TOP INTERVIEWS

MR. CHRIS EINCHCOMB Sakhalin Project Director, Russia Kazakhstan Business Unit, BP Exploration

Interview with
MR. CHRIS EINCHCOMB


Sakhalin Project Director, Russia Kazakhstan Business Unit,
BP Exploration

Yuzhno-Sakhalinsk, 1st August 2002

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Could you provide us with an overview of the Sakhalin-5 block? I understand that reserves are colossal: estimated at 600 Mn tons and 600 Bn cubic meters, with costs running into tens of billions of dollars…

Sakhalin-5 is what we would classify as one of the first true exploration licenses in Sakhalin. BP and its partners are following a very different approach from the rest of the industry which has gone for PSA's [Product Sharing Agreements]. We are moving forward in the traditional Russian style, with Russian partners to follow the exploration route, which at the moment allows us to start with geological activity.

Sakhalin-5 is unexplored until now, so the figures quoted externally are clearly an expectation rather than a reality, and we will only know the true potential of the block once we have started exploration and shot seismic and drilled wells.

The size of the acreage is about 10,000 square kilometres, with potential of being as large as Sakhalin-1 and Sakhalin-2 projects. Each of those projects themselves is in the order of 5 billion barrels, just over 680mn tonnes.

I understand that drilling could commence as early as 2004… Do you have any idea at this point if this will involve directional drilling techniques or the establishment of an offshore platform?

Our approach will depend on what we find. The first thing we are doing is 3D seismic research, which will provide a major insight into the appearance of the subsurface. This will be the biggest offshore 3D survey to be shot in one operation - which represents close to 2,500 square Kilometres of data. If all goes according to plan, we could be drilling by 2004.

If we are successful with exploration, one of the challenges we face is the water depth, because the Sakhalin-5 block is deeper [15 to 75 meters in depth] than the Sakhalin-1 or Sakhalin-2 block, for example [which is 30 to 50 meters deep]. This means that we have to look very carefully at the type of structures we will install.

BP brings specific knowledge and technology that we have acquired in places which have a similar type of environment, like Alaska, and our analysis with contractors illustrates the potential for major concrete offshore platforms, which could be substantially bigger than the Molikpak platform [operated by Sakhalin Energy] and the Orlan platform [being brought in by Exxon Neftegas]. The project will most likely involve one single offshore structure that will perform directional drilling in order to minimize the impact on the environment.

The Alliance between BP and Rosneft SMNG was established in 1998. What was your experience so far with your Russian partner?

BP is a late entrant to Sakhalin. In the mid-1990s, when Exxon and the rest of the investors were entering the market, we decided not to participate mainly because we were a much smaller company and we were focused on other opportunities around the world. That is one of the reasons for which we decided to participate first via exploration, rather than going through a development phase.

Ever since we have worked in Russia, we have learned that selecting the right partner is the key to delivering results. Very quickly we realised that, from a local perspective and local knowledge, Sakhalinmorneftegaz (SMNG) is a key partner while Rosneft, its parent company, brings ideas and important federal relationships. So the formation of the Alliance was fairly simple in terms of selecting the right partners. It took about six months to negotiate the agreement, which represents a good partnership framework: BP bringing financial and technical strength, and Rosneft and SMNG representing essential local and federal knowledge.

I think the partnership is working very successfully. Technically and commercially, we have been working together for the last four years. Although we might have very different approaches, we have learned a great deal from one another. We have become more aligned in terms of our objectives and political process, and this relationship has grown and has recently developed at a very high level, when BP decided that it didn't need special conditions for investment for working within the Russian system.

I think we are distinctive in that we tend to work fairly closely with our Russian partners, whereas some of the other projects such as Sakhalin-2 do not have Russian partners and Sakhalin-1 is purely an Exxon-operated project. Ours will be jointly operated with a joint company, which we are in the process of creating.

This begs the question: what will the Alliance look like, and do you have a name for it yet?

We do not have a fixed name for the Alliance… yet. We plan to adopt a name that will reflect a local interest, with a Russian name rather than a Western one, and we are currently talking with the community, the indigenous people, and the children's groups that we have been supporting in order to gather their ideas.

The process is moving forward, and we are determining the right corporate structure. It is clearly stated under the agreement that the Alliance ownership will be 49% for BP and 51% for Russia. The company will also name its own CEO, although at the moment we have not agreed whether it should come from BP or the Russian side. Depending on who takes that position, then the other managerial positions will be split between both partners.

Will you also be looking for new investors or partners to join the Alliance?

At the moment we feel very comfortable with the way the consortium is equally divided. I think that as we move forward these projects will require a great deal of funding, and it will certainly be a challenge to provide such high levels of funding. We will make this decision once we have taken the first steps into the creation of the Alliance.

Therefore, are you actively looking to attract funding to fuel this project?

It will be very difficult to attract external funding for exploration. BP tends to finance most of its projects, although this will also depend on the financial strength of our Russian partners. When the project grows to the development stage, in 2007 or 2008, we could be receiving external funding or we may decide to fund the entire project ourselves, although realistically I believe that external funding will be necessary in the long run.

There was concern from the Russian side that the Russian government wanted to break up the Sakhalin-5 block into four or five independent blocks and sell them individually. What is the situation today, and how could this affect BP?

Russian legislation is changing and next year it will be closer to international standards for tenders and bidding processes. The area we have been awarded is 10,000 square kilometers wide, while the original application for the entire Sakhalin V area was originally for 25,000 square kilometers. We are satisfied with current terms, since this is already a very large area, and our Alliance agreement covers both Sakhalin-4 and Sakhalin-5 blocks. Meanwhile, we also intend to be an active participant in future tenders.

You have acquired 25% of Sidanco now and you are increasing your role in Sakhalin. Is Russia a strategic market for BP?

Russia is a very strategic market for BP. We have grown into a company that produces 3.5 million barrels of oil equivalent a day, and we are eager to discover new opportunities in order to increase production and maintain long-term growth. There are few places in the world that can offer such opportunities, and this is why Russia is one of our focus areas.

BP is distinctive in Russia, since we have had previous experience running a Russian company. It has been a learning experience and we are coming out of it stronger and wiser. Our share increase in Sidanco illustrates our commitment to Russia.

Sakhalin is a new frontier, ranking within the top five opportunities in the world. It is not fully developed like Western Siberia, so the business approach is very different to Sakhalin. BP is at its best when it is finding, developing and discovering hydrocarbon sources - growing organically, which is a very high priority for us.

BP says that "the old economy was about machines, the new is about people and ideas"… so what was the best idea you recently had to help build your business in Russia?

I think that the ideas we bring cannot be defined only in terms of technology and infrastructure, but also in the approach that we take to care for the environment. Sakhalin has a unique environment that has to be cared for, and we will bring different ideas on ecological management and environmental management. There is legislation in place here but we plan to go beyond these measures in order to preserve and support the local environment and its communities.

We plan to use new technologies like Highly Interactive Virtual Environments (HIVEs) to accelerate the analysis of the 3D seismic and plan and execute our operations. Initially we plan to use these in London but would hope to see one on Sakhalin in the future.

If Russia is a major focus of your future operations, will you move to Moscow or even to Sakhalin in order to be closer to your partners and clients?

We will always have the office here, and the office will grow as we start to increase our operations. Yet as BP looks to change its entire portfolio within Russia, the centre of our Russian operations will migrate towards Moscow. Meanwhile, we are also in discussion with our Russian partners to determine the right time to move our operations to Sakhalin. One of the challenges we face is simply the lack of hotel room availability, and studies show that in 2004 there will be a lack of available office space and accommodations. Therefore, any major move to Sakhalin will also involve the construction of our own infrastructure for housing and office space. Since we are not bound by PSA legislation, we have a greater flexibility in terms of construction plans, yet we also have to plan ahead in order to ease the transition and minimize the impact on the local economy.

Therefore, the address on my business card will not change for another 6 to 12 months. In twelve months it will probably change to a Russian address, and it will change to a Sakhalin address when we find out the results of the drilling. So I believe that 2004 will be the right time to move to Sakhalin. Expect to see more and more people from BP in Sakhalin very soon.

Fact Sheet: BP in Sakhalin


In 1998 an Alliance was formed between BP (49% ownership), and Russian companies OJSC NK Rosneft (25.5% ownership) and Rosneft-Sakhalinmorneftegas (25.5% ownership) to develop Sakhalin V hydrocarbon resources.

In June 2000 BP opened a representative office in Yuzhno-Sakhalinsk and appointed a resident manager on the island.

In July 2002 BP was awarded a 5-year exploration license for part of the offshore Sakhalin V block. This was an important step for The Alliance of BP, OJSC NK Rosneft and Rosneft-Sakhalinmorneftegas. The Alliance is jointly carrying out all operations, including geological studies of the subsurface of the license area. Depending on the analysis of this data, drilling could commence as early as 2004.

The exploration license is for the Kaigansky-Vasuykansky blocks of the East-Smidt offshore area in the southern part of the Sakhalin V tract. The blocks cover a total area of about 10,000 square kilometers. The island of Sakhalin ties off the east coast of mainland Russia in often ice-bound and technically challenging waters off the Sea of Okhotsk. BP's 30 years of activity in Alaska will provide unique operating and environmental protection experience in similar climates.

Sakhalin is considered to be a world-class hydrocarbons province. Onshore production of oil and gas began in the 1920s and in the last 30 years there have been five giant discoveries of more than 500 million barrels of oil and 1 trillion cubic meters of gas.

BP recognizes the environmental significance of the waters around the island and their importance to the local fishing industry. Offshore Sakhalin has many of the environmental and climatic challenges, which BP has faced as the largest operator in Alaska. BP was instrumental in developing the North Slope of Alaska at a time when there was no infrastructure in place, and the projects have been executed on the coastal planes of the Beaufort Sea with respect for the environment and the indigenous people.

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