Focus on Russia: Finnish-Russian Oil Production in Northwest Russia

Published Jun 17, 2004
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SeverTEK, a joint venture equally owned by Finnish energy company Fortum and Russian oil company Lukoil, commenced oil production in the South Shapkino field in north-west Russia in mid-July 2003.

In April 2004, the total production rates were nearly 29,000 barrels per day in the average (approximately 1.4 million tonnes per year). Prior to production start-up SeverTEK built a 100-kilometre export pipeline from South Shapkino to Kharyaga terminal, where produced oil is pumped into the southward trunk pipeline for transportation to Russian oil refineries and to international markets through Primorsk port, Druzhba pipeline and other export routes.

Oil Lies Under Arctic Tundra SeverTEK’s head office is located in Usinsk, Komi Republic (KR), some 2000 kilometres north-east of Moscow. The company has four licences to develop five oil fields in the Timan-Pechora oil and gas province: South Shapkino and Middle Sercheyu in Nenets Autonomous Okrug (NAO), Pashshor straddlling NAO and KR, Upper Grubeshor and South Yuryakha in KR. The total proven and probable oil reserves of the five fields are estimated at 30 to 40 million tonnes. The fields are located some 200 kilometres north-west of Usinsk, in the middle of bare uninhabited tundra.

Setting Up the Joint Venture Fortum Oil Oy, previously Neste, set up SeverTEK joint venture in 1996 with French Elf Aquitane and Russian KomiTEK. The August 1998 collapse of the rouble and other changes did not improve the investment climate, and Elf withdrew from the project in 1998. Fortum acquired Elf's 30 percent share and became a 50 percent owner. In 2000 Lukoil bought KomiTEK, and active negotiations started between Fortum and Lukoil on SeverTEK business development. It was the common understanding from the very start that 50-50 financing by partners was the most feasible option to pursue. In summer 2001 the partners decided to invest in the development of the biggest of the five oil fields, South Shapkino, with proven and probable oil reserves at about 20 million tonnes.

Project Financing Arrangements
The total project cost was calculated at $362 million. Apart from economic feasibility, the investment decision was based upon a number of other criteria, such as compliance with Russian rules and regulations and with Fortum’s and Lukoil’s environmental, health and safety policies. Minimum impact on the environment, safeguarding of health and safety of workers and local population was set as a top priority target.

The South Shapkino project cost is covered by equity equally split between the two shareholders, and a $200 million loan granted by EBRD and syndicate banks such as HypoVereinsbank. This project financing arrangement, first of its kind in Russia, received Euromoney’s Project Financing Magazine’s Award for the European Oil and Gas Deal of the Year 2002.

Strong Environmental Safety Commitment
All parties to the SeverTEK financing deal – Fortum, Lukoil and EBRD – were in strong agreement on the crucial importance of environmentally and socially responsible, safe implementation of the project. EBRD approved the Environmental Action Plan for 2002-2005 and follows its execution closely. The overall aim is to minimise interference and impact on the surrounding environment and local livelihoods. The related actions include, for example, protection of the permafrost with sand and piling of all structures, gas reinjection at the stage of full-scale production and use of gas for power generation, minimal flaring, produced water re-injection, no discharge of fluids or solids to nature. The state of the fragile tundra environment is regularly monitored. The area is very rich with lakes, ponds, rivers and small creeks, many of which are traditionally known as spawning places of fish. Using of vehicles in tundra is not allowed, apart from the winter road, which is usually open from December to April. In summer, access to the field is by helicopter only.

South Shapkino oil field is located on the pasturelands of the Izhemsky Olenevod reindeer farm. Twice a year, the reindeers pass the oil field area and the pipeline route, moving to northern summer and southern winter pasture areas, following the traditional indigenous people’s nomadic way of life. To minimally disturb this activity, the oil field facilities location, route and location of reindeer crossings in the South Shapkino to Kharyaga oil pipeline have been surveyed and agreed with the reindeer farm, using their expertise and knowledge of the tundra. Contacts with the Izhemsky Olenevod farm are regular, and run practically on a daily basis. SeverTEK provides support to the farm and herders in many different forms.

SeverTEK Moving Steadily Forward
To increase production levels, SeverTEK is drilling new wells in South Shapkino. Construction of the permanent Central Processing Facilities (CPF) continues, including systems for gas and water injection. CPF will have total oil processing capacity of 50,000 barrels per day. Substantial amounts of 3D seismic data were acquired last winter in South Shapkino and Pashshor fields. The results are currently being processed and interpreted. Further evaluation of the four satellite fields is ongoing, including test production from two Pashshor exploration wells, which started in March 2004. Currently SeverTEK has a permanent staff of more than 500 people. Most of them come from different regions of the Russian Federation. Due to harsh arctic working conditions they work on a rotational basis, one month on, one month off.

Fortum and Oil
Fortum is the number one oil refiner and retailer of clean traffic fuels in the Nordic area. Environmentally benign traffic fuels and other oil products for domestic and industrial customers are produced at Fortum’s two oil refineries in Finland. The product range consists of gasoline, diesel fuels, light and heavy fuel oils, aviation fuels, base oils, lubricants, gasoline components, solvents and liquefied petroleum gas (LPG). Clean traffic fuels are also exported to countries outside Europe. To ensure safe marine transport only double-hull or partly double-hull tanker vessels are accepted into Fortum’s tanker fleet. Fortum owns the Neste gasoline station network which consists of 1030 stations located in Finland, the Baltic States and St. Petersburg region in Russia. SeverTEK is currently Fortum’s biggest investment in Russia.

Fortum’s goal is to maintain its position as the leading refiner of clean fuels. To support this, Fortum has decided to separate its oil business into a new company (Fortum Oil Oy) and list it on the Helsinki Stock Exchange. Also, the company invests EUR 500 million into its Porvoo refinery to increase sulphur free diesel production from Russian crude oil. Work has started and the new diesel plant is expected to become operational in 2006.

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