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Black Sea Energy and Economic Forum 2009


  • John Roberts, Energy Security Specialist, Platts
  • Bruno Siefken, Vice President, Upetrom Group
  • Mark Sturgess, General Manager, Europe, Africa and the Middle East, Hunt Oil

October 1, 2009

JOHN ROBERTS:  (In progress) – instructions to slideshows that give legal disclaimers.  I say I work for the largest – (inaudible) – energy information agency in the world.  There are, of course, larger agencies in the world that deal with energy information.  However, I do not necessarily regard the U.S. Department of Energy and its Energy Information Administration as being entirely independent.  (Laughter.)  

What I would say is that it’s absolutely an honor to be here at the Black Sea Energy and Economic Forum.  We do have a full panel, but of course one of the great things about forum is that speakers get sidelined and sidetracked, hijacked, almost kidnapped by people moving around and wanting to grab their attention.

So we’re going to start right now.  The session is “Oil:  Prospects and Challenges,” and if you have a very strange situation, which we’ve heard, in which the OECD part of the world, oil consumption has been relatively flat.  Indeed, one could argue it’s been relatively flat for about 30 years in many ways, but that is increasingly a function of the relationship between the Middle East producers and the consumers of South and East Asia.

We have a changed environment.  We also have a radically changed environment in terms of investment prospects, something like perhaps as little as 10 or 11 percent of the world’s oil reserves open for direct participation on a risk and reward basis by foreign companies, and perhaps another 6 or 7 percent available in partnership with NOCs, with national oil companies.

This is a very different state of affairs that we’ve compared to the pre-OPEC past.  Why do I go back to that era?  Because that was the era that in some ways defined the way in which people look at oil and look at the role of big oil companies.  

And if you want to know what the difference is between a national oil company and an independent oil company in the production world, it’s very simple.  An international oil company, an IOC, is essentially in command and control of its own budget, subject only to relatively predictable tax operations from the home state and the states in which it operates.  

If you are a national oil company in a producing state, you are not in control of your own budget.  Your income, your expenditure, will be controlled and will, to a certain extent, be determined by non-energy functions: the state of the national budget, the state of the economy, the state of the country’s financial reserves.

Your policies will not automatically be dictated on what we would regard as strictly commercial terms.  That is not necessarily a bad thing; it’s simply a different thing.  It’s a different way of looking at operations.

So when you look at oil challenges, you’re looking at not simply OICs or NOCs on their own, but how they cooperate with each other and how you resolve one of the world’s biggest energy conundrums, which is how do you develop resources in resource-rich areas that do not wish to involve, very substantially, the kind of large-scale traditional international oil company that might actually have the financial reserves, resources and the technological resources, to do justice to the reserves in question, and thus resolve the biggest overall problem of all, which is not the question of what resources are there in the ground; it is a question of how do you translate those resources in the ground into actually physical output?

Now, we are very lucky that we have an example here of one company that has done just that:  Hunt in Yemen.  And Hunt, one might almost say, took a flyer in about 1984-’85 when it went into Yemen.  It’s not expected but made Yemen a significant oil province, and I’d be very, very curious to know what lessons you drew from that and whether you think they are applicable today.  So that was my first question.  After that, let’s go on.

MARK STURGESS:  Yeah, obviously you’re quite right; we did take a bit of a flyer.  I think there was a British ambassador that once wrote words to the effect that I would drink any oil that anybody finds in Yemen.  So I think he’s dead now and I don’t think he’s dead now and I don’t think it was a function of actually drinking any of the oil.

But we did take a bit of a leap.  I won’t go into all the gory details of how we got in there but obviously we did take a – let’s say a major investment into a country that few people really knew anything about.  We made the discovery in 1984.  Being an American company they love to tell everybody that it was actually made on the Fourth of July, so, you know, that’s one of one those things.

And through the assistance of the Yemeni government at that time, we were basically producing oil by 1986, feeing into a 10,000 barrel a day refinery for the local, let’s say, demand, and then by 1988 we’re actually exporting oil for Yemen and producing well in excess of 100,000 barrels a day initially, and then up to 200,000 barrels a day.

Obviously, as time when on, the Yemenis became much more au fait with the oil business and we, in the end, ended up with more than 90 percent of our staff over there being Yemeni nationals and helping us run the business.

Obviously this then attracted further foreign investment; earlier on Oxy, Nexen, who also made a significant discovery pretty much of the same magnitude in total oil reserves, and initially their operations were going well.  

 I think as time went on, unfortunately, Yemen got caught up in the politics of the region and of course pressures from Saudi Arabia and both on a political level but also on a social level because of course they then basically forcefully repatriated all the Yemenis back into Yemen, which then made the country somewhat more unstable, and then things started to become a lot more difficult overall; as you know, al-Qaida, terrorism, et cetera.

But I think one of the lessons that we learned early on was that working closely with the government and the local inhabitants actually did enable us to get our production on very quickly.  Without their assistance we would never have been able to do that.  

And as time went on, as I said, we had more Yemenis involved in the operation.  And so there is this necessity to develop those relationships very early on in anybody’s entry into any country so that you can monetize your investment as swiftly and quickly as possible.  

We obviously also made a quite large gas discovery on Yemen.  I know this is about – is all to do with oil that our partners in Yemen and ourselves have made significant gas discoveries.  And initially gas was not something that was part of the dynamic in that part of the world, but since then of course we’ve now, along with the operator Total, we will now be producing LNG from Yemen by October of this year.

Overall, I think the experience has been enlightening because we’ve actually seen it go almost full cycle, if you like, for us.  We were there are the very beginning.  Our association with the Yemeni government was much less confrontational.  They just, by nature, if things get confrontational, as production increases, et cetera, everybody tends to want a little bit more of the pie or this, that and the other, but we still work through that, develop the LNG project, as I said, along with our partners, and are now at the other end of that stream with production, as I said, from LNG taking place later this month.

So we’ve seen every aspect of the industry as we’ve gone through Yemen itself.  So from being a non-exporting technologically let’s say not advanced country, it has now become much more technologically advanced and obviously is a major exporter.

MR. ROBERTS:  Since one of the points is to be flexible and indeed almost opportunist in the sense of saying you may have gone in to do oil, but you’ve got to be flexible; you’ve got to be ready to do gas; you’ve got to be ready to think of changing circumstances – in your case severe changes in political conditions.  

MR. STURGESS:  Yes.  I mean, for us, obviously, I mean, we’ve had to change horses in midstream on a couple of occasions.  We got caught up in a civil war, which is not one of the most pleasant experiences that you can undergo, but we managed to find ways to, let’s say, not expose ourselves to any outright danger at that time from, let’s say, outside political forces.

MR. ROBERTS:  Now, our other speaker that is here at the moment is Mr. Bruno Siefken from Upetrom, and Upetrom is very busy in developing equipment for the development of both onshore and offshore, with clients all around the Black Sea.  

And if you take what we’ve heard about the Black Sea at face value, his company would logically, I would have thought, be a very good candidate for investing in, given that – if I can remember the words of Mehmet Uysal – not from this session but from a previous conference – that he reckons by 2023 – which is a mystical year for the Turks – Turkey, he believes, could be self-sufficient in oil and gas as a result of Black Sea development.  

Whether or not one reaches that scale, it at least tells you something of the hopes that people have for the Black Sea, and I presume it would be your company that’s going to play a large part in providing the equipment for that.

BRUNO SIEFKEN:  Yeah.  At least we’ve tried that.  Let me say that the Upetrom Group has several companies.  The Upetrom Group in Romania is privately owned and has mainly the machine shop in Ploiesti, which is producing land rigs for the Gazprom Company, mainly for Siberia, for minus 60 degree so the steel can stand minus 50 degree and you can still operate the rig.

So this was the start of the company, but since about five years when Petrom got privatized, GSP was formed.  The group – (inaudible) – Petrolia in Romania, and this company has more than 2,000 people now, and we are mainly drilling in the shallow water area up to 100 meters in the Black Sea.  So where you see on the map is an oilfield, it is always less depth of 100 meters.

And most of these fields have been drilled in the western Black Sea by GSP, and also the first Turkish field, AKCAKOCA Ayazli, was drilled by our company in Turkey about five years ago, which is already now in production.  

And currently – I don’t want to make it long – currently we are building a new jacket for our sister field of Ayazli in Turkey, which is AKAKOCA.  It’s 95 meters deep and the jacket is about 112 meters, building – (inaudible) – topside decks, and will have a platform rig from where we will drill seven wells into the gas reservoir.  And all that will be on-stream hopefully by the end of next year.

So our company has moved from drilling in the Black Sea to building jackets in the Black Sea to building pipelines in the Black Sea.  And according to this AKAKOCA field, there is a seven-kilometer pipeline which will be laid by our new pipeline-laying barge in the Black Sea, but also we will operate next year in Bulgaria for Melrose laying 80 kilometers of pipeline in the new Galata gas field.

And we are, at the moment, in negotiations with the Russians to lay the Olympia pipeline from Dzhubga, which is near the exit of the Blue Stream, to Tuapse, one loop, and then one loop from Tuapse to Sochi.  And they need the gas in Sochi for the Olympic Games in 2014.  Otherwise there will be no Olympic Games.

So that is quite a substantial job.  We are preparing ourselves for the deepwater operation.  We have only experience in shallow-water operation.  We are very much keen to start the subsea completion in shallow-water area, which we will work with TPAO on.

The Ayazli field, there are some satellite fields which they want to install subsea completions – very, very simple subsea trees.  So this is an experience for us also to go into the underwater area.  Therefore we can – (inaudible) – ship.  It’s an intervention supply vessel, with situation diving equipment, ROV on board, moon pool, geotechnical surveys, whatever is necessary to install platforms on the seabed.

So this is our area of operation and we are pretty successful, and when I just heard that somebody should invest into this company, I know that Deutsche Bank wants to do it.

MR. ROBERTS:  Now I’m going to open up straightaway to the floor.  What questions does the floor want answered concerning prospects and challenges?   

Okay, well, then let’s ask the obvious question:  Do you consider that the resource base is there in this region, in the Black Sea, to satisfy a considerable part of domestic demand, or do you think that we’re still going to have to continue to look at major suppliers of oil from outside?  How do you view the balance in this region, not the – (inaudible) – region?

MR. STURGESS:  From our company’s point of view, we still see that there is some significant resource potential, both here within Romania itself but also within the region.  We have looked at many countries around the Black Sea region in the past few years and for some reasons we have not entered into them.  But we do see that there is still a significant amount of potential in this region.  

Whether or not outside suppliers are required, let’s put it in another way:  It would not be an ideal situation to rely entirely on any outside sources, and obviously any indigenous resource that any one of the nations around the Black Sea region can develop would of course be in their own best interests with regards to at least – how should I put it? – some kind of swing security supply, if you like, such that if somebody does tamper with the system for a short period and there is not going to be a – let’s say a very hard-hitting impact on any of the countries within the region.

MR. SIEFKEN:  From my point of view I can tell you that Turkey today produces less than Romania offshore – this is fact – less than 30,000 barrels a day.  So from that point of view, I know what Mr. Russa has said – and I think it was in March on the Toroga this year that he says in 2023 we’re going to have oil and gas for the next 40 years to feed Turkey with energy.  If you listen to Mr. Patriciu, he believes that also.  If you listen to others, they’re also very positive.  

If you talk about the subject with the Russians, which I very often go to in recent days, is that they are planning three wells to be drilled in the Russian sector off the coast of Toebsa.  They expect huge oil reserves.

And if you look at the LUKOIL concessions in the North Caspian Sea, which we are talking about, to provide them with a jack-up, they want to build 80 exploration wells there.  They are talking about 3 billion tons – tons – of reserves, only in the Russian sector.

This is a huge amount of oil.  They still are not found; they are expected.  I know that we have in the Black Sea the biggest anticlinal where Mobile Exxon is sitting on, directly, nice located – the biggest anticlinal – known anticlinal which has never been drilled.  I think Mobile – BP tried to drill a little further east and they came into a very high-pressure region and had to stop it and they never released any data from this.

So from that point of view the vision is there but I think somebody said we need to invest the next 10 years, $300 billion to get there.  I believe the reserves are there.  Just to get it out takes a little bit of effort and experience, as you know.  You said you know how to do it.

MR. ROBERTS:  I must admit I remain slightly skeptical on timeframes because – I tried to find the story in my computer once and it was so old that I realized I was looking at the wrong set of computers.   It was from 1991, I think, when Turkey reached – TPAO and BP reached and agreement that they would each invest what was then the substantial sum of 50 million (dollars) apiece over the next 10 years in investment in the Black Sea because they though it was prospective.

And, funnily enough, by 1995 you were not hearing anything more about the scale of investment, but all the time in fact there was at least some degree of research, seismic activity, going on.  There has been considerable interest for a long time but it also goes to prove all of these projects take a massive amount of time from when they are simply visionary ideas to actually delivering the hard, crude oil.

Now, what was next?  Surely someone is going to raise the phosphorous.  Come and see.  (Laughter.)  

Q:  Well, actually – because I thought this was more an upstream panel – it does raise the question as to if more volumes are being produced in the Black Sea, what – the long-discussed pipelines.  But my real question is the – the panelists have touched on different areas of Black Sea exploration and production but have not mentioned Ukraine.  (Laughter.)  So I would welcome a couple of words each on the geologic aspects and the above-ground aspects.

MR. STURGESS:  Should I answer that?

MR. ROBERTS:  Go ahead.  You go first.

MR. STURGESS:  Well, we are running around as a company to look for jobs and we are a contractor service provider, hopefully to you also, but we have never touched Ukraine, and I can tell you why:  the stable situation.  The political and business system does not allow you to go anywhere.  You waste your time.  

I know that Shell is running after Vanco for a long time.  They say that they have a new agreement that everything above 100 meters, this is the critical line where we can work with jack-ups.  Genamunafta (ph) will do the job by themselves and then Shell will do it.  I don’t see any activity.  I don’t see nothing coming out of that.

I know that OMV was running after Genamunafta for a long time to get a concession agreement.  I know there are lots of Canadian companies running there and they don’t get anything.  The situation is not clear, and when you know that there are concession rights being given offshore to children of 18 years old, then you know where you are.  

This is the only situation I can tell you.  It is, from my point of view geologically very interesting because Romania has a part of the Ukrainian territory now got back finally, so the license round will come, and I think our friend from Hunt is very much eager to work on that also.  

We will also work on that because we believe that there is substantial reserves, which will be small – I mean, will be too small for Mobile Exxon but it is something.  There will be five concessions there.  And I think for us as an owner of jack-ups it’s probably very easy to go and drill some wells if you have the right geologist.  

But, going further, there is already found in the Soviet Union a lot of oil and gas.  There are gas reserves proven 2,800 meters.  Only one of these offshore fields is in production on the Azov Sea side.  Nothing else is offshore on productions, only onshore.  

And if you look at the onshore rigs, Ukraine has 70 rigs, maybe three in operation.  This is the actual situation.  So the country has run down.  That’s because they don’t have the money to pay the Russians for the gas, et cetera, et cetera.  And you heard our friend from the European Union what is the situation on Ukraine.  They have to pay to get gas through the country.  

There is no – this is my point of view and that’s because we don’t go as neighbors to say hello to them because we want to do business.  We visit them because it’s very cheap to live there for a seaside vacation.  (Laughter.)

MR. ROBERTS:  Well, there is this great paradox that, you know, you’d have thought that of all the countries in the region, the one facing the largest import bills would be the one that was most keen to develop its own indigenous energy resources, instead of which we seem to get a freeze.  

I wonder, Jim, do you want to come in on this and just say something about the general environment, or do you think that this would threaten your own position?  I’m talking to Jim Bown of Vanco, who does have direct experience with Ukraine.

(Cross talk.)

JIM BOWN:  My name is Jim Bown.  I’m president of the Vanco Company that’s working – working – that’s fighting in Ukraine at the moment.  (Laughter.)  Vanco International Limited was lucky enough to win a tender bank in 2006, which gave the company the right to negotiate for a share in the agreement – Ukraine’s first share of the agreement.  

There was a lot of state opposition in the tender.  I have to admit that Vanco – I don’t think fundamentally Gene Van Dyke, who owns Vanco, didn’t really expect to win but he – because he bid very aggressively.

And so then the company started to negotiate with PSA, and that took from the middle of 2006 until November 2007 to complete – lots of shenanigans on the way, lots of difficulties, lots of interferences, but at the end of the piece, the PSA that was done was pretty good for Ukraine.  Over the 30-year life of the project, if you count all of the royalties and the taxes and everything, Ukraine would get something over 70 percent of the deal, the value, and Vanco will get something less than 30 percent.

Now, for a project which is in deep water – we’re talking about 2,000 meters of water, two kilometers of water before your tool hits anything solid, the risks are very great, the costs are very great.  One deepwater well was costing about $70 million for one, with no asset value to it, so.

But unaccountably we began to run into problems.  The PSA was signed by the Yanukovych government, the Party of Regions government, and they were involved in all of the negotiations, and they were tough.  They did a good job that produced a good deal for the country.

But Ms. Tymoshenko took over the government in November/December 2007 and things gradually ground to a halt.  They didn’t put people up to the Coordination Committee, which is a key grouping to manage the PSA, and eventually they suspended the special permit, which is a license to operate, and then unilaterally withdrew from the PSA using improper procedure too.  All the time we were wanting to talk to them to ask them to – we could have solved all of the problems.  From our point of view there weren’t any problems.  

The girls – the 18-year-olds, my dear friend, I can tell you exactly who they are.  (Laughter.)  

MR. SIEFKEN:  So you know them very well.

MR. BOWN:  There were five of them actually because the fifth was a young junior lawyer from the law firm we were using in Kiev at the time.  And this law firm had been asked to register the representative office, which it appears they required us to do.  So this young girl was sort of the end of the food chain, this young lawyer, so she had the chance to do it.  

And our accounting contractors or consultants were Ernst & Young and we needed to do a tax registration.  Now, in Kiev that’s a pain in the butt.  You’ve got to – you know, you really have to spend a lot of time.  You run all over the place.  So this young lawyer went to Ernst & Young who then contracted four young ladies to do all the legwork, but they needed a power of attorney to be able to handle – (inaudible).  So that was done, all put in place.  

And all of a sudden, late in November – I think in 2007 – Mrs. Tymoshenko suddenly accused Vanco first of all of being a criminal bandit corrupt organization, and second of all that we transferred the project to four young college students who were going to transfer it to Gazprom.  It’s extraordinary that anybody – I mean, Yulia Tymoshenko is intelligent.  You know, she’s a good politician.  How she could stand up and even believe that and give it any credibility?

So these girls –

MR. (?):  She’s quite (dead ?) if she doesn’t believe it.  (Laughter.)  

MR. BOWN:  Exactly.  Exactly.  There is no –

MR. (?):  (Inaudible.)

MR. BOWN:  Exactly, Peter.

MR. (?):  (Inaudible.)

MR. BOWN:  Exactly right.  But the point is about PSAs particularly is they have to have what I would call transportability.  They’ve got to be transportable from one government to the next.  After all, the successive politicians say we are the government and the government today is representative of the government before.  No, no, no, no.  Ms. Tymoshenko decided there was a big problem mainly because she didn’t like my investors, and one in particular, who was a political opponent.  

So you’re absolutely right.  There was no – there’s no legal and commercial reason for blocking the PSA.  My company now has lost two years of exploration time so far because we haven’t done any work at all except background work.  We haven’t done anything undersea whatsoever, and yet the Prykerchenska block, which is 13,000 square kilometers of territory, has got some excellent structures on it.  In fact, the Ukrainian Black Sea all the way across –

MR. (?):  Yes.

MR. BOWN:  – based on the WesternGeco of 2D seismic, has got excellent structures across it, and the Romanian sector too, the Turkey sector.  It could be prolific.  So why, when Ukraine is so desperate for oil and gas that you – well, yes –

MR. (?):  It’s not logic to explain it.

MR. BOWN:  – Peter has got it right.  It’s a political thing.  So we did all we could under the terms of the PSA.  We went to Stockholm.  Thank god we actually went.  In the PSA we managed to get the arbitration outside of Ukraine.  Otherwise we would have been dead in the water a long time ago.  

So we’re in the middle of that process.  That process will go on until March 2010 when the hearing is.  Maybe May 2010 we’ll get an answer.  The government did not surrender its sovereign rights during the PSA negotiations, so is the tribunal ruling going to be enforceable in Ukraine?  Probably not.

So we wanted to talk all the way through – we wanted to use the arbitration just as a means of getting talks going.  She’s dug herself into a big hole.  We can get her out of that hole because of – we can offer things that would be cosmetic, zero value, to allow her to say really good things to her people.  

Nothing so far and now she is making this – she may well make this corruption issue an issue in the presidential campaign, which is coming up.  The presidential elections are on the 17th of January.  So for my investors –

MR. SIEFKEN:  Well, Mr. Putin will win maybe and prove that we are right.  (Laughter.)  

MR. BOWN:  Well, my investors, god bless them, they’re still in there.  They’re still spending money.  We’re not spending it very – we’ve just put in today – it’s October 1st – the work program and budget for 2010.  For 2009 it was over $19 million.  The government ignored it completely.  Now it’s down to $57 million, only because the 3D seismic work was considered cheaper now than it was a year or so ago.  But it’s nonsense.  

On a broader – moving away from the deepwater of the Black Sea, Shell has got eight joint investment activity agreements for doing deep gas below our existing gas fields.  I talk regularly to Patrick van Daele, who is heading up Shell in Ukraine.  They’re going slow.  

This is Ukraine for you.  I said to the guy, why are you going so slow?  He said, well, they’re working with the Ukrainian gas exploration and production company.  I said, well, so what?  He said, well, they’re insisting that we have to do it their way.  I said, what? Shell is one of the world’s great companies, you know.  The Ukrainians are insisting that the development has to be done their way.  I said, come on.  

But they’re still working.  JKX probably is the most successful foreign oil company.  They have been working a long time because they won their battles with Poltava Petroleum Company.  They now own that 100 percent so they’re doing – okay, they’re exporting gas as well; a little bit, not too much, but they’re exporting gas.

Regal Petroleum seemed to have some through their problems so they’re working, producing, developing.  And our little scout group in Kiev, it’s got, I think at last count, 14 companies.  So there is activity there.  The company is not standing still.  The government is standing still.  The state owns more than 90 percent of the oil and gas sector, but the 10 percent that’s left for the rest of us is still not bad.

But of course the deepwater of the Black Sea will transform all that.  It will be enormous.  Our project won’t make Ukraine self-sufficient on its own, but if our PSA starts to work, then lots of other companies will see that.  And if they do their tendering properly, we could see in five or six years’ time Ukraine’s Black Sea could be like the North Sea was with activity all –

MR. SIEFKEN:  Yes, they should be replacing the North Sea completely.

MR. BOWN:  All the way across – all the way across it.  And this is what the politicians are giving up on.  I mean, I used the word in London last November at the investment conference “madness.”  It really is.

MR. SIEFKEN:  And when you look at the size of the – just the physical size of the Black Sea, it is really the southern coast of the United States, which is in the Caribbean.  Gulf of Mexico, this is a similar size, similar area, and I think we really have a great chance.  And that’s what I would like to tell you because I forgot that before.

Upetrom Group is now actually starting to build a drill ship designed for the Black Sea which can go under the bridge without any extra costs.  

MR. BOWN:  (Chuckles.)

MR. SIEFKEN:  And also because the Black Sea has a wavelength of half the size of any other sea, it is a different ship.

MR. BOWN:  If you can invest and build a deepwater drill ship that will work in –

MR. SIEFKEN:  Three-thousand-six-hundred.

MR. BOWN:  – say 3,000 meters of water, it will never be out of work.


MR. BOWN:  The return on your investment will be very quick.  


MR. BOWN:  We even looked at buying an old tanker and actually doing a conversion job, which maybe your company would have done.  So there’s lots of activity possible there.

The Black Sea, nobody can stop it.  The Black Sea is going to be huge in oil and gas.  It’s just a question of when.  And people in Ukraine could have accelerated that process by wisdom.  Turkish Petroleum, now with Petrobras, now Petron, with Exxon Mobile, we’ll do that now.  But for a while Ukraine was in front and it’s just squandered all that, and it gets –

MR. SIEFKEN:  Most of these finds were done in the Soviet Union –

MR. BOWN:  Yeah, well –

MR. SIEFKEN:  – not during the period after that.

MR. BOWN:  I’ve been working and living in Kiev since, what, 12 years now, and I owned two – this Vanco job – I had a consulting company and so they were my clients and so I eventually took this job.  But the country is unstoppable too, like the Black Sea is unstoppable, but what we’re doing is slowing it down.  

So anyway, I’ve talked almost steady now.  I don’t want to bore you anymore.  So the fight is going on.  We won’t give up and we’re going to win.  (Laughter, applause.)

MR. SIEFKEN:  Good luck for you.

MR. ROBERTS:  This is the classic proof of what you get from having a really good audience, let alone a lovely panel.  (Laughter.)  So can I take – well, we’ve got some questions.  Did you want to add anything on en masse at this stage?  No?

(Cross talk.)

MR. STURGESS:  Quickly I will just say I think the below-ground potential in Ukraine is definitely there, as we’ve outlined in the Black Sea, but also on shore.  

And also, as we are talking about, you know, oil in the 21st century, for many of the countries in the regions I think some of the things that we do have to start looking at is applying new modern technologies to developing older fields and also any enhancements that have been used elsewhere in the world.  That’s something that the industry has to take a significant look at, not only in this region but elsewhere.

MR. ROBERTS:  John –  John Locke, a question.

Q:  John, thanks.  I just wanted to maybe close on the Vanco thing.  And I’ll ask Jim Bown, if Viktor Yanukovych were to win in the presidential election –

MR. (?):  Could you please use the mike?

Q:  I’m sorry – if Viktor Yanukovych were to win in the upcoming presidential election, would your problems – (inaudible) – to magically resolve themselves?

(Cross talk.)

MR. BOWN:  Very quickly, the situation now is at moment that President Yushchenko and Prime Minister Tymoshenko can’t agree on anything and nothing is getting done at all.  If Yanukovych wins the presidential elections, Yulia may well still be prime minister, so what changes?  Then she won’t agree with Yanukovych, he won’t agree with her, so they cannot move forward.

If she wins the elections and if the deputies go over to her side of the house, she will then have it all.  She’ll be president.  She’ll have a prime minister who is on her side and she’ll be controlling the government.  I’m a visitor to Ukraine and a foreigner so I dare not say anything more about the consequences of that.  

On the other hand, if Yanukovych becomes president and the Party of Regions formed a parliamentary majority in the government – I’m not supposed to say anything about that either – our problems will be reduced because Mrs. Tymoshenko I think has got a particular thing about my investors and that’s why she’s blocking this project.  If she’s not there, then that particular thing will go away.  If the Grand Coalition in June had taken in Ukraine – (inaudible) – would have gone away.  

MR. ROBERTS:  I was delighted at how tactful a response that was.  (Laughter.)  You have treaded some very thin ice there to that point.  (Laughter.)

Yes, do you have a question here?  Could you introduce yourself, please?

Q:  My name is – (inaudible).  And I was wondering if what happened this winter will happen again, this conflict with Ukraine that doesn’t pay the gas and that directly affects countries as Bulgaria – well, Romania too, but less than Bulgaria.  Thank you.

MR. SIEFKEN:  Do you want me to answer this?

MR. ROBERTS:  Well, supposedly the chairman is first.  The chairman will have a couple of words on this one.

Logically, Ukraine should be in a much better position next year because it has won a major battle already in that it is not being compelled to take as much gas as it originally negotiated to buy.  It’s only actually paying for the gas that it takes delivery of.  And since it has drastically reduced those already without complaint, if Mrs. Tymoshenko is to be believed, then next year it may take as little at 25 or 26 bcm and imports.  Compare this with levels of above 50 bcm a couple of years ago.

So 25 bcm at reduced prices, whatever they are, compared to late last year or early this year, is a substantial difference.  It would imply that they can manage it if only by squeezing EU to bail them out because it’s easier for the EU to bail them out than to go to the wall.  

Question:  Will the EU extract the only thing it needs in return for that, which is proper, genuine reform of the Ukrainian energy sector?  That is what is supposed to be in the Energy Community Treaty.  It’s supposed to be the roadmap for the development of an intelligence Ukrainian energy sector.  I don’t think it just popped into a Ukraine that’s been frozen.

I mean, therefore we are very much at the mercy of what happens after the government – but I don’t think that by definition we get an automatic repeat.  The Ukrainian crisis – the Ukrainian-Russian gas crisis last January was such a shock to the system.  

There are several problems with it, not least of which was the EU’s rather weak approach to Ukraine in the first week of the crisis when it could not even extract from the Ukraine what Ukraine should have been quite capable of delivering, which was namely the rationale as to why there would be a few days’ hiccough while they tried to hook up their own reserves in the west of the country with the cities further east.  You couldn’t get the pipelines flowing gas in different directions.

But once Prime Minister Putin had initiated, on the 7th of January, the complete cutoff, suddenly, in popular imagination if in no other form, the crisis crystallized, and in that sense I think Russia probably understands just what it did to its reputation, and I don’t think it would be likely to do it again.  It was such a massive shock to the system to actually have a major supplier say no, because of disputes with another country, we are stopping completely.

And there’s a third reason.  There has been some practical, on-the-ground European response.  We heard today about Bulgaria getting too inter-connectors from Greece to Romania, pushing up the inter-connectors to Hungary.  There is more flexibility in the system and I think in an emergency, as we saw those not so much the EU but European gas companies.  Once they realized the sphere of the problem they responded quite effectively.  

So if one did have such a crisis, with a little bit of luck the consequences wouldn’t be anything like so dire.  But, on the whole, I think it was such a bad crisis no one will want to repeat it.

Q:  Can I have a follow up?


Q:  If there is a crisis and the EU extracts, in early 2010, a commitment to serious reform from the Ukraine, what is your timeline for that reform taking place?

MR. STURGESS:  How long is a piece of string?  (Laughter.)  

MR. ROBERTS:  I did take a nice cautious approach to the – (inaudible) – project.  I think you could certainly classify the reform of the Ukrainian energy sector as a major project.  (Chuckles.)  

Somebody said you have to be old to make a prediction.  You’re asking me how old I am, aren’t you?  (Laughter.)  

Q:  Or you’re saying that you’re not that old yet.  (Laughter.)  

MR. ROBERTS:  No, the answer is if you had a really effective government that saw the obvious advantages of reform, I think you could do a lot very quickly, not least because you could unleash the power of foreign investment.  You could unleash the fact that they know what potential resources are there to be developed and speed up works that are in process but are stalled and perhaps on the ground.

So you could get some results pretty quickly, I think, but you’re also talking of that lovely word – favorite EU word, “process.”  Process always takes a long time.  

MR. SIEFKEN:  So to answer it, the threat is there.

MR. ROBERTS:  I think we should go back to Hunt where – I think we’ve gotten lost here.  (Laughter).  If you go back to the original wording of the panel, “The Prospects and Challenges for the Oil Industry,” it’s not necessarily confined to the region.  What would you say were points that you think we should be focusing on?  

MR. STURGESS:  Well, I did jot down some notes, as you probably noticed reading over my shoulder there, but I – (cross talk, laughter) – but I think maybe I’ll just start off with this phrase and I’ll just add a couple of points.

You know, oil in the 21st century, overall obviously it’s not going to go away.  We know that.  Everybody has been talking about it today.  It’s a matter of how we handle it.  And I guess – this is quite an oil statement but, you know, the industry, governments, consumers, producers have all got to work together to meet all the energy requirements in the future.  But we’ve got to be careful that we obviously don’t damage the environment but also that we don’t start creating conflicts by the way we go about doing this.

And I do sometimes wonder how the produced let’s say the – how we are going to provide the advantages of the developed world to the developing and undeveloped world without creating some of these problems and trying to enforce some things that – you know, green energy or whatever is a wonderful thing but the technology costs a lot and whatever.  

What are we going to do for some of these developing nations?  I don’t want to ride my bike anymore; I want to drive a car, you know?  I want to be like everybody else.  I want to change my standard of living.  How we handle that and how we handle, let’s say, using oil as an energy resource in the future is going to be very important.

Obviously transportation is the biggest thing.  That’s why I mentioned the cars.  But going on to what the industry and government spaces challenge is, obviously it’s to maximize what we’ve already got, what we already have, to get in there and also have the investment to go out and find more resources, be they conventional and/or unconventional, and that’s going to cost us money.

But then one of the other challenges I think we have are personnel.  Certainly in the Western world we’re all getting long in the tooth and we need to start developing, let’s say, a younger dynamic within the industry itself and also create a better understanding in our young people of what the oil industry really means to everybody and that it doesn’t necessarily go around damaging the environment.

MR. ROBERTS:  On the educational side, would you say that a contractor in Romania with a long history of the oil sector has a better prospect of producing the kind of young engineers and technologists for the sector than anywhere else in Europe?

MR. SIEFKEN:  No, I would not say that.  I’m five years in the country.  I worked with a lot of people from the University of Ploiesti.  The system to study is, from my point of view, not up to date.  They are still studying their – let me say how the school system is also in Romania is not so much self-initiative required.  You just pass your tests and then you become an engineer.

I have seen engineers which come as an internship to Petrom.  They are getting 14 days paid and they never show up.  This is a bad thing, from my point of view.  That doesn’t mean that we don’t have very good Romanian engineers, but most of the Romanian engineers are not in Romania, like you; you’re in Switzerland.  

And this is the problem.  They are all being pinched by good companies who knew they are very good, they have a good quality at the old system.  They learned in the field.  They have to grow from (peak ?).  Now everybody wants to be a manager and director and probably a chairman.

This is a problem.  People have to learn – and I agree with Mark fully that not only here in Romania but also in Germany and Austria the same problem.  In Europe and Holland, the University of Delft, a very good university; not enough students.  Germany the same; not enough students.  In Austria the same; not enough students.

MR. ROBERTS:  I’m pretty sure it’s the same in the U.K.

MR. SIEFKEN:  And from that point of view we have to change our image.

Q:  May I?

MR. SIEFKEN:  Yes, please.

Q:  The problem is also that the young people don’t have a chance to start somewhere, because when I – or in my case, I have a university degree of the University of Geneva and Lausanne in Switzerland.  So I made my studies abroad in Geneva.  And when I finished, I had to make a decision, whether I get back in Romania or I stayed there.

With my university degree it was let’s just say easy, and with my specialty – specialization, it was easy to stay in Geneva but it was also interesting to get back home where my family is and most of my family members.

And I looked for a job in Romania and I found – I postulated for a job of financial analyst because I have a university degree in accounting, controlling and finance.  So it was super for me but they didn’t want me.  And I was there – I was so frustrated because it was in Timisoara – well, it was in a big company – automotive – Continental, that was buying recently from Siemens a part of the supply chain for – (inaudible).  

And I was there – so no one gives us the opportunity to start here.  And on the other side, it wasn’t a salary problem because I didn’t want to come and get an executive post; I just wanted to start somewhere in a team and learn.

But having a reasonable salary – when I considered that I made five years of studies in a foreign language, and I felt that for me at that time a normal salary was 1,000 euros.  And it’s not a lot for Romania.  For my opinion, it was not a lot, but no one will – my file was rejected.

MR. SIEFKEN:  You had become too independent.  

Q:  Yeah.

MR. ROBERTS:  Is it also a gender issue?

Q:  Perhaps.  I don’t know.

MR. SIEFKEN:  It’s behavior.

Q:  But on the other side, now I’m discovering this industry, and I was wondering what this industry can propose to young people?   Because, from my point of view, the oil industry is money, money, money, politics, politics, politics.  We have less information on the social responsibility, on environment issues that are – for me that’s important.

And on the other side, I would like to know how much time do we need to form the people because, for instance, in Switzerland, manufacturer for watches, you cannot find a good manufacturer from one day to another.  It’s years of –

MR. SIEFKEN:  Learning.

Q:  – learning and –

MR. ROBERTS:  It’s experience.

Q:  I was wondering if in this industry it is the same thing?

MR. SIEFKEN:  Maybe I would like to add something here.  GSP and – (inaudible) – here in Constanta, has made their own training center.  We have now IWCF forum certificates with the University of Paris.  We will be licensed ourselves in the future.

So what we are doing, we’ve taken the engineers from the universities.  We’ve put them on the rig.  They have a trainer and they go on training courses and they get all licenses directly from us in our training center.  The next is anchor handling.  The next is crane operation.  The next is – so we start this little university and training center, which is a very modern new building, and we have a SIM-6000, where you can really simulate the whole drilling operation in the center.

So what we are doing is what you are asking:  Get the engineers and to train them and everybody who is coming new as an engineer will be going through a three-year phase on the rigs and on training courses that’s completed there.

We need this because we don’t get enough Romanian engineers.  And what you said about the salary – our system is as follows:  We pay our people a full Romanian salary, a normal salary, which is not very much, but when they work offshore on the rigs they have a Cyprus account and they’re going to get additional money from Cyprus.  Otherwise we won’t get good engineers and good roughnecks on the rigs.

If we pay them in Romania a higher salary, we have 70 percent overhead.  This is very expensive.  In Cyprus you don’t have it.  That’s because you keep the salary in Romania low and pay them outside, which is allowed if they work outside Romania.  It’s a very important issue.  This is the situation.

Coming back to the prospectivity, from my point of view – and I agree with Jim this is very good and we will continue investing in modern equipment to have for every BNP operator in the Black Sea enough equipment to supply them with any kind of service they require.  That’s standard, international.

MR. ROBERTS:  Vitaliy?

VITALIY BAYLARBAYOV:  Yes.  Vitaliy Baylarbayov, State Oil Company of Azerbaijan.  Thank you.  Just to dwell on the same subject, which is not entirely oil subject but it is how the emerging countries are developing their potential for the future.  We are obviously a country with a huge, very long oil history, and because of that we have a lot of specialists, which, we realize, are getting older and older and what they can do is not anymore satisfactory to the standards.  

Companies want to see, in their activity – we, as an oil and gas company – (inaudible).  So what we are going to do – (inaudible) – and not only in the sphere of oil and gas.  We are sending our people abroad using State Oil Company money.  So we are sending them elsewhere.  They are studying in the United States, in France, in England, in Spain, in Germany.  We have them elsewhere – (inaudible).

Using State Oil Company money, it was an obligation to come back and work for us for three years after they – three years only.  That’s an obligation after they will finish their education.  That’s what State Oil Company is doing.  But also it’s not only State Oil Company in oil and gas business but the state is doing the same for a long list of the specialties, which include – (inaudible) – services:  the law, medicine, culture, politics and international relations.  The state is doing the same.  

So from the President’s Fund – which is obviously, as the very end, also oil and gas money, but it’s President’s Fund, it’s country’s money, it’s budget.  We are paying for the education of our youngsters abroad.  The results we will see – we started this three years ago.  The results we will see in one, two, three years from now, and then later on they will be further and further.  Obviously we are doing this, this year.

The number of the people we are sending – we are a small country.  We are 18 million only, altogether.  The number we are sending each year is more than 1,500.  

MR. ROBERTS:  Fifteen-hundred?

MR. BAYLARBAYOV:  Maybe it’s not that much.  

(Cross talk.)

MR. BAYLARBAYOV:  Not all of them, when they come back, go to work for the State Oil Company – (inaudible).  There is no condition that those who use the state’s money, for example, need to work for the state.  They can work for Azerbaijan private enterprises as well; no limit on that.  Just the condition is they need to stay in Azerbaijan and work for the country in the capacity of private or state employee.  It doesn’t matter.  

To do that you can apply to – you can just go to the appropriate sites in Azerbaijan where all this is published, absolutely transparent program, absolutely transparent conditions.  We wouldn’t do that 10 years ago.  We didn’t have funds – (inaudible) – we have funds now and that’s one of the ways how we’re –

MR. SIEFKEN:  Congratulations.  

MR. ROBERTS:  We’ve gone through human resource challenges, technological challenges.  I think we’ve also touched on vertical challenges.  (Laughter.)  What do people think about supply challenges in terms of transit?  Is there a feeling that – I could ask Vitaliy this – that you still face transit issues of great significance, or is there a general presumption that whatever is outstanding is on its way to resolution?

MR. ROBERTS:  I think we can take oil to be a sort of broad-based phrase that –

MR. SIEFKEN:  Associated gas –

(Cross talk, laughter.)

MR. ROBERTS:  – in general.

MR. BAYLARBAYOV:  Transit is hugely important.  Freedom of transit is something producers are seeking elsewhere.  And whether this is oil or gas, the freedom of transit – which is guaranteed by, for example, European Charter –  and in our case not only by this document but the agreements which we achieve with the neighboring countries, whether those countries being Russia or Georgia and Turkey, are extremely important.

We are trying to develop this principle of freedom of transit – fairly paid transit – further in our discussions with our neighbors.  Demonstrating an example of what we ourselves are prepared to do, we offer the same principles we are insisting upon to those central Asian producers who might be interested in transporting across Azerbaijan; i.e. to Kazakhstan, to Turkmenistan, to the others further into Central Asia.  

And that’s, I think, hugely important for us as a country, which is, to a very big extent, landlocked and requires such transit.  Existing expedience proves that if you have properly structured agreements, the transit issue will work.  BTC, BTE – Baku-Tbilisi-Erzurum – and Baku – (inaudible) – Pipeline, Baku-Supsa Pipeline are very good – (inaudible).

Our transit is working.  Yes, we have further negotiations with regard to the further transit of our – (inaudible) – which are ongoing and where the same principles should be applicable:  non-discrimination, freedom, fair relationships, transparent, contractually fixed relationships supported by the international community, supported by the appropriate legal frameworks, which we would like to see being – (inaudible) – in the relevant documentation, whether this is IGA related to the specific project or overall attitude towards transit from the different transit countries.

And, again, here – responding to what John was mentioning – the example of the Ukraine is a good one and not the best one in a certain sense.  This is a country which is playing a hugely important role in transit of gas across its territory, and not only gas, by the way.  And we see how they are using their importance in the relationships with another country, which is also behaving depending on the political situation.

By the way, answering your previous question, I completely agree with Mr. Roberts, and I think that the crisis might – very likely might appear this particular winter – (inaudible) – the elections in Ukraine, it will probably definitely happen.  

MR. ROBERTS:  Oh, it’s just nice to have a proper argument.  (Laughter.)  

MR. STURGESS:  It was uncanny last year, wasn’t it, that Putin had said that gas needed to be at a much higher price and then everything in Ukraine shuts down within six weeks.  That’s an awfully interesting coincidence, I think.  (Chuckles.)

MR. ROBERTS:  One point that you brought up is the prospective role of your own country, Azerbaijan, as a transit country for others.  And in the past, you know, much of the argument about should one rely on Russia; should one rely on Iran was concerned in the pre-Iran nuclear crisis ear, with the question of how much could you rely on producer countries to operate transit for other countries in a reasonable manner?

What you seem to be saying is that we’ve moved on, that we have legal frameworks, we have the kind of appropriate structures and that you actually see a positive benefit to being – I take it to being a transit country.  Do you think this is something that is shared by others?

MR. BAYLARBAYOV:  I think it is.  I think it is shared by the others, in particular by those who understand what kind of importance it is to have transit of the hydrocarbons across their territory.

MR. SIEFKEN:  Yes, because they will find alternatives.  With the case of Byelorussia is the North Stream through the Baltic Sea.  They isolate completely –

MR. BAYLARBAYOV:  I’m trying to be more quiet when I’m commenting on the behavior of the other – (laughter, inaudible) – comparing to what I can say about ourselves.  

MR. ROBERTS:  (Inaudible.)

(Cross talk.)

MR. BAYLARBAYOV:  White Stream Consortium.  There was a very interesting statement made at the opening of the conference – (inaudible) – by Mr. Scaroni.  He said actually 65 bcm a year will go toward Tbilisi to Bulgaria, but it’s fully complementary to Nabucco because the 65 bcm will be – actually is – (inaudible) – which are now going through the Ukraine.  

A couple of weeks ago Prime Minister Putin, at the – (inaudible) – Club made the statement that in a few years’ time Turkey can substitute Ukraine as a gas transit through.  Why I’m saying this is that – well, how it was said by Mr. Scaroni, nobody actually has been excited.  How you can say that – (inaudible) – Ukraine, which makes such a good – it will be justified; no problem.  

The point is that it’s become something which is part of our mentality as a notion of the reliability of demand or security of demand is something which people started to understand and to respect.  So if Russia has a point that it needs to diversify from Ukraine, it’s taken like something normal.  

Now, this point of view unfortunately is not expanded to other producers, and this – expanded in ways that, well, this should be something that we also access normally.  And this is a very serious issue because if we understand and view our understanding to the point that – (inaudible) – Ukraine has been a problem for Russia, or – (inaudible) – some other countries could be a problem, for example, for the Caspian producers.  

And does this become something which is a part of the concept of the Southern Corridor which was issued the last fall and at the Prague summit was expanded?  The concept of N minus 1, which usually was attributable to electricity – so that what happens if we take one supplier out of this situation – is now coming to the gas sector.

And it’s a very good concept also to analyze from a producer’s point of view so that what happens if minus 1 occurs, especially where there are not – situations where interests are not allied and interdependence, which is entirely symmetrical, it becomes a problem, not a – (inaudible) – like Azerbaijan took – (inaudible).  

They are entirely dependent on the countries en route while these countries have huge diversification options.  Turkey can get Iraqi gas, Iranian gas.  Now they’re talking about building five platforms in Qatar and so on.  

So this asymmetry, if it’s changed and also the producers have a possibility to have diversification, this can bring a great stimulus for – (inaudible).  Then I think John’s question will be answered in a way that – well, then one of the greatest problems – (inaudible).  That is an element of this Southern Corridor about which we have been talking today and even listing projects in this – actually the first-time the European Commission said White Stream 1 and White Stream 2.  I was surprised because this was a terminology which only used to be used in the working process.  Thank you.

MR. ROBERTS:  I’m going to come back to a very basic question and I’m going to ask Mark and maybe Steve Mann to come out.  Is the fact that we’ve found ourselves sinking so much into gas rather than oil a fact that we actually think that there are not that many problems in oil or at least those problems that exist will more or less be resolved by market forces and therefore it is worth our while to concentrate on gas rather than oil?

MR. STURGESS:  Well, obviously, I mean, a concentration on gas has been for, let’s say, power generation and also as a part of everybody’s concern for the environment.  And so I think that’s why the attention has been focused and I think the difficulties are still there for oil for sure.  

And the world is going to need oil for the foreseeable future and we’ve got to be able to overcome these difficulties.  I mean, price – the latest price fall – yes, it’s back up to 60 (dollars) or $70 a barrel, but how much investment in exploration, enhanced oil recovery, unconventional resource assessment has taken place as just a result of that small fluctuation in price?

So that and it’s a requirement for some of the developing or undeveloped nations, which is going to increase quite tremendously over the next two or three decades.  We’ve got to face that problem and the supply is critical.  

MR. ROBERTS:  Did you want to –

MR. SIEFKEN:  As long as you – I mean, if you talk about gas, gas you cannot put into tanks and drive it over the road, you see.  Oil you can.  And this is the difference because if you look at a few years back, and I think they still do it, if you want to export oil from Kazakhstan, you can bring it to Finland.  It will cost you about $40.  And they rail it up there and they load it on ships and they drive it to the Baltic Sea, wherever you want it.

So there is always a way that oil will find its way somewhere.  Gas you have to pipe, and that’s the difference, and that’s because – (inaudible) – you’re talking too much about pipes.  And remember Mr. Patriciu’s statement, “Pipes are politics.”  So that’s because we talk so much about it.  Oil is always a commodity you can trade everywhere and negotiate and change for something else.  

MR. ROBERTS:  Steve, did you want to comment on the relative issues that –

STEVEN MANN:  Absolutely.  (Laughter.)  My comment is that an effective EU energy diplomacy has to encompass oil as well as gas.  Further candidness will be reserved for private sidebars.  


MR. STURGESS:  (Inaudible) – wanted to say that.

MR. ROBERTS:  Since we’re at an incendiary note, I think we could – unless there are any burning questions that other people would like to raise – are there any points that others would like to raise at this point?  And would either of you like to make any concluding comments?

MR. STURGESS:  I think my last comment was conclusion enough.

MR. ROBERTS:  Right.

MR. STURGESS:  Followed by Steve’s comment that we’ve got to concentrate on oil and not just gas.  (Chuckles.)

MR. ROBERTS:  Something coming from the back.

MS.    :  Just from an organizational standpoint, I would like to make sure you all know you’re invited to dinner.  We will be having dinner tonight in a very historic beautiful building in Bucharest.  It’s the CEC Bank building.  Buses will be departing at 6:45 – (inaudible) – and you’re all welcome to join us, of course.  Thank you.

MR. ROBERTS:  And thank you for being such a stimulating audience as well as being such a very, very learned panel.  Thank you both.

MR. STURGESS:  Thank you.  (Applause.)

Transcript by Federal News Service, Washington, D.C.

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