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‘These are dark days for Shell…’

The Moscow Times: Foreign Oil Firms See Hope In Salym

Monday 21 April 2008
By Miriam Elder / Staff Writer

Issue 3887 Frontpage

SALYM, Khanty-Mansiisk Autonomous District — With state pressure and ownership shakeups increasingly a fact of life, times are turbulent for foreign oil majors working in the country.

Yet Oleg Myakinin, newly appointed production manager at Salym, a 50-50 venture between Shell and Sibir Energy, sees his medium-sized western Siberian field as proof that foreign firms still have an important role to play.

“We are the largest onshore foreign investment project in Russia,” says Myakinin, who until recently worked for Shell at Sakhalin-2, the giant project in the Far East that was the country’s biggest foreign-led project until late 2006.

Following a bruising dispute with environmental authorities, Shell handed just under half of its 51 percent controlling stake in the $20 billion project to Gazprom, signaling a new era of state command over the energy sector.

The Kremlin’s drive has left companies such as Shell scrambling to get their hands on new assets.
The state has already earmarked new offshore developments for state-controlled Gazprom and Rosneft. Fields in western Siberia are reaching the end of their natural life spans, leaving largely untapped eastern Siberia as key for foreign majors.

“Coming into an environment like Russia is very special, especially when you’re working in the heartland of the Russian oil industry,” Chris Finlayson, head of Shell Russia, said in a recent briefing at the firm’s Moscow office. The company, he says, now has to show “where we can make a difference to justify having foreign investors.”

These are dark days for Shell. Production in 2007 dipped 4.5 percent from the year before. And Shell CEO Jeroen van der Veer said in a leaked memo cited by British media last month that the firm ranked fourth out of the top five in terms of shareholder returns over the past three years.

“Taking an early hit, they’ve actually performed fairly well in recent years,” said Simon Wardell, an analyst at London-based Global Insight, referring to a reserves scandal that rocked the firm in 2004.

“Their production has increased a little bit, but their reserve figure is still a concern,” he said.

When Shell’s stake in Sakhalin-2, the world’s largest liquefied natural gas project, was cut, it had to write off the equivalent of 402 million barrels of oil in reserves.

Yet even Shell’s experience looks tame compared with the trials of its chief rival, BP, which is facing a potential ownership shakeup at its main venture here, TNK-BP. While Russia comprises just 4.25 percent of Shell’s production, the country accounts for a full quarter of BP’s production portfolio.

And while TNK-BP last summer was pressured into selling its flagship Kovykta gas project to Gazprom, Shell is hoping to use Salym as a sign of what it can do in the country.

“We do see it as … an enabler for other opportunities across Russia,” Finlayson said. “It has been a great demonstrator for us, for what we can do.”

Foreign oilmen here no longer speak with the bravado of the 1990s, when preferential contracts were handed to international firms in a bid to lure investment. These days, they speak with humility and trepidation, fully conscious of the Kremlin’s power at a time of sky-high oil prices.

“It is very much a codification of the situation as it exists already,” Finlayson said, referring to a bill about to become law that curbs foreigners’ access to dozens of strategic sectors. “We would not move forward with a major investment without checking with the authorities whether this was acceptable to them.”

As Russian production hits a plateau and begins to decline, officials are warning that a reversal is not possible without investment in new oil-producing regions such as the Arctic offshore and eastern Siberia.

LUKoil vice president Leonid Fedun, in a recent interview with the Financial Times, warned that 2007 output of 10 million barrels per day was the highest he would see “in his lifetime.” In western Siberia, he said, “the period of intense oil production [growth] is over.”

In Salym, the three fields belonging to Shell and Sibir Energy, a London-listed oil firm controlled by billionaire Shalva Chigirinsky, are pumping 118,000 barrels per day, close to their peak, following the start of commercial production three years ago.

“What we have achieved in the region is unheard of,” said Jan Snaas, who heads Salym’s wells team.

That, in part, is because Shell knows the lay of the land, he said.

“It is not necessarily what you know, but who you know,” Snaas said at Salym’s base camp. “We go out, have beer with the guys, go fishing, go to the sauna in the evening. You build a social relationship. This is how it works.”

Yet once Salym begins to peak, Shell will have to look elsewhere to boost its reserves.

“Everyone is confident that the hydrocarbons are there, but there has still been a lot of living off the Soviet past,” Finlayson said.

The government, he said, hopes that offshore production will account for 20 percent of its production by 2020. “That is basically equivalent to developing the North Sea. The scale of that challenge, if it is going to be achieved, is really quite extraordinary. That is why I am confident that over time the opportunities will open up for cooperation with the Russian state-owned companies,” he said.

Shell has proposed a plan for developing the Arctic Yamal Peninsula to Gazprom, which holds the license to an area estimated to hold 10.4 trillion cubic meters of gas.

“To a certain extent, [Russia] is still a very attractive place to invest, even with the changes that have happened to contracts,” said Wardell, of Global Insight.

“Even though risks would have undoubtedly grown in the eyes of oil companies, Russia is still … one of the few places where you can actually get access to fairly large fields, which is exactly what the international oil companies are looking for.” and its also non-profit sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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