Transnational Report

Strand 4

Russian Fact Finding

Mission

Objectives and Results

Report No. 4 - 03
Revision No. 00

October, 2003
Writer:
Lise Nyvold

Client: Landsdelsutvalget
Responsible Person: Ine Hilling

This report covers the main objectives and results from the Strand 4 Russian mapping
session in October 2003.

Project Manager: Lise Nyvold Responsable for quality control:

Telephone direct: + 47 77 62 26 51 Ine Hilling, Landsdelutvalget
E-mail: lise.nyvold@barlindhaug.no
Name of report:
Main objectives and results
Adress: Sjølundveien 2 Ark. Nr: Internett:
dokument1 http://www.barlindhaug.no
9291 TROMSØ Company mail:
Telephon: 77 62 26 70 norfico@barlindhaug.no
Fax: 77 68 40 39
Org. Nr: NO 936 392
954 MVA

27.10.2003
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NMC STRAND 4 RUSSIAN MAPPING SESSION
MAIN OBJECTIVES AND RESULTS

Content:
1. Preface .............................................................................................................................3
2. Objectives of Russian Mapping Session......................................................................3
3. Map and describe the current situation – outline scenarios ......................................4
4. Identify stakeholders in the logistic chain – oil companies, industry, authorities.10
5. Assess potentials for regional co-operation and maritime transport......................12

Ref: n:\3917nmcr\rapp0004.doc
Saksbehandler: Lise Nyvold

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1. Preface
As you will know the discussions in Strand 4 so far have resulted in the following priorities:
• Maritime link to the Barents region
• Increased sea transport connections between the supply bases and the petroleum activity
centers
• Improved cross-border connections

As a part of this Strand 4 have focused the increasing oil & gas activity in the Barents region
and especially the Russian waters offshore the oblasts of Murmansk, Archangels and Nenets.
It is expected that the increased exploration activity and other development projects will lead
to substantial growth in cargo volumes. Strand 4 aims to promote the maritime link in this
context as a suitable transport route for equipment and supplies to the oil & gas industry.

In order to review the situation and assess the potentials, Strand 4 has already presented a
report describing the expected activity. In the meeting in Groningen in June 2003 , the
Strand 4 work group concluded to advance this one step further. It was emphasized that it is
imperative to establish business relations between the regions in order to secure
development and sustainability of the maritime link.

The Strand 4 program includes therefore a fact-finding mission to Russia. There is a

comprehensive minute worked out from the trip, Day to day report from Moscow 13.-
17.10.2003. The report consists of the program for the trip, all speaks made, keynotes and
the discussions afterwards, and also the delegation views and a sum up. All participants, in
the delegation and Russian participants are listed.

This report describes the Strand 4 objectives with the facts finding mission and sums up the
findings from the visit to Moscow.

2. Objectives of Russian Mapping Session

The mapping session had 3 main objectives:
• Map and describe the current situation – outline scenarioes
• Identify stakeholders in the logistic chain – oil companies, industry, authorities
• Assess potentials for regional co-operation and maritime transport

In addition of course it was an objective to present the NMC project and its partners to
Russian players and promote the Northern Maritime Corridor as an arena for regional
collaboration and development.

In the following the report will present the findings of the facts finding mission concerning
each objective.

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3. Map and describe the current situation – outline scenarios

The development of exploitation of the Russian oil & gas fields in the Barents area is taking
on a speed that seems to give huge growth in volumes of oil shipped through NMC area.

• The demand growth mainly caused by the USAs need for stable supply of oil and gas
represent a central factor. The international interest in the Barents region is based on the
same logic

• The energy dialog between Russia and the USA, and Russia and Norway was focused.

• The dialogs should focus upon areas of cooperation that enables the production of the
huge resources to be safe in terms of environmental issues/ transportation, effective in
terms of operational concept/ transportation, and by this be competitive on the world
market and by this return national and regional social-economical development

• On the fact finding mission the NMC project and individual delegates was actually in a
position to give the Norwegian and Russian authorities ideas on these matters, specially
concerning supply system effectiveness

• The export capacity is a major constrain on the petroleum industry.

• The domestic market in Russia develops slower than the production, and does not give
enough payback to make the industry able to execute the necessary investments

• There is need for foreign/international company investments for pipelines/transport

infrastructure to get the waste resources to the payable markets in USA/Europe

• Signals is that Transneft will keep its monopoly on petroleum transportation

infrastructure

• Customs clearance takes to much time, regulations are limiting the potential for reduced
time consumption

• Export more complicated than import because there is no economic revenue from export
clearance

• For the supply industry it is therefore a problem to send equipment for repair and
maintenance. Could have guaranteed return but the bond fee is large

• St. Petersburg is very difficult, takes in average 30 days to clear the goods

Today the Timan Pechora oil fields are the main production areas. Privazlomnoye and
Stockman represents vast oil & gas resources coming up, but the Stockman field has many
unsolved issues concerning how to operate and transport gas over long distances. This
situation means that the solving and realising of the resources in the disputed area is an
important topic.

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On the facts finding mission these coming fields were at the center of attention.

Prirazlomnoye oil field has been discovered in 1989 on the shelf of Pechora Sea in location
of 950 km from Arkhangelsk and 1025 km from Murmansk. Sea depth over the area is 19 –
20 m. Remoteness to the shore is 60 km. Air temperature is from –50oC to –4oC, average
ice thickness in winter time is up to 1,6 m, wave height – up to 12 m. Recoverable resources
of oil (C1+C2) are 610 million barrels. Field development scheme includes: Estimated max
production level up to 55 million barrels/year in the 5th year of the field development.

Stokmanovskoe gas-condensate field has been discovered in 1988 in the central area of
Barents Sea in the distance 565 km from the Cola Peninsula. Sea depth is 280 – 360 m on
the deposit’s area. Sea wave height – max 17,5 m. Recoverable resources of natural gas
(C1+C2) are 3205,3 billion cubic meters, gas-condensate (C1+C2) 227 million barrels.
According to initial feasibility study, prepared by Giprosspecgas, the field is able to give
annual production 60 billion cubic meters of gas during period of 50 years. Development
scheme includes construction of gas pipeline 565 km to the shore and building of LNG plant
near Murmansk.

The disputed area was looked into in depth at the meeting with the Russian Ministries and
at the Round Table Conference. This area represents
• Good geological prospects of finding huge oil and gas deposits both for Russia and
Norway
• Possible to make use of known improved technology
• The fields are closer to shoreline and established and well-functioning infrastructure in
Murmansk/Archangels and northern Norway
• Possibility of establishing shore based facilities
There is taking place a constructive energy dialog with the Ministry of Natural resources,
Transportation and Development and Trade. The dialog is based on President Putins and
Stensnæs joint statement during Putins visit in Norway. The disputed area is important for
dialog development. The progress is positive. On the energy side an energy expert group is
working on cooperation in the disputed area.

The offshore fields of Finnmark/Kola will be of significant importance due to:

• Less environmental concern
• Lower investments and operational costs than further east in the Barents Sea, Kara Sea
and Pechora Sea. In this respect it is of major importance that a border line agreement is
reached in near future. Even so we need to remember that market conditions are tough
and the cost effective solutions must be used to utilize the advantages. This demands
cooperation on framework and operational issues to obtain that goal, the major topics
are:

1. Authorities/foreign affair: need to find a border line agreement, and also cooperate
on operational framework issues that clear the ground for reducing
investments/cutting costs.

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2. Putting together companies working on a practical level together, sharing

experiences.
3. In this way the respective countries petroleum resources are effectively developed,
and the pay back to national and regional economical and social development is on
track.

• On Privazlomnoye offshore field and in general Norway would like to offer its
competence and experience in
• Operating offshore, regarding safety, effective transportation and supply
systems.
• The impression was that the Russian was interested in exchange of knowledge
• On base functionality, emergency preparedness and logistic operations.
• Contacts were made between individual companies to follow up on this issue.

• The supply system must be cost effective and it is forward necessary for Russia and
Norway to cooperate in common transportation systems. This was the major focus for
the facts finding mission.
• It is important to agree on a common base.
• If it is up to the oil companies there will be several bases and that will not benefit
the industry.
• On infrastructure: one should agree on choice of transportation mean.

Oil transportation
Concerning the numbers given in Moscow on oil transportation in NMC was very much the
same as was known/anticipated, and shown in the report from Ocean Shipping Consultants
Ltd.

Scenarios
Expected volume and direction of oil trade from the Arctic region;
• Large scale export expansion
• Possible export growth through Murmansk
o From 3,0 mill. Ton in 2003
o To 20,0 mill. tons in 2010
o And possibly 45,0 million tons in 2015

This is the lowest estimates, alternative high estimates includes volumes like
• 80,0 mill. Tons by 2010 or 2015.

The large range between the scenarios indicates the uncertainty of future development.

Gasresources: Mr. Ivanov from CNIMF sums up that 30 % of Russian hydrocarbon

recourses will pass through NMC area. According to Ivanov the USA has stated their annual
need to be 100 mill. Cubic. The main known field is Stockman and Fedinsky high, but also
the disputed area could hold vast gas resources.

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How the transportation of this gas will be carried out is still unknown. LNG or compressed
gas, sub sea installations brought on shore at some point or transported more or less directly
from the huge fields like Stockman.
Mr. Ushakov stated that the estimated LNG volumes are expected to rise to 8 - 12 mill tons.

Markets
• The high scale oil volumes on European export hauls has more than doubled since 1995
o Total shipment from 1 mill. Tons to 6,5 mill. Tons by 2010
o Rising to 13,0 mill. Tons by 2015
• Total Artic oil export volumes to USA expects a high growth rate
o Expected to reach 2,0 mill. Tons in 2004
o Rising to 13,0 mill. Tons in 2010
o And by 2015 reach 31,0 mill. Tons

The gas market will also be Europe and the USA. The USA has stated that it would like to
be served by the Barents Sea on gas already by the year of 2010. Concerning Europe as a gas
market it was stated that knowing the costs connected to developing and operating a gas
field, and knowing that the EU have rules that put restriction on long term supply
agreements, this will be a disadvantage to the industry in developing the European market.
But also Europe wants to diversify its supply sources to stabilize their energy situation.

Terminals and ports in the Barents area

Export shipments from the Arctic currently comprise movements from Arctic ports and
offshore fields – both are limited in terms of annual capacity, and especially limited in terms
of ship size capacity. It is a rapid development of supplying larger ships, latest new is a
320.000 ton tanker is being put in business in the Kola Bay by December 2003.

The important oil terminals today is

Murmansk
Started operation in 2002. The terminal is accessible to vessels of up to 150,000dwt. The
facility has been developed as a temporary interim measure ahead of a larger terminal
construction – planned for vessels of up to 300,000dwt. Murmansk plans for 300.000 tons
capasity tankers, changes the conditions in the Ocean Shipping Consultants Ltd report and
cuts some of the possible savings from using H&I transhipment terminal. A new Murmansk
terminal will cut these savings even more, but Scottish transhipment will still be favourable
on some of the long routes. The calculations are based on current tanker rates

Varandei (outside Archangels)

The terminal has been expanding for the last years. The waters are shallow and last autumn
there was installed an artic submerged shipping terminal (ASST) on the seabed by
Murmansk Shipping Company. In 2003 its expected to transport 1,5 mill tons of oil from
Varandei, and its mostly 20000 ton dw tankers that traffics from Varandei to Murmansk. So
far this year 600.00 tons has been transported from Varandei. (Krivapolov). In 2015, 12,0
mill. are expected transported from this terminal.

Ports
Kandalakse/Vitino seaport provides services in storage and transference (transhipment) of
bulk-oil cargoes such as petroleum, black oil and stabilized gas condensate. The port is

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capable of handling three tankers simultaneously. At present one sea tanker with deadweight
up to 70 000 tons and two tankers such as ore-oil carriers can be handled simultaneously.

Murmansk and Archangels are the most important cargo ports in the Barents area today
What was clear from the trip is that the two ports are
• Competitors in the question of location of one main supply base for offshore oil & gas
operations. Transport Ministry seems to favour Murmansk, while CNIMF favour the
axis Archangels/St. Petersburg. CNIMF gives its advices for transportation systems to
many major oil companies.
• Starting to cooperate in developing the infrastructure capacity and niches of the
individual ports

Today it seems
• Most petroleum related goods is transported through St. Petersburg and further up to
Archangels.

• This represents an old established supply system for artic settlements and production
areas. Although St. Petersburg has ice problems and some of the goods (theoretically)
could be transported more effectively on alternative transportation routes the general
impression was that only commercial business development/choices will be able to alter
this system. St. Petersburg is the main port for Russia

• No governmental decision will be made that touches upon the 70% Russian supply to all
projects.

• A shift will come only by the business being made

• The oil companies will to a large degree be free to find their supply system

• From a regional governmental point of view there is a need for competition on various
areas in the petroleum industry development, including supply
base/industry/transportation. The regions do not want to be a hostage to one/few huge
single investors, that will halter the regions development in an overall social-economical
perspective.

• For the Privazlomnoye field its likely that St. Petersburg to Archangels is chosen as
supply link

The Norwegian delegation saw these issues as important to experience in direct dialog with
players and the Ministries.

Transportation system/Supply system

The main issues will as mentioned before be
• What supply system the oil companies will prefer. Both economical and environmental
concerns connected to infrastructure will be considered,

• Competitiveness: market competitiveness will put strong demands on developing a

transportation system that serves the operations effectively

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• For the future gas transportation the available technological solution will probably put
strong conditions on the possible operational choices to be made.
o LNG
o Compressed gas
o The possible length of pipelines from the fields to land will be central
issues.

• Murmansk as a transport junction is favourable, the capacity of the commercial port, the
depth allow 300000 ton tankers, The Kola Bay is not is freezing port in north Russia.
Most icebreaker fleet is located in the area. Murmansk Shipping Company carries out
the shipment and has the fleet, vessels, nuclear ice breaker etc.

• Archangels is also a transport junction, not ice free, but seems to have the advantage of
representing the traditional artic hub for general goods being first gathered in St.
Petersburg.

• The Transportation Ministry wants to develop a cargo base around exported goods:
optimistic concept says 27 mill tons a year, pessimistic concept says 13 mill tons a year.

The infrastructure connected to the ports is also important

• Both have railway connection.

• The high volume pipeline link planned at Murmansk should also make an impact on the
search for a final supply system. Murmansk expects also European investment
contribution to secure the start up of pipeline construction.

• Service industry

If the disputed area should in fact be closer to realization than e.g Stockman it is
important to focus on
• Solving the delimitation question as soon as possible

• The importance of Russian Norwegian cooperation on transportation system/supply

system is obvious.

• The view from the delegates was that either way Norwegian players will be present, and
Russian players will take their business towards the Norwegian area in the Barents
Sea/North Sea.

• The cooperation on safety and environmental issues must continue and technological
cooperation should be organized on authority and operator level

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4. Identify stakeholders in the logistic chain – oil companies,

industry, authorities
The main Russian stakeholders is set up by the major oil companies making choices for
logistical system and locations, if or when to invite in partners etc.
- BP TNK
- Lukoil
- Yukos
- Sevmorneftegas
- Gazprom – major gas company
- Gazflot
- Surgutneftegaz
- Sibneft (bought by Yukos ?)
- Rosneft
- Transneft- transportation monopoly
- AGD-Arkhangelskgeoldobycha –exploration company
- AMNGR-Arktikmorneftegazrazvedka –prospecting, exploration
- Rosshelf, joint stock company
- Total
- ConocoPhilips (Polar Lights Company)

The authorities dealing with different aspect of importance:

The RF Ministry of Energy (Former Ministry of Fuel and Energy) is responsible for
monitoring the country’s energy balance and the daily management of the oil and gas sector
including production forecasts, exports, domestic market, processing, transportation
development & co-ordination programs.

The RF Ministry of Natural Resources (MNR) is the ministry responsible for distribution of
undeveloped natural resources. Its functions include preparation and announcement of
licence rounds (tenders), issuing of licenses for exploration and production and supervision
of compliance of the companies with the license terms.

Governmental commissions - The Government Commission on Trunk Oil, Gas and

Petroleum Product Pipelines was put down in November 2000 and has the control of the oil
producers access to the system of trunk pipelines, including issuing of licences for oil
export.

Federal Energy Commission of Russian Federation - FEC of Russia

The Russian power industry has its tariffs - including those for transportation of petroleum
products through the state-owned pipelines - regulated directly by the government i.e.
through the Federal Energy Commission of the Russian Federation and regional energy
commissions of constituent members of the Russian Federation.
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Russian-Norwegian working group on energy

Since June 2003 a Russian-Norwegian Working Group On Energy has been set up for the
purpose of implementation of a cooperation program between two countries in energy
sector.

The Ministry of Transportation deals with all decisions regarding transportation issues –
Northern Sea route is a major focus. At the Round Table conference the impression was that
NMC caught their interest as the western part of NSR, and that contacts was made to
continue on developing the NMC infrastructure as a part of the regional infrastructure.

The Ministry of Economy & Development deals with the negotiations with Norway on
delimitation issue together with Ministry of Foreign Affairs.

Other main commercial companies:

Schlumberger – supply industry
Bertling – forwarding company
Northern Shipping Company – big White Sea cargo operator
CNIIMF - 25 % state owned commercial adviser for many oil companies on transportation
system, technical design etc
Murmansk Shipping Company – big oil shipping operator

Also custom authorities will be importance since custom clearance according to Bertling
varies from city to city, St. Petersburg using more time than e.g Archangels. The delegation
picked up different information on what kind of information was needed, and that most
companies uses custom brokers in addition to holding their own company custom
coordinator.

The delegation had business to business talks with BP/TNK, Schlumberger, Murmansk
Shipping Company, Northern Shipping Company, Bertling and CNIMF
• Security was discussed and Statoil was asked to provide training for emergency
accidents and excepted immediately but stated at the same time the need to exchange
knowledge on Barents vs. North Seas
• The NMC can learn from Bergesen on this issue, Bergesen has experience in
cooperation with Russian shipping players and security issue
• NorCargo and Northern Shipping Company will follow up their contact made in
Moscow, the possibility of developing a EU Marc O`Polo project together will be
assessed
• The presentation of Scottish transhipment possibilities interested the Russians and will
be followed up possibly with further investigation of possible cost savings.
• TFDS Offshore had good contact with Murmansk Shipping Company, and will by this
contact be able to strengthen their following up and developing of existing cooperation
with Sevmorneftegas Company

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5. Assess potentials for regional co-operation and maritime

transport
Common issues for cooperation in focus in Moscow
• Safety at sea – there is a working group between Russia and Norway in action witch
goal is to contribute to realize commercial cooperation in the energy sector both on the
operator and supply side. Sustainable development is also a very important part of the
work, responsibility for oil spill (roles and organizations, professional & industrial
bodies, state, boat owner, cargo owner), rules and regulations, framework for
commercial equal competitive conditions

• Sailing routes – what are the Norwegian position (12 mile zone), conditions made up
from insurance considerations

• In general it could be a good idea to work through the regional level more than the
national both regarding governmental and private company contact. The national level
seems to be hard to get in contact with due to their huge project responsibility. The
national issues must be lifted to a governmental level by the NMC project, leaving
business players to pursue their commercial interest.

• The disputed area: both operators and governments have common interest in a
relatively quick solution and judicial, technical, environmental and infrastructure
framework should be based on cooperation between Russia and Norway. This will be
the major way to ensure cost effectiveness and important safety/operational standards. I
will contribute to market competitiveness and thereby to the two countries wished
national and regional development.

• A solution for disputed area should lead to a common strategy for the exploration and
development of the area. There should be cooperation between Russian and Western
oil/gas companies, cooperation amongst supporting industry:
–Freight Forwarding companies
–Major Contractors
–Equipment suppliers
• In connection with this a common base should be considered within a free trade zone
concept

• Customs: there seem to be a potential for exchanging experience on how to serve the
petroleum industry needs concerning effective and predictable custom accomplishment

Southbound transportation issues for regional cooperation in focus in Moscow

Infrastructure
• Business to business contacts made that will be able to develop partnerships in
commercial fields like shipping of oil including transshipment connected to terminals
• Base functions; transportation of personnel, rules & regulations, safety, operational
experience from the North Sea to the players interested at serving the Barents Sea
operational needs

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• Different port qualities and niches in the overall transportation system

Northbound transportation issues for regional cooperation in focus in Moscow

Infrastructure
• Base location; supply transportation system. If disputed area is relatively close to
realization it is immensely important to cooperate on constructing a supply system that
enables the resources to be cost effectively utilized. The Norwegian players expect to
participate regardless of location but puts emphasis on the need to cooperate on a
common supply system for both countries.

• Different port qualities and niches in the overall transportation system

Supply chain
• Put people together to look into the logistics and how to operate in these areas

• Develop cargo base knowledge: register return freight potential in the overall
transportation system

• Business partnership contacts very investigated and networking stated. Some players
discussed concrete partnership possibilities in serving the industry

Short list of important follow up actions:

• A free trade zone will be a great means for smooth operations on both Norwegian and
Russian side. Statoil as weel as the NMC management should pursue this to the
ministerial level
• NorCargo and ASCO will pursue their cooperation
• Russian representatives asked for experiences in safety at sea, in particular surveillance.
Russians could be invited to see Norwegian and UK operations. NMC management to
follow up together with Statoil
• Bergesen has made a huge storage tank for Russia. Their learning could be useful. NMC
to follow up
• NorCargo and Northern Shipping Company will together pursue shipping line from
Arkangelsk to Norway/UK/Continent
• NorCargo will pursue cooperation will Murmansk Shipping Company
• Graeme Smith’s presentation was well received and he will contact the major oil
companies to pursue the idea of transhipment in Orkney
• Custom clearance issues were addressed from several different angles during the trip.
Delay in custom may cause expensive rig delays when operating out of Russia This is a
matter that should be addressed by the Governments on both sides.
• It was a conclusion a main conclusion that there is a shared responsibility between the
NMC management and each individual to pursue the learning and the contacts made.
There was also a conclusion that a next mapping session should be by a trip to
Murmansk and Arkangelsk. NB: The Moscow mapping session should not end up as a
single happening!
• Furthermore, the commercial sector must take initiatives, and then the government will
follow.

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