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Wikileaks reveals BP Russian problems… January 19, 2011

Posted by mytruthaboutoil in Geostrategy, Oil (general), Oil giants.

The oil spill was not enough for BP. A new cable published by WikiLeaks shows the big challenges BP faces in its new Arctic exploration joint venture, and also sheds some light on the Russian government’s motivation for allowing the unprecedented deal with state-controlled oil company Rosneft in the first place.

The cable, which quotes Tim Summers, the former acting Chief Executive of BP’s Russian joint venture TNK-BP, shows how Russia’s oil industry has operated far below international technical standards, but struggled to improve its efficiency because of government interference in the sector. It reveals why Rosneft so badly needs BP expertise to tap oil and gas reserves in Arctic waters, but also raises questions over whether BP will be able to deliver on its ambitious plans in the sclerotic Russian operating environment.

TNK-BP declined to comment on the cable. A representative of Summers declined to comment.

In a September 11 2009 meeting with the U.S. Ambassador to Moscow, Summers is said to have talked at length about problems in the Russian oil industry.

The cable said:

“The inefficiencies in the system ‘are so huge’, according to Summers, that it would take a very long time to modernize the Russian oil and gas sector.  Summers pointed out that a well that would take 10 days to drill in Canada would take 20 days to drill in Russia. He said moving a drilling rig from one site to another, a process that might take 7 or 8 hours in Canada, takes 28 days in Russia.

“Multiply that by hundreds or thousands [of rigs] and you can start to imagine the costs.”

Rosneft executives admitted earlier this month that one of the main motivations for the BP deal was access to better technology. “Acquiring new knowledge…is of the greatest importance,” said Igor Sechin, Russia’s Deputy Prime Minister and Chairman of Rosneft.

It appears that a joint venture with a company like BP may be the only way to achieve this. Many state-run oil companies in other regions, notably the Middle East, have been able to lead development complicated oil and gas projects in close collaboration with Western oil service companies. However, Summers said these companies were reluctant to enter Russia because of worries about intellectual property theft or negative headlines about the business environment.

“Russia continues to be seen as too risky by many service companies,” he is quoted in the cable.

Summers also outlined how direct government interference hampered the work of oil companies.

“Oil company Slavneft (on whose board Summers sits), had been ordered to cancel an order for foreign equipment in favor of a domestic supplier, even though the foreign equipment was clearly superior,” the cable said. “Sechin (who is in charge of the energy sector) told Summers directly that he should be using Russian gas turbines instead of the preferable General Electric models TNK-BP was buying.”

Whether BP’s Arctic venture with Rosneft will face similar interference is debatable. Summers was talking about onshore oil drilling, for which Russia has an established industry with significant vested interests. In contrast, Russia currently has no offshore oil industry to speak of, so the pressure to patronize local companies may be lower.

These comments show the particular challenges of operating in Russia, but they also show how things have changed. That Sechin has gone from quibbling about turbine suppliers in 2009 to approving a multi-billion dollar exploration agreement in 2011, suggests a more accommodating stance to foreign involvement in Russian oil and gas.



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