Norsk Hydro in Russia

After more than a decade of patient efforts in Russia Norsk Hydro is awaiting its reward. The giant Shtokman field in the Barents Sea is worth waiting for. In the meantime Kharyaga has proven a very worthwhile involvement. Phase two of Kharyaga came on stream four weeks ago.

Shtokman is a huge gas field located in the north of the Barents Sea. It is at least three times the size of Troll, with estimated reserves of at least 2.500 billion m3 gas.

‘What is decisive for the Shtokman project is when a definite need for its gas is manifested on the European continent,’ says Norsk Hydro Oil & Energy’s President EPI, Morten Ruud. As a huge gas field involving a development of considerable cost and technological challenges, securing the sales contracts is vital.

‘As I see it, it is not realistic to expect Shtokman to be producing at least until sometime between 2012 and 2014. Counting back the years it take to develop such a field, about 6-7 years, we might still have a couple of years to wait,’ Ruud says patiently.

Fighting it Solo
‘We are first of all dependent on which strategy Gazprom chooses. We don’t know for certain whether they will concentrate their efforts on such a huge development as Shtokman yet. Maybe they will prioritize a development at Yamal where, after all, there is some infrastructure.’

A Shtokman development is complicated and far from the markets. Located far north in the Barents Sea there is need for pipelines to the Russian mainland, and from there it needs to be transported all the way to the markets in Europe.

Norsk Hydro has been working towards an involvement in the Shtokman for more than a decade. Together with Conoco and The Finnish Barents Group, Norsk Hydro made a deal with the Russian authorities in 1989, but it was later made void.

In 1995 Norsk Hydro was again invited to work on the project together with Gazprom and Rossnelf and the western companies Fortum, Conoco and Total.

The cooperation agreement between the Western companies and Gazprom expired in the autumn 2002, and was not extended.

‘We came to the conclusion that we could best pursue our interests on our own,’ Ruud explains. But he is not anticipating Norsk Hydro as the only partner with Gazprom in the Shtokman development.

‘Even for Gazprom the Shtokman development requires such huge investment there is need for several partners. That is why we might very well end up in cooperation with some of the companies we have already worked with there,’ Ruud explains.

‘Gazprom is looking for a group of companies that together can bring in the right technology as well as the financing needed for the project.’

Technology is Key
‘We feel we have a strong position with Gazprom,’ Ruud maintains. ‘The Shtokman lies in harsh northern conditions, which we are accustomed to. Gazprom needs partners with the right technology, and we believe we fit that description.’
Having said that Morten Ruud is careful not to appear to certain.

‘In Russia we never know, we simply have to keep on working and wait with patience. There is a lot of bureaucracy, and surprises should be expected.’

‘But we have been here for 10 – 15 years and can compete on our own merits,’ Ruud points out.

Kharyaga
Working with the French has so far proved fruitful for all involved. Norsk Hydro is currently involved in the Kharyaga field, where TotalFinaElf is the operator.

Phase 1 of the Kharyaga development came on stream in 1999. Phase two came on stream only four weeks ago.

There are also plans for a Phase three, although decisions have not yet been made. Ruud expect a decision within the Kharyaga-partnership about Phase three by the end of 2003.

Kharyaga is the first onshore field to come on stream in Russia under a new production-sharing agreement (PSA) between oil companies and Russian authorities. The production-sharing agreement was signed in 1995, and Hydro farmed into the agreement in 1996.

Hydro owns 40 percent of the field, while operator TotalFinaElf holds 50 percent and local concern Nenets Oil Co. has 10 percent.

20 percent to Lukoil
‘There is an agreement that Lukoil will take over 10 percent both from Norsk Hydro and from TotalFinaElf, thereby leaving us with 30 percent,’ Ruud explains. When that will happen is again up to the Russian authorities. .

‘The agreement is finalized, and the contracts are signed. We expect the agreement will pass through the authorities during the second half of 2003,’ Ruud says.

The first of three wells started producing on Oct. 2 1999, pumping out about 7,500 barrels per day of a light, high-quality oil. Two more wells came on stream the following months, and the production last year was 12 000 barrels a day. With phase two fully up and running it will be 30 000 barrels a day.

The wells are connected to on-site processing facilities. The oil is piped from Kharyaga to Usinsk using the KomiTek transportation system before it is transported via the Transneft system 2,400 kilometers to the western border of Russia. From there the oil is shipped to the European continent.

Morten Ruud’s mind does not only travel eastwards. He is responsible for all of Norsk Hydro’s oil and gas projects internationally. In that capacity he is in a period of reviewing his and his colleagues’ efforts. Norsk Hydro will renew its international strategy during the summer 2003. There is little doubt Russia will still be high on the agenda, though. At all levels of the organizations we hear great anticipations and expectations of rewarding involvements in the land of the Tsars.