSalym, we are reaching a turning pointof this company….”

The next clutch of difficulties forwould-be upstream players used to beaccess to the state pipeline monopoly

R-8 Oil and Gas Investor ▪ October 2005

Land of contrasts, Russia is host to many wonders: The Cathedral of the Transfiguration and its 22domes, on Kizhi Island, north of St. Petersburg

Transneft. Due to a genuine lack of ca-pacity, coupled with a certain reluc-tance on the part of state authorities,Transneft wouldn’t grant access to itssystem, therefore condemning smallplayers to sell their crude on the under-valued local market or build their ownexport infrastructure. In the last fiveyears, the situation has improvedgreatly and many independents havehighlighted that accessing pipelines iseasier today than ever, despite a still-crippling lack of spare capacity.

Equally, Gazprom was said to havemade a lot of effort to grant access to itsgas transport infrastructure, here againproviding an encouraging signal of thelarge players’ change of attitude.

TaxesStill a major concern for many is the

tax regime, which penalizes companiesat times of high oil prices, as it lacks aprogressive calculation mode. Thisissue has attracted the attention of nat-ural resources minister Trutnev, and re-form is in the works. After years ofpublic outcry from the industry, in par-ticular from smaller producers harshlypenalized by the current regime, thisnews is one of the best signals sent toindependents during the last five years.

Yet, the ill-adapted tax regime, lim-ited access to infrastructure and inaptlegal frameworks have never managedto prevent large and small players aliketo consider Russia as a priority area forbusiness development. ConocoPhillips’entry to Lukoil’s capital or the BP-TNK venture are groundbreaking oper-ations that have helped disperseremaining foreign anxieties born fromthe Yukos affair. TNK-BP, despite diffi-culties including the Russian Federa-tion’s tax claim (recently reduced toOctober 2005 ▪ Oil and Gas Investor R-9

Still a major concern for

many is the tax regime,

which penalizes companies

at times of high oil prices….

acceptable levels) and unnerving un-certainties on the Kovyktinsky gas field,remains a success story. But the devel-opment of the latter issue will be a testof the Russian authority’s true inten-tions for foreign investment.

Kovyktinsky, the largest gas field inEastern Siberia with estimated reservesof 1.9 trillion cubic meters, is developedby Rusia Petroleum, which is majority-owned by TNK-BP. Here again, the no-tion of “strategic reserves” iscrystallizing a great deal of uncertaintyabout this project and TNK-BP is eagerto see the Russian authorities clarifytheir views. Until then, the venture,along with other large foreign corpora-tions, may see some of their invest-ments questioned.

Despite these signals, the attractivepotential of the Russian Federation re-

mains very important. Today, about75% of Russia’s ground-oil fields arebeing developed and are reckoned to be50% exhausted. The replacement ratesare worrying, at around 50%, and ex-ploration capex is only half of what itshould be, lagging between $1- and $2billion per year.

But potential for further growthabounds, in Eastern Siberia, the Arcticregions and offshore. The Russian natu-ral resources ministry is expected to putup to 240,000 square kilometers of seashelf for auction for geological explo-ration before 2010. Total reserves ofthese offshore territories are estimatedat 90- to 100 billion tons of oil equiva-lent, 80% gas.

These resources will be able to supplya large part of Europe’s gas need andsome of the United States’ for decades.

But this will not be possible withoutclose cooperation of foreign players andRussian entities both state and private.

This has already been recognized bymost of the key operators in Russia, anda lot of the positive changes registeredin the last year or so are to be attributedto this recognition. Yet, there are stillcauses for uncertainty, some of themmajor.

The exact strategy regarding the roleand shape of the state-owned upstreamoperators or the final content of the fu-ture subsoil law are only some of theseclouds that are taking too long to clear.For the future to be bright and coopera-tive, Russia has to act clearly andquickly to define the shape of its oil andgas industry of the next 50 years andthe degree of openness, serenity and se-curity it is willing to guarantee. �

R-10 Oil and Gas Investor ▪ October 2005

Russia’s future mega-projects aren’t solely about extract-ing mineral wealth, but also about transporting it. With49,000 kilometers (30,500 miles) of main oil pipelinesand 222,000 kilometers (138,000 miles) of gas pipelines,Transneft and Gazprom are the largest pipeline operators inthe world.

Future projects will consolidate these positions. For oiltransportation, the last large, implemented project of theregion was the Caspian Pipeline Consortium (CPC), amultinational project operational since March 2001 andtransporting oil from Kazakhstan to Russia’s Black Sea portof Novorossiysk. Involving the Russian state as a share-holder, the project has been controversial, as Russia was re-luctant to see foreign-owned pipeline infrastructure on itsterritory as well as being a transit country for Caspian oil.

The congestion of the Bosphorus shipping lane providedextra worries to the shareholders of this groundbreakingproject.

Meanwhile, the Blue Stream project is now operational,delivering Russian gas to Turkey through the deepest un-derwater gas pipeline ever built.

Today, the center of attention isthe Pacific pipeline project. Con-struction is to start in December2005, and it is to be completed by2008. The length of the route fromEastern Siberia to Perevoznaya on thePacific coast of Russia is 4,130 kilo-meters (2,566 miles) of four-footpipe, that eventually will carry be-tween 56- and 80 million tons a yearwhen combined with railway infras-tructure.

State-controlled Transneft willown and operate the pipeline, whichshould involve leading engineeringcompanies like Stroytransgas for itsconstruction. The total cost is ex-pected to reach $16 billion.

The North European gas pipeline should also be a refer-ence project directly connecting the Russian gas networkwith Baltic-region countries and the European gas grid.This 739-mile gas pipeline will run under the Baltic Seafrom Vyborg to the coast of Germany (in the vicinity ofthe town of Greiswald).

Construction of marine gas pipeline sections to delivergas to consumers in Finland, Sweden, Great Britain andother countries is planned. Construction started in August2005 and is to be completed by 2008. The cost of the pro-ject is estimated at $7.8 billion, of which $5.7 billion is tobe allocated for development of the South Russian gasfield.

For these projects, financing will be a major issue, andthe opening of Gazprom shares to foreign investors, as wellas large bond issuances by both Gazprom and Transneft,are expected to ease access to the massive amounts of capi-tal required to bring these projects to full completion.Once again, Russia is finding itself on top of the rankingsfor project size.

Pipelines

Irkutsk

SEA OFJAPAN

SEA OFOKHOTSK

Pavlodar

Nakhodka

Omsk

Angarsk

Komsomolsk

Possible East Siberian

Oil Fields

West SiberianOil Fields

Volga-UralsOil Fields

LakeBaikal

Tomsk

Daqing

Proposed pipelineExisting pipelineProposed deepwatertanker terminal

RUSSIA

KAZAKHSTAN

MONGOLIA

JAPAN

CHINAN. KOREA

S. KOREA0 500 Km0 500 Miles

KYRGYZSTAN

Source: U.S. EIA

During Soviet times, oilfield services—from drilling tohydro-fracturing, downhole services, engineering andconstruction services—were geographically organizedand attached to specific production organizations. There weredrilling teams and oilfield-service brigades working exclusivelyin Tyumen, in the Ural region or in Tatarstan, and attached totheir regional upstream state “companies.”

These teams were a depositary of technical excellence andoperational capabilities corresponding to the operating envi-ronment where they worked, and the oil and gas fields’ struc-tures and reservoir conditions specific to their regions. Withthe break-up of the Soviet Union, these teams found them-selves attached to the newly created Russian oil majors andoperating under more commercially sound strategies.

When the majors expanded their operations beyond origi-nal centers, and sometimes abroad, the service teams’ lack ofexposure to different environments and their unfamiliaritywith the associated technical challenges became apparent.Meanwhile, foreign service companies that had arrived dur-ing the last years of the Soviet Union or at the very dawn ofthe New Era were in turn displaying a great deal of flexibil-ity, cutting-edge techniques, and business savviness that wasbadly lacking to the home-grown players.

Schlumberger, one of the earliest movers, started buildinga strong local base, cooperating closely with the local majors.

The metamorphosis of the service sector is taking longerthan the upstream reshuffling. While the latter first engagedin a rush for assets, followed by a streamlining of operationsand a certain attempt to concentrate (notably under stateimplosion), the service sector has been rather slow to evolve.The main reason is, of course, its integration in the corporatestructures of the Russian oil and gas majors, which are busysorting out their upstream concerns before considering reor-ganizing and spinning off service divisions and other noncoreupstream activities.

Today, oil and gas majors still handle around 70% of theirservices internally, leaving only 30% to local and foreigncompanies. The time for more radical change has come, andthe service industry has already shown some progress.

ModernizationFirst and foremost, the needs of the Russian industry have

evolved fast, and the industry has learned to become ex-tremely demanding on the services and technologies de-ployed upstream, midstream and downstream. This ispartially due to the influence of foreign service players, whocompete through sheer quality of service, and to radicalchanges in mentalities in the industry since the early 1990s.

From a purely quantitative approach, the Russian industryhas moved into a more quality-oriented approach, with re-newed consideration ranging from more proper and carefulasset management to a need for better reservoir understand-ing and care backed by the appropriate use of the latest tech-nologies available, from state-of the art reservoir modeling

and directional drilling to well stimulation. The use of these techniques also allowed foreign service

companies to charge premiums ranging from 10% to 80%over Russian service companies’ prices. With oil prices sky-rocketing and easy oil getting thinner, the Russian upstreamhas been happy to spend the extra buck, and learn quicklyhow to unlock maximum value from its assets.

The Russian industry has now looking at spinning off thelast remnants of its formerly vertically integrated structure.Drilling teams have been spun off into subsidiaries, a preludeto their complete sell-offs and independence. Specialized op-erations have already been turned into independent compa-nies and a few major service operators have been created.

Midway between the oil and gas producer and the serviceplayer is Ritek, which is expected to produce 2.6 million tonsof oil (19.4 million barrels) this year. Created in 1992 by thewill of the giant Lukoil, the company was put in charge of

THE RUSSIAN ENERGY SECTOR: SERVICE COMPANIES

Learning Curve How does one service an industry that explores and extracts hydrocarbons across 6.56 million squaremiles and 11 time zones?

October 2005 ▪ Oil and Gas Investor R-11

The Zapoliarnoye gas condensate field is one of the largest in the world.(Photo courtesy Stroytransgaz)

developing difficult oil fields, depletedreservoirs and declining wells that themajor was reluctant to exploit itself.

The company has developed know-how and become a specialist in dealingwith challenging production condi-tions, exporting its equipment and itstechnology to Oman, China and in thenear future to India. From a major’s di-vestment (although Lukoil is still themajority owner of the company with59.1%), a strong hybrid niche player,both service provider and oil companywas established.

Valery Graifer, Ritek president andLukoil chairman, says, “In the years tocome, we’ll continue producing inno-vations and extracting oil. For us, theinnovative approach is a priority.Today, the standard oil recovery factorin Russia does not exceed 35%.”

Ritek works at engineering solutionsthat allow extracting 60% to 70% of oilfrom a well. “Thanks to fiber-optic sys-tems, for example, we can significantlyincrease the oil-recovery factor and tapresources more carefully,” he says. “I ex-pect that all the efforts put into our re-search activities will bear fruit withintwo years.”

Another precursor in the service in-

dustry, this time a pure service opera-tor, is Petroalliance, a company createdin 1989 as a U.S.-Soviet venture. Basedon cooperation with U.S.-based West-ern Atlas (now part of Baker Hughes),for years, the company has been theuncontested leader among Russian ser-vice companies, expanding its range ofactivities from seismic acquisition andmodeling to onshore and offshore seis-

mic surveying, well workovers, fieldmodeling, logging, drilling support andother services. It has also been the onlycompany able to compete head-to-headwith foreign players like Schlumberger,Halliburton and Baker Hughes, bettingon its perfect understanding of localoperating conditions, the Russian oiland gas industry and associated politi-cal connections to ensure a strong pres-ence in Russia, as well as in theCaspian region, notably Azerbaijan.

In Russia, Petroalliance is estimatedto control 4% to 5% of the oil-servicemarket. The company has always beendeemed very close to Russian giantLukoil, which ensured it with a sizeableamount of work throughout its 16 yearsof existence. But lately its largest des-tiny shift came with the entry ofSchlumberger as an investor in 2004with an initial acquisition of 26%, con-firmed earlier this year when Schlum-berger purchased another 25%,bringing its total stake to 51%.

The purchase of the rest of Petroal-liance is in 2006. Today, with offices inHouston and Moscow, Petroalliance isa player to be reckoned with on theglobal stage, and Schlumberger’s major-ity stake is a clear testimony of how the

Valery S.Graifer, president of Ritek: lookingand thinking ahead

The Krasnodarskaya compressor station, part of the Blue Stream pipeline delivering Russian gas to Turkey. (Photo courtesy Stroytransgaz)

Russian service industry can also be anattractive playing field for the globalindustry.

A new breedThe game is certainly worth the ef-

fort, as most of the industry reckonsthat the overall value of the servicemarket approaches $10 billion per year,with a level of maturity that has yet tomatch that of its Western counterparts.Despite the presence of most of thelarge international players and the riseof strong local contenders, the midsizemarket is relatively limited, and struc-tured much in the way the top seg-ments used to organize their services.

The small and medium-size E&Pcompanies still rely, in part, on theirin-house capabilities to service theirfields. In Tatarstan, for instance, mostof the independents have enhanced-oil-recovery capabilities, cementingand casing, logging and usually a set ofother capabilities. This, in turn, limitsthe potential size of the market high-lighted by sharp increases in drillingcosts, from $110 000 to $300 000 onaverage in only four years, (yet still wellbelow Western averages).

Higher costs have signaled that com-panies will have to look for more effi-cient ways to drill, and increasinglysubcontract field operations, maximiz-ing yields and asset life.

This change in the operating condi-tions has encouraged the developmentof strong local contenders, with orwithout foreign backing. One such up-coming local player is Moscow andSamara-based Eurasian Drilling Co.(EDC). Today the largest privatedrilling contractor of the Russian Fed-eration, the company is a spin-off fromLukoil Bureniye (Drilling), a subsidiaryof Russia’s largest upstream company.

Following the acquisition of 11% ofLukoil by ConocoPhilips in 2004, EDCpurchased the assets of Lukoil Drillingfor $130 million, including $60 millionin debt, and committed $75 million forequipment upgrades and renewals.Today, the company is Russia’s largestdrilling company, and is also workingin Egypt, Iran and Oman and has thefirm intention to strengthen its leadingposition and expand its activitiesthroughout the former Soviet Union’sterritory. Performing 15% to 20% ofthe Russian Federation’s inland drillingtoday, EDC is poised to remain a verykey player in the years ahead.

Yet, many members of the servicecommunity still perceive the companyas a Lukoil subsidiary, casting doubts on

the self-proclaimed independence ofthe operator. Whether EDC will per-form as a regular market player gov-erned by the laws of competition andfair business or if it will benefit from acozy captive market with its formermother house is anyone’s guess.

Teaming competenciesMeanwhile, the sheer size of the in-

dustry has attracted a set of other inter-esting players. Looking to build aposition in drilling and oilfield services,Integra is a new generation of player.Backed by Western private capital, thecompany acts as a holding, with a viewto purchasing service assets across Rus-sia, and now encompasses drilling,workover and geophysical activitiesafter purchases in Western Siberia andthe Komi region.

“With 40% of the market serviced bysmall and midsize companies, the po-tential for horizontal and verticalgrowth is large,” says Felix Luba-shevsky, Integra’s chief executive. “Mybelief is that we are at the beginning ofa consolidation movement that will ex-tract seven to 10 players that will be amix of majors’ subsidiaries, foreignplayers and independent players con-trolling up to 70% of the market.”

For Integra, the largest areas ofgrowth in the years ahead will be East-ern Siberia, South Tyumen and theYamal province, he says. In this case,the real challenge is managing asmooth development and the coordina-

tion of very different assets gathered inone ad hoc structure.

This model was also followed, yet ona smaller scale, by Petroservices, an-other gathering of various companiesunder a single roof. Manufacturer andsupplier of downhole equipment, thegroup also produces hydrodynamic re-search tools, carries out monitoring andmeasurement services for drilling, in-cluding hydrosounding, as well as activ-ities in pipeline-flow measurement, ITand other services. Petroservices pre-sents a convincing profile for foreigncompanies willing to enter the RussianFederation’s market and use an existingvehicle to develop activities or find apartner.

“Our first aim was to get together op-erations that would not have gone faron a stand-alone basis,” says MikhailDamaskin, Petroservices general direc-tor. “We can now centralize their mar-keting, sourcing, and sales efforts andconcentrate on building synergies. Allthese things these companies might nothave achieved by themselves.”

Indeed, in a country where compa-nies have been used to deal with in-house services, convincing them to callupon external companies isn’t necessar-ily easy, so one has to display strongcredentials to become a recognizedcontender. With service contracts usu-ally signed for periods of one year, pres-sure weighs heavily on the shoulders ofservice contractors who have to renewtheir lifelines every year and face the

October 2005 ▪ Oil and Gas Investor R-13

The former Soviet Union was a collection of all types of terrains and environments, a good trainingground for EPC contractors. (Photo courtesy Stroytransgaz)

threat of permanently losing their con-tracts.

For drilling contractors, the competi-tive threat can take unexpected shapes:major global players like KCA Deutagand Weatherford are already present inthe Russian Federation, pulling the sec-tor upwards as far as quality and diversi-fied service approaches are concerned.The new threat is now emerging fromthe east: Chinese drillers have alreadystarted to penetrate the market in East-ern Siberia and the phenomenon is ex-pected to grow in the years ahead.

“This is taken seriously by most ofthe actors of the sector,” says the seniormanager of a leading service contractor.“This is why we are strengthening ouroperational and corporate structures, sowe are able to approach our clients withcritical mass, alongside solid servicesand offers. As most of the operatorswon’t be able to engage in a price com-petition for long, the threat has to beaddressed through quality and privi-leged partnerships with the upstreamplayers.”

As a result, companies like IDS (In-tellect Drilling Service) have appeared.Made up of experienced drilling spe-cialists, IDS is an engineering and ser-vice center looking at extracting andmaximizing customer value from theextensive Soviet and Russian experi-ence in drilling.

“We have to work on changing men-

talities besides improving our clients’bottom lines and striving to improvethe overall quality level of this indus-try’s drilling activities,” says AlexeyMesser, IDS general director. “The sec-tor is still reacting slowly to new prod-ucts and services available to improveoperational results.”

Through increased competition andchanged market expectations, a rush forrecognition has begun for those whodon’t benefit from protected marketsinherited from the past.

Former giantsRecognized service players in the

Russian Federation include those inplace for many years. In engineering,procurement and construction (EPC),the uncontested leader is Stroytransgas,a giant player, directly descended fromthe MinNefteGazStroy, the Sovietministry of oil and gas construction.

Turning over more than $1 billion,with 20,000 workers, the group special-izes in pipe engineering and construc-tion, such as power stations,compression stations, development andoperation of oil and gas fields, and civilengineering.

The company has built large chunksof the Russian-region pipeline infras-tructure and worked on large interna-tional projects like Blue Stream thatbrings Russian gas to Turkey through a396-kilometer pipeline, partially run-

ning under the deep waters of the BlackSea and the deepest pipeline projectever achieved.

The company also set world recordsof productivity in this project, and dis-played a breadth of know-how, frommicro-tunneling to the laying of a criti-cal gas infrastructure in a seismic re-gion. Stroytransgas has also beeninvolved in projects in Greece, Finland,Algeria, India and Kazakhstan.

Currently the company is buildingpipelines in Sudan and India and re-cently won a new EPC contract in Al-geria. Despite being the directdescendant of a state-controlled struc-ture and notwithstanding its sheer size,Stroytransgaz displays a very modernfront, has streamlined its business, sepa-rating units and establishing sub-sidiaries to gain efficiency points, and isconstantly looking at ways to be best-in-class.

Alexander Lavrentiev, vice presidentand head of strategic management, says,“Selecting between the different waysto develop ourselves is not a threat or adifficulty but an opportunity to opennew prospects. The main difficulty inRussia is linked to the development ofmarket relations. The biggest Russianclient still has attitudes that are differ-ent from normal international practice.

“Normally, the client divests andoutsources EPC. But here, some Rus-sian clients think it is better to spend

money inside the companythan outside. Internationalpractice has shown thatonly in very stable admin-istrative systems this ap-proach could be imposed.At Stroytransgaz, with ex-tensive international expe-rience working on a pureEPC basis for Bota,Sonatrach and otherclients, we believe thatmarket drivers will pushRussian clients into moremarket-orientated ap-proaches.”

Educating the market istherefore another tasktaken by Russian serviceplayers when trying to tapinto the 70% of servicesstill completed in-house.Bringing in the latest tech-nologies and using capital-intensive techniques tomaximize the use of anasset or the quality of in-frastructure is now becom-ing accepted as commonpractice.

R-16 Oil and Gas Investor ▪ October 2005Drilling and oilfield services are tomorrow’s hot play in the Russian oil and gas sector.

Much work re-mains to be done onshifting businessparadigms and orga-nizational habits,from a vertical ap-proach, where totalcontrol over a pro-ject is the norm, tosubcontracting andthe use of modernappropriate instru-ments.

“Stroytransgaz ac-cepts constructioncontracts,” Lavren-tiev says. “It also ac-cepts EPC contracts.We had to constructthe whole chain ofthese competencies.Now we are workingon our processes tosee which link needsto be strengthened.We have found outthat we have to de-velop our engineer-ing companies andproject-managementcapabilities. Welearned a lot fromlarge internationalplayers and Ameri-can corporations tosee how they orga-nize themselves andwe see now that westill have opportunities to structure our-selves in a way that could be more effi-cient.”

From a rigid structure and frame ofactivities, companies like Stroytransgazhave learned to radically change theirprofiles, and to adapt more precisely totheir environment. They became keyglobal contenders in very short periodsof time and are more eager than ever toreap the benefits of their visions.

Russia is looking at building one ofthe world’s largest oil pipelines, con-necting Western and Eastern Siberiawith the Pacific. It is also involved withthe biggest gas production and trans-mission project in the world—connect-ing the Yamal-Nenetski province toEurope through the Baltic region (al-ready Stroytransgaz was involved in theconstruction of a gas pipeline connect-ing Yamal to Europe via Belarus), aswell as some possible interconnectionbetween the Russian grid and Asianand European markets.

In other words, the future is brightfor the few Russian mega-players thathave managed the transition from state

administrations to fully recognized in-ternational players, displaying know-how, competitiveness and an appetitefor global growth.

Vertical and horizontalOther large players have developed

through both vertical and horizontalgrowth. One example is MNP, a groupowned by OMZ, a Russian steel con-cern. MNP has gathered shipbuildingactivities (at five shipyards) with shipmachine building, drilling tools anddrilling equipment divisions and astrong heavy offshore design and fabri-cation capability. This is in part due tothe acquisition of U.S. offshore designand engineering company Friede Gold-man.

Michael Kosslapov, MNP presidentand chief executive, says, “The marketis slow for heavy land rigs these days.”Competition from the East is increasingand becoming a source for concern.

“We have to be wary of the Chinesecompetition in this segment, with play-ers like Baoji that are stepping up theirpresence in this market. For our group,

we foresee growthpotential in smallerland drilling rigs likemodular cluster rigs.”

As for the rest ofMNP’s business, off-shore design todayrepresents 15% oftotal activities andcould well go up,with Caspian pro-jects providing thebulk of this growthmomentum. Thecompany alreadyparticipated in theconstruction ofequipment dedicatedto Kazakhstan’s off-shore fields, notablyfor Italy’s Saipem. Alarge integratedplayer like MNP—benefiting upstreamfrom metal suppliesfrom its mother com-pany, midstreamfrom fabricationyards and shipyards,and downstreamfrom a wide array ofsubsidiaries—stil lneeds to work hardon its strategy to facecompetition andmaximize its owngrowth potential.

In the case of itsdrilling equipment activity, the openingof service centers is expected to providethe differentiation necessary to copewith Western and Chinese competi-tion.

Niche excellenceAfter being cast in the shadows of

unforgiving international competition,local equipment makers are seeing lightat the end of their tunnel. Such a sig-nificant player is Volgaburmash, thecountry’s leading maker of drillingequipment, and one of the world’slargest producers of rotary drillbits.

After difficult years, the companysuccessfully restructured itself and ex-panded marketing efforts into Asia, theMiddle and the Far East, North andSouth America, Africa and Australia.Meanwhile, it upgraded its productiontool and expanded the range of its prod-ucts, today offering 350 different bits,from three to 26 inches.

“We were successful in coming toterms with our past and efficientlyshape our present,” says MichailGavrilenko, Volgaburmash president.

October 2005 ▪ Oil and Gas Investor R-17

Chinese companies are adding supply to the Russian land-rig market.

“And today, we have learned to forgetabout having complexes on our prod-ucts: after serious efforts and capital ex-penditures, our quality and our servicescan today rival on the global stage. Ourpast in unrivalled and we are workinghard to make our future the same.”

Despite the optimism, Gavrilenkoworries over the purchasing policies ofRussia’s large upstream players. “No-body knows what they buy, to whomand for what prices,” he says.

In the shadows of the large groups,smaller players also try to find a place inthe sun, and here again, offer reason-able opportunities of investment andcooperation. The Soviet Union’s tradi-tion for scientific excellence has left be-hind a plethora of highly qualifiedtechnicians and engineers eager to em-brace opportunities.

A wealth of entrepreneurs and brightminds has established small businesses,sometimes one-man shows based upona single technical innovation. A decadeon, and some of these players are stillaround, some thriving, others strivingto move to the next phase.

The cutting edge of their productsand services deserve attention from theoil and gas investment community, butIgor Melnikov, chairman and presidentof Petroservices, draws limits to foreigninvestors willing to step in the serviceindustry.

“We are very happy to see foreigncompanies coming and bringing theirknow-how and technologies and estab-lishing joint ventures in Russia,” hesays. “On the other hand, we don’twant to see too many companies com-ing to Russia only to purchase assets.”

He adds, “We want transparent in-vestment to come to the Russian ser-

vice sector. We don’t like monopolies;we want a fair, open and competitiveenvironment.”

Examples of local exciting playersabound. Geokosmos creates and sup-plies 3-D terrain and engineering struc-tures models and large-scale digitaltopographic maps, allowing the precise3-D visualization of terrain as well asstructures over it, even complicatedones like oil and gas treatment plants.

Meanwhie, Geophysical Data Sys-tems (GDS) is a seismic-data-process-ing software developer established 13years ago. Its Interactive Statics Tech-nology product allows quick and easyprocessing of data, notably in difficultterrain. GDS has also worked withmajor clients in the Gulf and in theCIS region. Yet the Russian marketseems to be ample enough for Alexan-der Zhukov, managing director.

“A few years back, we were activelyseeking customers around the world—in Canada, Saudi Arabia and others—but since then, the volume of workwith Russia has picked up, and has pro-vided us with enough work to keep our

company and our people totally busy,”he says.

“Today, with the announced conver-sion of exploration licenses into pro-duction licenses, we see a goodstimulant for the development of explo-ration activities, and for our products.”

Another example of technical excel-lence is INEF, a Moscow firm that hasdeveloped equipment and techniquesfor the acoustic rehabilitation of wellsand beds, allowing increased yields fromboreholes previously partially clogged.

The company has recorded commer-cial successes in Russia and in theCaspian region, increasing yield in upto 1,500 wells in more than 50 fieldsboth in Russia and abroad, producing inexcess of 2.5 million tons of additionaloil from wells that were suffering struc-tural damage. Building on these suc-cesses, INEF is now looking at otheropportunities to expand its sales and toinvite an investor to give it a secondbreath of life at a time when depletedfields, old oil wells and damaged struc-tures are boosting commercial valuemore than ever across the former SovietUnion and beyond.

“Our technology will be very populartomorrow with small and medium-sizecompanies, as it is cheap, easy to deployand produces fast results,” says IsaakOrentlikherman, INEF chief executive.“We are ready to collaborate with possi-ble partners, as we believe this technol-ogy has a strong commercial future.”

Growth potentialThis example illustrates the sort of

potential still to be revealed by theRussian service sector, from the largestplayers to the smallest, offering nicheinvestment and other forms of partner-ships opportunities. With only 30% ofthe sector to be considered as “open”generating up to $3.5 billion of rev-enue, the potential for future growth isenormous and the appetite for develop-ment by local companies is real, andtoday more than ever built on solid cre-dentials.

The sector also remains firmly an-chored at the heart of a major hydro-carbon region, also promising plenty offuture developments provided EasternSiberia, the Arctic North and the mostpromising parts of the Russian shelfkeep their promise. The balance of ac-tivity development should be providedby the use of enhanced-oil-recoverytechniques and the unrivalled construc-tion of groundbreaking infrastructureslike the giant pipelines being planned.For those lucky enough to service thisgrowth, the sky will be the limit. �

R-18 Oil and Gas Investor ▪ October 2005

The overall value of the [Russian] service

market…has yet to match

that of its Western

counterparts.

Four years ago, the debate about the legal system framingE&P activities was centered on production-sharing agree-ment (PSA) laws. Some leading voices, including jailedYukos chairman Mikhail Khodorkhovsky, deemed the lawdetrimental to the nation’s interests and too favorable to for-eign companies.

The law was scrapped, triggering the ire of foreign in-vestors, and only the agreements signed between the stateand the foreign majors involved in the Sakhalin 1 and 2 andKharyaga projects were “grandfathered.”

Today, there are rumors of the possible revival of PSA leg-islation to facilitate the development of the next generationof mega-projects on the Arctic shelf and elsewhere, but thefocus of the industry is elsewhere. Everyone is waiting on theforthcoming new subsoil law, which is expected to come intoforce by the end of the year to replace one deemed out ofdate and ill-adapted by the industry.

Drafts of the law have been circulated, dispositions havebeen leaked and some of its provisional content has causedalarm among the international oil and gas community, aswell as among many of its Russian counterparts. The an-

THE RUSSIAN ENERGY SECTOR: LEGAL ISSUES

Framing PerceptionsConsideration of a new law involving Russia’s protection of its greatest-potential assets has piqued theinterest of Russian E&P investors.

For Andrey Goltsblatt, “it is time to take Russia seriously.”

October 2005 ▪ Oil and Gas Investor R-19

nounced intention to limit access to underground mineralwealth considered “strategic” (affecting many industries be-yond hydrocarbon extraction) without a clear definition ofwhat that term encompasses, sends shivers down the spines ofmany executives from the nickel, gold, diamond and, mostimportantly, the oil and gas sector. Failing to clarify thispoint, Russia will send the wrong signals to the global oil andgas sector at a time when cooperation is required to developthe next generation of mega-projects.

Meanwhile, other dispositions of the draft law, notably onecalling for restrictions of access to foreign capital, with thenecessity for companies involved in mineral extraction to be50% Russian, added a great deal of confusion to an alreadyworrisome situation.

Other areas of uncertainty also appear, regarding the use ofa double or of a simple key approach, i.e. giving authorityover the licensing processes to both the federal governmentand regional institutions. Today’s mineral law is based on adouble-key approach, and regions have been wary of an-nounced changes, which might reduce their considerable lee-way on mineral extraction activities as well as financialreturns.

Yet, the draft law also contains dispositions that have been

hailed as progressive by most. Rights of minerals develop-ment by a company that has conducted geological explo-ration work will certainly reassure most of the oil and gasindustry and ease investments into difficult assets. It shouldalso increase the number of greenfield exploration wells thathave fallen to an all-time low in the past two years.

The easing of license-transfer procedures should also pro-vide the industry with more flexibility and should in turnboost activity, providing further incentives to foreign opera-tors to seek opportunities.

Beyond the subsoil law, which should durably reshape thesector in the years ahead, there is much work to be done tostrengthen the Russian legal system and ensure that thecourts are independent and fair, and are being given themeans to render justice efficiently and with consistency. Theregional courts notably need to see their work facilitated forthe rule of the law to be strengthened.

There are plenty of legal challenges to be addressed by theRussian Federation, and these are testing times. AndreyGoltsblat, senior partner at Pepeliaev, Goltsblat & Partners,a Moscow practice very involved in the industry, says, “In re-cent years, Russia has been hesitating between differentcourses of action, different directions. Today, its course seemsdefined but it needs to mark it out more clearly for the out-side world, to stop misreading and misunderstanding its trueintentions and take Russia seriously.”

The future subsoil law provides Russia with just such anopportunity to set the record straight and eliminate its oldnationalistic and protectionist demons once and for all. Thedebate raging around this new law should be an honest, co-operative multilateral and constructive one.

It is the right time in the country’s recent history to pro-claim its intention to be a genuine partner, open andfriendly, looking at making the best use of its subterraneanwealth, for the sake of its future. �

R-20 Oil and Gas Investor ▪ October 2005

Everyone is waiting on theforthcoming new subsoil law….