Capps of Conoco Digging In for Long Haul

Despite encountering numerous obstacles in its 10 years in the country, Houston-based energy company Conoco Inc. says it isnt budging.

"The fact that we have been here since 1990 in continuous mode is a show of our dedication," said John Capps, president of Conoco Russia in an interview at the companys Moscow headquarters.

Over the past 10 years, Conoco has invested $600 million in its domestic operations, with payments in 1999 totaling $20 million, he said.

Conoco began to explore Siberia for oil deposits in 1989. The company then focused its operations in 1991 in the Timan-Pechora territory, which covers the Nenets Autonomous District and part of the Arkhangelsk region.

And Conoco has launched its two largest projects in the country in Timan-Pechora the Polar Lights Co., a joint venture to develop the Ardalinskoye oil field, and the Northern Territories pipeline system.

Conocos operations in Russia are not limited to Timan-Pechora. The company began working alongside Rosshelf, a subsidiary of Gazprom at the Shtockman gas condensate field in the Barents Sea off of Murmansk in 1995.

Wall Street analyst Prudential Securities Inc. rated Conoco Inc. first in exploration and production results in its September 2000 comparative analysis of 13 major oil companies for the period 1995-99.

Sticking With It

Conoco has persevered in Timan-Pechora even after other major Western players pulled out of the region.

Early this year, one of the best-known Western investment projects, the Timan-Pechora Co., collapsed after it fell afoul with Vladimir Butov, governor of the Nenets Autonomous District, according to the Vedomosti newspaper.

The project had been initiated by a consortium of international oil companies, which at one time included LUKoil and the U.S. oil companies Exxon, Texaco and Amoco, before it merged with British Petroleum, Vedomosti reported.

Dmitry Avdeyev, oil and gas analyst for United Financial Group, said the mere fact that Conoco has been operating in Russia for 10 years "is not necessarily an indicator of success."

After all, he said, Conocos projects have been repeatedly impeded by the bureaucracy of the federal government and regional authorities.

Nevertheless, Avdeyev said, Conoco has had a better track record than many other Western companies in forming strong alliances with their partners in the country.

Capps agrees that Conocos staying power owes a good deal to the companys good relations with its Russian partners oil companies LUKoil, Rosneft and Arkhangelskgeoldobycha, or AGD.

The companys cooperation with Rosneft dates back to 1995, the year of Rosnefts founding. Conoco signed a memorandum of understanding with LUKoil in 1998.

However, Capps said, communications with Rosneft got off to a bumpy start: "We had some difficulties coming to a common language."

He said relations finally improved largely because there was a change in Rosnefts management in 1997.

In October, another one of Conocos partner, LUKoil, began operating in the United States with the purchase of the gas-station operator Getty Petroleum Marketing.

Capps said that while no specific projects were planned to collaborate in the United States, Conoco would consider participating with LUKoil outside of Russia.

"We view LUKoil as a very credible partner anywhere in the world," he said.

Paying Dividends

Capps, a registered engineer, joined Conoco in 1970. In 1995, he went to Arkhangelsk in the Far North to serve as operations manager of the Polar Lights Co., and a year later, he became its director. He was promoted to president of Conoco Russia in 1999.

Conoco and AGD founded PLC in January 1992 to produce and export oil from the Ardalinskoye oil field. Rosneft joined PLC in 1995. Conoco holds a 50 percent stake in PLC, AGD 30 percent and Rosneft 20 percent.

Steven Dashevsky, oil and gas analyst for the Aton brokerage, said PLC has yielded impressive results. In the first three quarters of 2000, PLC produced 1.2 million tons of crude oil and exported more than half of that amount, Dashevsky said.

Speaking about PLC, Capps said: "We probably have the only project in Russia paying back dividends to its owners."

And PLC provides 40 percent of the tax revenue of the Nenets Autonomous District, according to Conocos figures.

"Most other joint-venture groups just come in and make modifications [to a preexisting project] but Polar Lights was a whole new green field development," Capps said.

Administrative Wrangle

On Nov. 13, Conoco announced its plans, after a two-year delay, to launch the Northern Territories, a project to build a land and sea pipeline system in Timan-Pechora. The participants Conoco, LUKoil and AGD plan to export up to 7.5 million meters of crude oil a year initially via the Pechora Sea. The project will give LUKoil access to a new export route that will lessen its dependency on Transnefts export pipelines.

Dashevsky of Aton said the Northern Territories project is significant, although, it will "take some time" to develop.

Capps said frequent conflicts with Nenets administration have hampered Conocos efforts to realize the project. "For some reason, we moved into an area of conflict rather than cooperation [in Nenets]," he said.

The Northern Territories project was approved for a production sharing agreement in November 1999 by President Boris Yeltsins government. But the transition to President Vladimir Putin stalled the process and the new administration has made little progress on PSAs, Capps said.

At the same time, the Nenets Autonomous Districts prosecutor generals office filed one of many suits against PLC this fall this one alleging the terms of the companys production licensing agreement violates the law.

The court, however, dismissed the case on Nov. 2.

Capps said PLC has been satisfied with its dealings with the Arkhangelsk court system. "We didnt win every case but fair doesnt always mean that we win," he said.

Part of the friction with the administration was over Butovs demand that Conoco begin work in the region before being granted a PSA, Capps said. PSAs enable foreign partners in joint ventures developing oil, gas and gold resources to negotiate tax breaks with federal and regional governments in exchange for a share of the output.

Conoco refused to start without a PSA, Capps said, because PSAs attract equity and debt investors and enable a company to secure financing.

Last September, Putin unofficially conferred responsibility for production sharing agreements to German Gref, the economic development and trade minister, Capps said, but the Energy Ministry continues to exercise control over PSAs.

"The situation has created some confusion because its unclear who is in charge," Capps said.

The situation may be improving, however. Late last month, Prime Minister Mikhail Kasyanov signed a decree appointing Deputy Energy Minister Ivan Matlashov to head a commission to regulate the production sharing agreement for the Northern Territories project, Interfax reported Nov. 30.