Stephen Terni, ExxonMobil Russia
Release Date: 2010-08-25
Stephen Terni, President of ExxonMobil Russia Inc., has been interviewed by Russiaenergy.com for a Russia Special report to be published in Oil and Gas Financial Journal, to discuss ExxonMobil's strong and long-standing relationship with Russia, its main local projects, the challenges and prospects envisaged in Russia.ExxonMobil has a strong and long-standing relationship with Russia, having been present in the country for over two decades and scoring a major project: Sakhalin-1. How would you define ExxonMobil’s relationship with Russian both in terms of opportunities taken and challenges faced?
There is no doubt that Russia has been an excellent opportunity for ExxonMobil. There are a number of countries around the world where you could say studies hadn’t work as planned and that they had been bad investments, Russia is definitely not one of these.
ExxonMobil is very pleased with the results of the Sakhalin-1 project, which has been developed under a Production Sharing Agreement (PSA), effective since 1996. Nine years later we started it up, it went to full capacity and we very quickly began selling crude oil to various markets, and supplying gas to local users in Khabarovsk Krai in the Russian Far East. They were in fact very proud to be the first recipients of hydrocarbons from Sakhalin oil and gas projects. To this day consumers there have received over 6 billion cubic meters (210 billion cubic feet) of gas to heat their homes and supply other energy needs.
Sakhalin-1 is a multi-decade project. It includes three oil and gas fields - Chayvo, Odoptu, and Arkutun Dagi - located off the north-east coast of Sakhalin Island in the Russian Far East. The potential recoverable resources are 307 million tons (2.3 billion barrels) of oil and 485 billion cubic meters (17.1 trillion cubic feet) of natural gas. So far, ExxonMobil and its partners have taken the first steps, knowing there is a long way to go to develop those fields to their full capacity. It will take many decades to get there; we are here for the long-term and this is the way ExxonMobil approaches its business. The next step of the project will be to start up the Odoptu field which will happen in the next three months. The first phase of the Arkutun Dagi will start in 2014.
In addition to that, ExxonMobil continues to look for opportunities for partnerships with local players to develop other resources and also be active in the entire oil and gas value chain since we have unique access to the external markets. Also, ExxonMobil has an existing chemical and downstream distribution business in Russia, so we provide the full gamut of activity from production to retail.
But what about the challenges?
The challenges are many, as in most places. For instance, in recent years there have been changes in the legislative framework towards foreign investors. The new laws are more restrictive and make it difficult to enter projects on the terms that we – IOCs – are used to. We are working with the Foreign Investment Advisory Council and the Petroleum Advisory Forum to encourage change and lobby for improvements in legislation, because I think we have something very special to offer to the local industry.
IOCs in general, and obviously ExxonMobil in particular, bring lots of necessary experience and expertise, particularly in difficult conditions and in sectors such as offshore exploration, where ExxonMobil has a long history of activities in the Arctic. We also have financial strength and a worldwide team of experts; all this together means we have a lot to offer Russia.
I believe it is starting to become apparent to decision makers in Russia that there is an important role for IOCs to play. Yes, the current conditions may be too tight, but gradually the legislation is being discussed, and although it will take time for it to become law, it is going in the right direction and the sector is opening up. This is an industry where those who succeed do so because they are patient and look for the right opportunities in the long-term.
Many foreign companies have complained about the PSA model imposed in Russia, over issues such as high national content demands and other obligations that make investments in Russia appear less attractive. What’s your assessment of this?
The Sakhalin-1 PSA is not about the degree of national content, it is about best efforts. Maximizing Russian content is one of project's key objectives.
We have designed our processes to firstly let local companies know what project needs are; secondly we give them a chance to register in our supplier data base through the workshops or conferences or even via the Internet; and then we set up a team to qualify them and to check what they are capable of. Based on this analysis, we prepare a short-list and issue the documents. Every time Exxon Neftegas Limited, operator of Sakhalin-1 project, has an opportunity to put a Russian company that might be able to do the job in the list, we do it.
Besides this, we have encouraged our contractors’ community to engage in JVs so that a local company who might not have a certain expertise can benefit from our activities by uniting its forces with a foreign company able to transfer the necessary technology: a win-win situation.
Sakhalin-1 has demonstrated great local content performance - the value of contracts awarded to Russian companies to date amounts to US$7 billion, which represents 70% of the total number of contracts awarded to third party vendors. ENL and its contractors currently employ hundreds of Russian nationals. More than 500 Sakhaliners work directly for ExxonMobil’s affiliate ENL. Many of them have received and will continue to receive professional training in Russia, USA, and Canada. - at the moment, six thousand people are involved in S-1 activity, including direct employees and contractors. As Russian national employees are trained and gain experience, their percentage will approach 90% of the workforce.
One of the main reasons why the Sakhalin -1 project is so widely known worldwide is due to the technological challenges and advances it represented to the oil and gas industry. In your opinion, what were the main technological breakthroughs brought by ExxonMobil operations in the project?
Sakhalin-1 is one of the largest green field developments in Russia. It is also one of the most complex and ambitious projects in industry. People ask us if ExxonMobil with its 100-plus years of global exploration and development has ever been involved in a project that offered so many challenges. We tell them the company has had experience with all of these challenges. This includes operating in sub-Arctic environments, researching and applying ice-breaking technology, working in remote areas thousands of miles from manufacturing and supply centers, developing drilling plans for extreme horizontal drilling, working under complex regulatory regimes, and many others. However, while we might have faced two or three of these challenges on a project before, just about every single one of them came together on this project.
Application of the state-of-the-art extended reach drilling (ERD) technology is an important factor in the development of Sakhalin-1 fields. We first applied this technology at the Chavvo field, where we drilled 20 ERD wells from the Yastreb land rig and 21 ERD wells from the Orlan offshore platform. Application of the ERD technology has helped minimize the cost and footprint required to develop Chayvo, where we set records in depth, horizontal reach and drilling speed. In February 2008, Sakhalin-1 set a new world record for extended-reach drilling when the Chayvo Z-12 well achieved a measured depth of 11,680 meters, or over seven miles. This exceeded by 398 meters the prior world record set in 2007 by Chayvo Z-11 well. We are proud that twenty of the world's top thirty world record ERD wells are on Sakhalin -1. The ERD, directional drilling, Fast Drill, Integrated Hole Quality are examples of technologies that helped us start production of oil and gas from the Chayvo on time and on budget.
Drilling at Odoptu started in May 2009 and in January 2010, we announced the successful completion of the first two extended-reach wells. The Yastreb drilled horizontally under the sea floor of the Sea of Okhotsk to a target area in the oil reservoir located over 9 kilometers offshore. The extended-reach wells are the first two of seven wells which will tap the reservoir at Odoptu.
The reservoir target at Odoptu is about 30 percent shallower than the reservoir successfully drilled by the Yastreb at Chayvo in the first phase of the Sakhalin-1 Project. As a result, drilling at Odoptu required further well design optimization and the use of new technologies including an upgrade to the Yastreb rig to increase torque output by 50 percent. The world-class execution of the initial Odoptu wells effectively leveraged learnings from the successful Chayvo Phase 1 project. Continued application of ExxonMobil’s leading-edge Fast Drill technology resulted in record performance at Odoptu, paving the way for lower development costs. A second important breakthrough was achieved at Odoptu with the application of proprietary software modeling and the use of key technology to successfully deploy very long completion assemblies. These accomplishments significantly improve ExxonMobil's capability to optimize field development at the Odoptu and Arkutun-Dagi fields.
How do you thing these new technologies will reshape the future of exploration and production in Russia and beyond?
The fact that we can do more with our rigs in a shorter period of time means that we can invest less, improving the economics of projects. Therefore it can make some projects feasible where they weren’t before and as we go deeper and deeper into the oceans it will definitely put ExxonMobil in a better position in the market.
And what about further exploration projects in Russia, are there any in the pipeline?
Let’s just say that Sakhalin-1 is our first priority, this project is ongoing and we have many development plans for it in the pipeline. It is a huge project in itself, which will continue for decades to come. Of course this is not to say that ExxonMobil is not looking towards other opportunities. We are in constant talks with national companies to identify opportunities and set-up new developments and partnerships in Russia where we see potential for commercial projects and where we believe our experience and technology can be of value to Russia.
Briefly, what does it take to be successful in Russia and how have you applied this recipe for success to ExxonMobil activities here?
In Russia, you have to be consistent with your goals, set your objectives very carefully and be patient. From 1996 to 2005 ExxonMobil engaged in a long and steady process that lead to our success in the Chayvo field and quick advances on the other two Sakhalin-1 major fields.
Our successes in Sakhalin show how true ExxonMobil’s idea of taking on the world’s toughest energy challenges really is. We consider ourselves to be a premier technology company in the industry, investing more money in research and development than any other player – more than 1 billion US$ per year. Over the next five years ExxonMobil will invested more than 125 billion US$ in project development.
For Russia, this hopefully means using ExxonMobil’s unique expertise in exploration in challenging regions such as the Arctic, where the future of Russia’s oil and gas industry – and indeed the world’s – is. It is in such areas that I believe ExxonMobil can help Russia the most.
What are your main ambitions and expectations for ExxonMobil’s operations in Russia over the next three to five years?
To name a few, we wish to continue to develop our downstream businesses as the Russian market continues to grow, capitalizing on ExxonMobil’s already well-established downstream business in Russia. Naturally we also intend to continue to invest in the Sakhalin-1 project, exploring its full potential, and finally we hope to be able to replicate Sakhalin-1 successes in the promising new exploration areas of Russia.
| Company: | ExxonMobil Russia |
| Position: | President |
| Country: | Russian Federation |