Bill Carnahan , PetroResurs LLC, LUNDIN GROUP
Release Date: 2010-10-04
Bill Carnahan, General Manager of PetroResurs LLC, a LUNDIN GROUP company, has been interviewed by Russiaenergy.com for a one-off Russia Special report for Oil and Gas Financial Journal to discuss Lundin Petroleum's operations in Russia, the experience of being the first ANP foreign player on the Russian market, and the major developments expected for the coming years.Mr. Carnahan, what has been Russia’s participation in the international growth of Lundin Petroleum’s reserves?
Russia’s biggest contribution has been the contingent resources found in the North Caspian Morskaya offshore field, estimated between 110-450 mln gross recoverable barrels. Lundin Petroleum’s other assets in Russia comprise assets in the Komi Republic in partnership with Arawak Energy Corporation. The Komi assets in my view are representative of a positive story for operations within Russia. These assets have been producing in line with forecasts and with almost a 100% Russian workforce. These assets show that 100% foreign-owned Russian entities at the development stage can succeed.
You’re the first ANP foreign player in Russia, a market often viewed by the international industry as a hostile place for foreign investors. What is your assessment of Russia as an investment destination?
There are challenges for sure, but I think many of these challenges are the result of the pace of change within Russia. I think it has been common for Western companies to come and expect their business to run in a manner similar to other parts of the world and when they don’t frustrations can ensue. However, I do think that several key recommendations within the industry that are voiced by both foreign and Russian companies do register and are heard but it takes time for change to develop from these recommendations.
For instance, we have an issue with the foreign strategic investment law, in particular to our offshore investments in the North Caspian Sea where by license holders are now required to be at least 50% controlled by state companies. Given our investment to date in our North Caspian asset this is a key issue for us, and we’re in the process of working with state companies to interpret this new law. We understand the importance of Russia’s protection of these strategic assets and the new law should provide clarity on what was previously a key but unclear segment of our industry. In our case we were committed to Russia and invested in advance of the new law and so our case is unique and perhaps more difficult. However, going forward this change should help investors to better understand the playing field in advance.
I think it is important to note that frustrations that do occur within the industry are not foreign company specific. I have recently been at conferences where Russian industry leaders are expressing very similar concerns to those of the foreign companies and I believe that in time these collective voices will be heard.
Could you tell more about the assets of Lundin Petroleum, its main development in 2010 and plans for the near future?
Lundin Petroleum made its entry in Russia in 2006 through the acquisition of a Canadian company called Valkyries Petroleum. The acquisition and the idea behind it were excellent, the company held a mature and cash flow positive asset in the Komi republic which we have discussed. In many ways it represents a model of how to operate within Russia. Complimenting this was a key exploration asset in the North Caspian where we have drilled three offshore wells in the last two years. This operational accomplishment I believe is only comparable with the Russian majors and has resulted in a significant increase to Lundin Petroleum’s contingent resources particularly when considered in relation to the reserves of the company. Finally with the acquisition we also acquired two smaller non-core companies which we operated for between two and three years and then divested of. This represents quite the cross-section of upstream oil and gas industry in Russia and has created a significant asset in the form of our personnel who have worked with us through this experience. Today on the operational side we have roughly 70 employees, and our non-operated assets in the Komi Republic employ around 650 people.
What major developments do you expect for the coming years?
We need to see more interpretation on the foreign strategic investment law to assess how we move toward development in the North Caspian Sea. The key aspect there is the tax environment which is likely the hottest topic in the industry in Russia today. In addition to the difficulties associated with the interpretation of law discussed earlier there is an absence of a framework to efficiently recover exploration and development capital. As well, the netback environment in general but particularly for the North Caspian and East Siberia is challenging. As a consequence, it is difficult for companies to invest in what is a key element for the future of the Russian industry. In this regard we are starting to see and expect to see additional changes in the near future.
What are the main guidelines for your partnerships in Russia and how independent are they from more global partnerships within Lundin Group?
From the legal prospective, Russia is more entity-based but there are similarities in structure to other parts of the world. I think it is important for companies to understand the bureaucratic regimes that exist here which can turn into a challenge particularly if they do not have an experienced operational understanding of Russia. Unfortunately the negative paradigm associated with Russia often automatically turns communication to the negative. In our case, both partners have personnel on the ground who have a good understanding of the operational environment so I think we have become quite good at understanding for example the bureaucratic requirements.
Often when you take the time to listen and get to the bottom of an issue there is a clear logic to a requirement. An interesting example of this can be seen through the recent focus placed on corporate governance in the west. Many of the measures that have been adopted as a result of recent cases have elements that already existed in Russia. In the offshore environment many countries have implemented measures that are similar to what Russia is currently establishing.
Lundin Petroleum is specialized in the offshore fields. Will this continue to be your niche in relation to your Russian operations?
Offshore is something that definitely will be kept as a niche and area of expertise. However, relatively speaking right now we prefer the economics of the onshore in Russia. Getting back to the tax environment discussed previously there needs to be an improvement particularly in order to attract the tremendous capital that will be necessary to explore and develop offshore. We recognize the importance of hydrocarbon based tax revenues to Russia and understand that the introduction of change in this regard needs careful consideration but I think everyone sees it as a crucial element of future development of the industry here.
What role does Lundin Petroleum play in the oil and gas industry in Russia and what is Russia’s future role in Lundin Group?
Lundin Petroleum is currently focusing on areas in the world such as Norway, South East Asia, and Russia. Moreover, we have a long-term outlook for offshore development in Russia and as a European oil and gas company continuing to work with Russia as it transitions will be an important part of our future. It is clear that Russia will continue to play a major role in the industry and we feel that it is likely that continued changes will come to address large reserves and fields for the major players but also to give opportunities to small and medium players. We can be at a positive point in the cycle.
What will be your final message about the challenges and opportunities in Russia and especially in the Komi Republic?
I’m proud of the successful story of our investments in the Komi Republic and particularly the exploration achievements in the North Caspian. Challenges exist within the current tax structure particularly for the upstream side of the business but I believe Russia will address these challenges as we expect further improvements in the years to come. We have enjoyed working in the Astrakhan region and have made great efforts through corporate responsibility programs to have a beneficial socio-economic impact and we look forward to continued investment both offshore in the Caspian and potentially in other areas as well.
| Company: | PetroResurs LLC, LUNDIN GROUP |
| Position: | General Manager |
| Country: | Russian Federation |