The game about Russian oil

It took Kvaerner management just five days to negotiate a sale of its subsidiaries Kvaerner Hydrocarbons and Kvaerner Process Technology two weeks ago. And it took multimillionaire Mikhail Khodorkovsky $ 100 million (about $ 880 million) to include the companies in Yukos Oil's portfolio.

Thus, Yukos had secured companies that fit the Russian oil giant as a glove. Not least, this applies to Kvaerner Hydrocarbons. This company already had Yukos as its largest customer before the acquisition.

Around 160 employees at Kvaerner Hydrocarbons work today for Yukos Oil in Moscow. But Kvaerner Hydrocarbons has several bold sleeve contracts. The key word is pipe systems.

No beginner

Kvaerner Hydrocarbons is the fluctuating Norwegian industry group's expertise in oil and gas pipelines. The Kvaerner Company's expertise currently benefits Yukos Oil on the gigantic Priobskoye field in Siberia.

But Kvaerner Hydrocarbons is not at all unknown to Russia and its backyard from before. In 1996-99, the company built the 850 kilometer long oil pipeline from Sangachal in Azerbaijan to the Georgian port city of Supsa on the Black Sea.

The pipeline cost $ 600 million to build and has a daily capacity of 115.000 barrels of oil extracted from the Caspian Sea – including from Statoil's oil field.

In addition, last year Kvaerner Hydrocarbons began construction of a gas pipeline from Sangachal through Georgia to the Turkish border. A Turkish company is responsible for the continuation of the Erzurum pipeline in the eastern part of Turkey.

- We expect to complete the pipeline in 2004-2005. Our stretch is 700 kilometers, and the gas will be transported from BP and Statoil's fields in the Caspian Sea, says Vice President Roberto Pirani in Kvaerner Hyrdocarbons.

He also says that the construction of an oil pipeline – also to transport Statoil oil – on the same route is part of the gas pipeline contract.

- But we are in the middle of negotiations now, so I can not say more about it yet, says Pirani.

Caspian conflict

This means that both Statoil and Kvaerner have planted their bones in the midst of highly controversial conflicts: first, in relation to who owns which oil fields in the Caspian Sea, and secondly, which way the oil should be transported out of the area.

The Caspian Sea has very rich deposits of oil and gas, and after the collapse of the Soviet Union, new fields are constantly being opened at turbo speeds. Five countries border the Caspian Sea; Russia, Kazakhstan, Turkmenistan, Iran and Azerbaijan.

The problem is the distribution of these natural resources. The countries quarrel among themselves as to whether the Caspian Sea is an inland sea, which gives the peripheral states their own economic zone, or a lake, which indicates an equal economic distribution between the states.

Russia and Iran believe that the Caspian Sea is a lake. The other three countries that it is an inland sea. But Turkmenistan, Iran and Azerbaijan are also arguing among themselves about where the borders should be drawn in that case.

Not least, the discussion and accusations are loud between Turkmenistan and Azerbaijan. Statoil is participating in the extraction of oil in three offshore fields in what Azerbaijan has declared as its zone, and is thus in the middle of a neighboring feud of which no one knows the outcome.

- Absolutely unacceptable

A couple of years ago, Statoil claimed to NorWatch that the conflict between Turkmenistan and Azerbaijan was almost resolved. In a letter to NorWatch, however, Turkmenistan's foreign minister accused the other party of "expanding the participation of international companies and resolving the dispute in his favor arbitrarily", declaring Azerbaijan's position "absolutely unacceptable".

The Foreign Minister also made it explicitly clear that one of the problem areas is the Azeri-Chirag fields, where Statoil is active.

- No, they have not agreed yet. But the Russian oil company Lukoil is one of our partners down there, so it indicates that they have a pragmatic relationship to the conflict, even though they have their principled views, says Statoil's information manager Kai Nielsen, who adds that he does not know whether there are diplomatic talks about the distribution keys between the countries.

Boom town

Statoil's involvement in the Caspian Sea is divided into three areas. The most relevant are the Azeri-Chirag-Gunashli oil fields, where production started in November 1997. Statoil is here part of the Azerbadjan International Operating Company (AIOC) consortium.

Statoil has an ownership share of 8,56 per cent in AIOC, which consists of as many as 10 international and national oil companies. AIOC is still only in the first phase of extraction, which means that 120.000 barrels of oil are extracted daily, against the expected one million tonnes at full development.

Although Azerbaijan's post-communist oil adventure is still in its infancy, the country is far from a novice in oil. In fact, the country's capital Baku became the world's first oil boom town in the late 1800th century.

Baku was then called the Caspian Sea Riviera – a playground for rich oil barons who swung in a city with palaces and casinos designed by Europe's best architects. However, the oil age ended with the Russian Revolution, Hitler's attempts to obtain oil, and Moscow's five-year plans. To this day, old oil towers and oil spills stand as a glaring memorial to the ancient oil rush.

Pipe quarrel

After the fall of the Soviet Union in 1991, the oil barons have again taken Baku, this time in black Mercedes and with mobile phones in hand.

In addition to the dispute over who owns the oil in the Caspian Sea, they have also had to take a stand on another very sensitive issue: which road and how the oil should be transported out of the Caspian Sea.

When Statoil set its oil rig legs in Azerbaijan, an oil pipeline already existed from Baku via Chechnya and Russia to Europe. But the West, led by the United States, did not want to become dependent on transportation through Russian territory.

The choice of routes for new oil pipelines became a major policy, and a tug of war between a number of countries that wanted a piece of the pipeline cake and a strategic position on the international economic map.

Pending the decision on where the main pipeline would go, the aforementioned pipeline was built from Azerbaijan to Georgia. This western pipeline, built by Kvaerner Hydrocarbons, is currently used by Statoil's AIOC consortium.

- In the beginning, we used the pipeline through Chechnya. Now all our oil goes through the western pipeline. But we need one more alternative, says Statoil's Kai Nielsen.

Trumped through by the United States

The AIOC companies, including US oil companies, originally wanted a main pipeline to be built from the Caspian Sea south through Iran to the Persian Gulf.

However, the United States strongly advocated that the pipeline pass through Georgia and south through Turkey to the port city of Ceyhan, despite Russian protests, threats of sabotage by the Kurds and economic concerns from the AIOC.

But the United States intimidated with the Iran boycott and got its will through.

- It has been decided that the oil pipeline will go via Georgia to Ceyhan in Turkey. The preparatory work started in November 2000, and construction is expected to start in July next year, Statoil's information manager states.

- This has not created violent reactions from Russia. The decision has been made, so there is no more to discuss, Nielsen adds.

Kvaerner Hydrocarbons is hardly sorry about that. As mentioned, the company is already building a gas pipeline in the disputed route, which will transport gas from Statoil's Shah Deniz field in the Caspian Sea.

Innertier for Yukos

As part of the contract, it is stated in the cards that it is Kvaerner Hydrocarbons that will also be responsible for the very controversial oil pipeline in the same route.

Yukos Oil has thus shot an innertier by capturing Kvaerner Hydrocarbon's expertise. It is not enough that Kvaerner Hydrocarbons has a lot of iron in the fire in the Caucasus and is already engaged in the Priobskoye field in Siberia. Yukos Oil has several pipeline plans for its newly acquired company.

In a speech in Moscow during a meeting sponsored by the American Chambers of Commerce in May this year, Yukos chief Khodorkovsky eased the veil a bit.

according to The Russia Journal He pointed out that reduced demand in Europe and transport problems are two main barriers for the Russian oil sector. The solution lies, among other things, in investing more in the Chinese market.

According to Yukos Oil, that is exactly what is happening. The oil company is currently negotiating with the Chinese authorities for the construction of a thousands of kilometers long oil pipeline from Yukos Oil's oil field in eastern Siberia to China, which is expected to transport 20 million tonnes of oil in 2005 and 30 million tonnes in 2010.

- Of course we would like that contract, says vice president Roberto Pirani in Kvaerner Hydrocarbons.

That wish will probably not be difficult to fulfill when Mikhail Khodorkovsky now takes over the Kvaerner company.

Statoil in the Caspian Sea

Statoil participates with an 8,56 percent stake in the AIOC consortium that operates the Azeri-Chirag-Gunashli oil fields in Azerbaijan's zone. The other companies in AIOC are BP (34,14%), Delta Hess Khazar (2,72%), ExxonMobil (8%), Lukoil (10%), Itochu (3,92%), Pennzoil (5,63% ), TPAO (6,75%), Unocal (10,28%) and Socar (10%).

Today's production is 115.000 barrels, while expected production in 2010 is 800.000 to one million barrels.

Statoil participates with a 25,5 percent stake in the 860-square-kilometer Shah Deniz field in Azerbaijan's zone. The partners are BP (25,5%), Socar (10%), OIEC (10%), TotalFinaElf (10%), LukAgip (10%) and TPAO (9%).

Statoil participates with a 15 percent stake in the Alov-Araz-Sharg fields in Azerbaijan's zone. The partners are BP (15%), Socar (40%), Alberta Energy (5%), Turkish Petroleum (10%), and ExxonMobil (15%).

Hydrocarbon contracts

Built on behalf of the AIOC an 850 kilometer long oil pipeline from Sangachal in Azerbaijan to the Georgian port city of Supsa on the Black Sea. The pipeline, which was completed in 1999, transports 115.000 barrels of oil daily from AIOC's fields in the Caspian Sea, where Statoil is one of the players.

Built on behalf of BP / Statoil a 700 kilometer long gas pipeline from Sangachal via Georgia to the Turkish border. The pipeline, which will be completed in 2004/2005, will transport gas from BP / Statoil's Shah Deniz field in the Caspian Sea.

Negotiates with AIOC to build an oil pipeline in the same route as the gas pipeline they are building. The pipeline, which is expected to start construction next summer, will transport oil from AIOC's fields in the Caspian Sea to the Turkish port city of Ceyhan on the Mediterranean.

Modernizes Yukos Oil's oil extraction plant on the giant Priobskoye field in Siberia. Current candidate to get the contract for the construction of a several thousand kilometer long oil pipeline from the Priobskoye field to China.

Kvaerner Hydrocarbon's expertise lies in engineering and project management in the construction of oil and gas pipelines.

Yukos Oil

Yukos Oil is Russia's second largest oil producer, and was founded in 1993 following a merger of the companies Yuganskneftegaz (oil field) and Kuibyshevnefteorgsintez (refinery and petrochemicals). After a series of bids and auctions in 1995-96, Yukos became the first private oil company in Russia.

Mikhail Khodorkovsky became Yukos CEO in May 1996. The company acquired Eastern Oil Company in 1997 (oil production), took control of Eastern Siberian Oil & Gas Company in January 2001, and has partnered with Schlumberger, one of the leading international companies in the oil sector.

In October 2001, Yukos acquired Kvaerner Hydrocarbons and Kvaerner Process Technology, as well as 22 percent of the shares in the Kvaerner Group.

Yukos also has 1400 gas stations and employs a total of around 90.000 people.