In other words, there are NO CONTROLS IN RUSSIA!!!

And read both articles mentioned below if you

want to "get it".

The second article, an interview clearly from 2003

is one of the leading articles in THIS month's

magazine!!

"Oil&Gas Vertical" #16/2003 - Articles

http://www.ngv.ru/eng/magazin/view.hsql?id=1730&mid=74

Slush Moneyor why the use of environment-friendly technologies does not pay

Anatoly Nuryaev, First Deputy General Director of Surgutneftegas

The use of natural resources in the oil business has been recently attracting a lot of Government attention. Still, there issues are not getting any fewer. Moreover, the situation is worsening by the year because the standards applied in real life are quite different from those established by law. On the one hand, the Law On Environmental protection clearly establishes the principles to be applied to economic activity.

The official Government policy with regard to the man-nature interface is aimed at reducing adverse environmental, ensuring rational use of natural resources, the use of energy-saving and waste-reducing technologies. And, judging by the legal provisions, the Government believes in creating incentives for the companies adhering to the said principles, including economic incentives. However, in reality the Government policy is not as simple as that, primarily when it comes to levying payments for discharge, emission, waste disposal, and offsetting environmental protection costs incurred by companies.

"The Assessment Procedures for Environmental Pollution, Waste Disposal and Other Hazardous Impact Payments and Thresholds Thereof" are still in effect. These Procedures were approved by the RF Government Decree #632 as early as February 28, 1992. However, the procedures for offsetting costs against payments are not in effect. The enactment of the Law On Payments for Adverse Environmental Impact will hardly improve the situation.

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Essentially all drafts of the Law On Charges for Adverse Environmental Impact presently under review are of purely fiscal nature. They clearly show that the beneficiaries of environmental payments have direct incentives to support most environmentally hazardous businesses and technologies. In fact, the authors of these drafts are promoting the principle of "pay and pollute the environment as much as you want". However, the principle of "payment collection from the polluting entity" has failed to bring the desired result anywhere in the world. Still, we are taking this faulty approach.

Intelligent Choice

The use of environment-friendly technologies results in lower environmental payments. Hence, bureaucrats are not interested in improving the environment. They are seeking to maintain the current level of payments against all odds, even if such charges result in companies' failure to implement their production programs without any concern that eventually their actions would result in budget losses. Here is an example. As is known, 75% of Surgutneftegas' operating acreage is in water conservation zones (the definition of such zones is somewhat peculiar, which will be discussed below). For several years we have been developing a cluster drilling technology in water conservation zones seeking to reduce environmental impact. The objective was to improve the disposal system of dried and cleaned drill cuttings by using them as inert soil to fill pads and roads. It took us two years to complete the studies and develop the technology, and four more years to conduct field tests. We involved leading national research centers, obtained all the necessary endorsements and the approval of the Independent Expert Review Center of Russia's Academy of Sciences.

Even though the new technology increases the cost of a well 1.5 times we knowingly chose to use it because of its significant environmental benefits. Since 1999, by our order the Uralmach and the Volgograd Drilling Equipment Plant have been manufacturing new drilling rigs meeting modern environmental standards. To date, we have already purchased 47 new drilling rigs with a four-tier system of cleaning drill cuttings. We have actually initiated the replacement of imported equipment with the domestically produced facilities by financing their design and manufacturing. Giving our machine builders their due it should be admitted that their product is no less environmentally efficient than its western analogs.

Local branches of the State Sanitary Inspection, State Environmental Committee, and the MNR Water Service monitored all phases of the new technology introduction and use, and issued appropriate approvals. The conclusion was clear and firm: drill cuttings used for inert soil to fill pads make no impact on the qualitative and quantitative composition of ground water, and they are no more hazardous than natural sand or turf.

The Worse, the Better?

The new drill cutting utilization technology enabled us to reduce drilling waste by half. The method met both environmental and economic expectations, but failed to meet the expectations of bureaucrats. Hence, they raised doubt as to the efficiency of the new method and described it as a trick to avoid paying pollution fees. They are presently trying to denounce the effort of a large team of drilling engineers, designers, environmentalists, and researchers of Russia's Academy of Sciences. As an alternative to our technology they are proposing to carry drill cuttings to a special disposal ground. Such disposal grounds could be built only in blind creeks in forests falling into Category I. In the Surgut region this would be the first flood plain terrace of the Ob River, which means additional alienation of highly fertile land area. Moreover, moving drill cuttings at long distances (from several dozen to hundreds of kilometers) increases the risk of polluting the area along the roads and waterways to be crossed. Obviously, this option is unacceptable either environmentally or economically, but it is highly beneficial in terms of filling environment protection funds. However, the officials seeking to fill these funds have never presented any public account of how these funds were spent and on what. Still, it is pretty obvious that in our region these funds have never been spent on environmental improvement.

To date, no approval has been issued of operation procedures in water conservation zones, which may lead to a stoppage of exploration, drilling, and cluster pad construction, and eventually to lower oil production. Understandably, bureaucrats have little concern of the Company's potential losses, but lower production today means lower budget revenues tomorrow. Has anyone run this economics?

Initiative is Punishable

Another technological innovation developed by Surgutneftegas had a similar fate. It is an improvement in restoration of forestland used for drill cutting pits. The technology was developed jointly with the Forestry Institute of the Russian Academy of Sciences, Siberian Branch. It is based on a reaction of natural communities to such interference as drill cutting pits. Normally, they would soon have new grass and trees covering them. The conventional restoration technology of sites used for cutting pits is to backfill such pits with sand, which requires up to 2500 m3 of mineral soil per one pit. At that, drilling wastes are merely conserved under a layer of soil without access of oxygen or ultra-violet rays. The proposed restoration by forestry method requires no sand fill. Local herbal and tree vegetation is planted along a water body and dike perimeter, which successfully take root and form a center of natural communities similar to the vegetation of the local river flood basins.

In 1999 to2002, we completed such forestry restoration of 990 cutting pit sites. The land restored by the said method was accepted by the State Forestry Fund. In 2003, contracts were executed with three forestry households for the restoration of 326 cutting pit sites. However, officials of environmental protection agencies and municipalities are demanding immediate backfilling of the pits with sand citing applicable regulations governing acceptance of restored land sites by the State Forest Fund that have no provision for cutting pits.

It is against the interests of the state and subsoil users to insist upon the use of outdated technologies, which are not sound either environmentally or economically. Hence, new industrial regulations are urgently needed to encourage the use of resource saving and environmentally safe technologies and create incentives for companies to develop and use the best environmental technologies at their own cost. Government officials should also be made liable for actions hindering the use of modern technologies and setting unjustified requirements to businesses.

Bureaucratic Mire

It is of equal importance to make environmental lawmakers and experts on subsoil use answerable for their actions. It is no secret that legal documents are often passed in haste, sometimes under pressure from some lobby or other, without proper expert reviews. As a result, we see such masterpieces as the RF Water Code. The authors of the Water Code lightheartedly granted all swamps in our country the status of surface water bodies. As such, swamps are subject to protection by water conservation zones. Note that most of the Khanty-Mansi Autonomous District territory is covered by swamps. Swamps cover 80% of the Surgut district and 70% of the Nizhnevartovsk district. Water conservation zones are also required around all lakes. But most of them are located inside swamps and are connected by a system small rivers and springs. These are water pools without fish, freezing in winter and drying in arid seasons. So, 5% of our territory at most doesn't meet the definition of water pools subject to protection by water conservation zones where no industrial waste may be disposed.

The drill cuttings (drilled rock) produced as drilling waste must be carried to dry land. But dry land in our region is in most part a thoroughly drained acreage of river flood plain terraces covered by highly valuable pine forests. The lawmakers are apparently unaware that the turf soil is the best, and in our region, the cheapest natural sorbent and filter capable of absorbing and decontaminating various pollutants of industrial origin in much larger quantities and much more efficiently than all other soils. They are equally unaware that swamps are hardly suitable for human life and swampy areas are sparsely populated. The diversity of species and the value of the flora in swamp ecosystems are significantly lower compared to forests and water pools. It is hard to understand the rationale behind the lawmakers' definition of water conservation zones and the prohibition of placing cutting pits in swamps.

To date, the Water Code is a major hurdle to the socioeconomic development of northern regions because its drafters had no idea of local specifics. The Code fails to reflect priority protection of human habitat, and hence, contradicts the basic environmental protection principles. In addition, it fails to comply with the RF Land Code according to which swamps are categorized as forestland. The Land Code also has a number of inner inconsistencies: water conservation zones fall in two categories at once, the environmental protection land and water fund. How should the natural resource user operate, how should he design facilities? What should he use for guidelines?

No clear regulations are currently in place, and judging by the reluctance to develop such guidelines, somebody finds the existing ambiguities and discrepancies highly beneficial. Some ground or other could always be found for imposing environmental penalties, and very significant at that. Reclassification of swamps from lands into water pools was no accident. Fines for water pollution are 36 times higher than for land pollution. In addition, a new charge was levied for the use of water. The user of natural resources now finds himself between two conflicting departments of the Ministry of Natural Resources - the forestry and water protection departments. Government officials from forestry agencies request damage payments for spoiling the underlying forest layer in swamps, while those responsible for water protection request the establishment of water conservation zones around water pools in swamps. Ongoing disputes and denials of land allocation lead to delays in production startup.

Clearing Up

Consistent and comprehensive efforts to improve the rules of the game are critical to both subsoil users and the state. Inadequate and irrational environmental legislation adversely impacts national economy and lowers attractiveness of Russia's industry and specifically its petroleum industry to investors. To date, oil and gas producers contribute up to 40% of Russia's GDP. At that, this sector accounts for nearly 10% of ultimate atmospheric pollution by all industries. Apparently, oil production is by far lesser source of pollution, even though it takes most of the blame and most sanctions and restrictions are aimed primarily against oil producing companies. There is no doubt that persistent efforts are needed to ensure cleaner operations. We are willing to invest in such projects and develop more environment friendly technologies, but for that a system of incentives is needed instead of artificial hurdles created by our environmental legislation.

What is our specific proposal?

First, the enactment of the Law On Charges for Adverse Environmental Impact needs to be accelerated. It should be a direct action law - encouraging rather than fiscal in nature. The Law should provide for a specific mechanism for offsetting environmental costs and encourage the use of the safest environmental technologies through offsetting the associated costs against compensation for adverse environmental impact.

Second, tax and other incentives need to be provided to subsoil users introducing resource saving and energy saving technologies to mitigate adverse environmental impact.

Third, the RF Water Code calls for amendments and additions to reflect regional specifics.

Fourth, legislative acts governing the use of natural resources need to be revised in order to remove inconsistencies among various laws, codes, and regulations, and the spheres of their respective application should be clearly defined. The practice of hindering the use of advanced technologies and setting unjustified requirements should be stopped.

In order to get rid of those who like to fish in troubled waters natural resource evaluation cadasters should be developed, as well as specific regulations for rational use of natural resources defining sound rules and standards. Our experts are willing to submit specific proposals in each of the above areas, to participate in drafting and discussion of such regulations, and involve the country's leading researchers in reviewing and amending current regulations.

More on Russian Oil and Gas economics:

http://www.ngv.ru/eng/magazin/view.hsql?id=1728&mid=74

Interview with VLADIMIR LUKIN

Russian liberal political activist currently serving as the Human Rights Commissioner of the Russian Federation. He previously served as the deputy chairman of the Russian Duma and as chairman of the Duma's Foreign Affairs Committee and currently serves as Ombudsman. He is a director on the board of the Nuclear Threat Initiative (NTI), and is also a former Ambassador to the United States. He is considered a long-time specialist in U.S.-Soviet/Russian strategic arms control issues and is a member of Russia's Council on Foreign and Defense Policy, an independent association of national security experts.
Retrieved from "http://en.wikipedia.org/wiki/Vladimir_Lukin"

One More Time on Oil Diplomacy

Deputy Chairman of State Duma of the RF FC
http://www.ngv.ru/eng/magazin/view.hsql?id=1732&mid=74

Although it may have made its federal budget dependent on the world oil market, Russia has refrained from direct participation in the efforts of the world's oil association on keeping the prices for the basic energy resources acceptable for both sellers and consumers. Today, it is exclusively OPEC policy that we ought to thank for our oil superprofits. Moreover, no one in Russia has said yet what we are to do if the price of oil drops to $22 per barrel. VLADIMIR LUKIN, Deputy Chairman of the State Duma of the RF FC and also President of the Organizing Committee of the Third All-Russian Week of Oil and Gas (which took place in Moscow last November) expressed his opinion directly before the forum. He said in his interview to the "Vertical" Editor that Russian oil diplomacy could promote comprehensive decisions on energy issues at the international level. However, forming this cooperation won't start before next spring, after the election campaigns are over.

Editor: Vladimir Petrovich, the situation around Iraq still strongly affects the international energy markets. What is the reason for this?

Vladimir Lukin: First, let us answer the question of why the Americans overthrew the Hussein regime. An objective analysis of the situation proves that the reason for war involved oil to a great extent, whereas the search for weapons of mass destruction was only the casus belli used to disguise the redistribution of world oil. The terrorist attacks of 9/11 made the US change their point of view regarding their growing dependence on energy resources from the Persian Gulf countries, which, by the way, head OPEC. The US also came to understand that it is impossible to effectively counteract international terrorism globally, because it is impossible to fight with the entire Arab World, which reigns over oil and gas resources. They chose Iraq as the best country to use to teach a good lesson to all the other countries of the Middle East and to the world community as a whole --- Who else could be chosen after having had an economic embargo for so long?

The US seems to be making practical steps to strengthen their influence on settling the price of world energy resources.

Ed.: Do you mean there is a shift from a sellers' market to a consumers' market?

V.L.: I think that now we can just speak of the trends. The demand for oil and gas is increasing annually in the US, but their own resources are in many ways exhausted. Thus, having 5.2 tcm of gas and recovering 548 bcm annually, the US will exhaust all their gas potential in 9.5 years. Corresponding indicators for oil are 3.8 bln tons, 286 mln tons, and 13.2 years (these data are taken from BP Statistical). Consideration of these facts shows that in 10 years, the US will be completely dependent on the resources of imported energy reserves. I should mention that starting in 2005, Great Britain will need to start importing a volume of gas as well. So, is it possible that the US, being the most powerful country in the world, will fully close itself off from the world situation, above all a question that consists of tens or even hundreds of billions of US dollars?

In other words, there are no doubts that a regulated market, or "the consumers' market" as you call it, is more profitable for the US than the "sellers' market".

Ed.: Thus, OPEC can collapse...

V.L.: From an ideological point of view, this "death" is impossible. We must not forget that the cartel is the main guarantor of the stability and predictability of the world oil markets. A price controller for the world's energy market must exist, in one form or another. The disappearance of a control mechanism would mean, in this case, simply the immediate appearance of a new mechanism, which would be more effective regarding supply stability and pricing.

Disorder is profitable to no one, as it is never profitable when the prices for the energy resources are too high or too low. There cannot be a winner and a loser in this "seller and consumer opposition", as one cannot exist without the other, and their balance of interests is based on the demand and offer of energy resources which forms a stable world market. When pricing oil, important question (whether a barrel costs $18 or $30) is by whom and in what way the pricing was influenced. This idea makes me think that the US will never take their fingers out of the pie.

Ed.: OPEC will protect itself...

V.L.: OPEC will protect itself "to the last oildrop", which seems to be their objective as there is no other alternative.

Ed.: Do you think Iraq will support OPEC?

V.L.: I think that as a member of the cartel, Iraq will be interested in keeping the prices for oil high, especially during the period of its reconstruction. This means it will follow OPEC's policy. This has been demonstrated by the words of Ibragim Bar al-Ouluma, Oil Minister of the Temporary Government, who stated in the lobby of the 127th OPEC conference that Iraq fully agrees with OPEC policy and is planning to develop relations with that organization.

This is not an ordinary phrase, but any other opinion would provoke a conflict, as Iraq's behavior on the world markets is controlled mostly by Washington rather than by Baghdad.

Ed.: So, by bringing Iraq back to the world oil market the US plan to strategically control the market. In what extent does it meet Russia's interests?

V.L.: I'll start with the fact that Russia's Budget for 2004, which is being discussed in the State Duma now, is based on an oil price of $20--22 per barrel, i.e., we still make our economy dependent on the state of the market. We won't discuss here the expediency of such a policy, but it implies that Russia's interests are met when world oil prices are not less than those calculated for the Federal Budget. Settling the price of oil objectively meets Russia's interests, and OPEC contributes to our oil superprofits by limiting the export quotas of its members and keeping prices high.

On the other hand, it is not expedient to "irritate" OPEC by the continuous increase of oil exported from Russia. There is a solid reason for this. OPEC countries such as Saudi Arabia are capable of going through a breakdown of prices for a fairly long period. Unfortunately, one cannot say that about Russia, which would have difficulties with the Budget straight away. I do not mean Russia should join OPEC, as it would be more advantageous to OPEC than to Russia, and it is too radical a step for today. In this situation, it is more expedient to develop a full-scale cooperation agreement between Russia and OPEC, which would describe the procedures of mutually convenient decisions on all issues up for discussion. Neither party wants a price war, as this would entail significant economic losses and other problems. Thus, the situation should be solved by cooperating efforts---not only on paper, but also in practice.

Ed.: But if we intend to oppose the US, then we have to accept their methods...

V.L.: We do not need other methods. To be in opposition is quite easy but not effective. The Americans are pragmatic people, and they understand that even in the most distant future, Russia and its energy resources can cover only 8--10% percent of American market. The growing demand of the US economy will still be provided for by other producers. And price does matter for the US. Although the increasing of our budget cannot be said to be a priority of the US, we are simply obliged to use the improvement in Russian--American relations in our oil diplomacy.

Ed.: Do we have one?

V.L.: As was demonstrated by the visit of Mr. Abdalla ben Khamad al-Katyi to Russia, OPEC President and Qatar Energy and Industry Minister, which included debates about the potentials for further oil market development after Iraq has returned to the market with all its product volume, Russia has not made a decision. We should say that Russia's behavior has been determined by the biggest oil companies in recent years. Those companies were acting in favorable circumstances, resulting from the state of the world market, and they were increasing their recovery and export of HC raw-stock and trying to take the biggest share possible of the world market. The end of the Iraqi conflict could bring the end of the superprofits and a reworking of the current development strategy.

This will not only affect the companies that have invested their money in sites on Iraq's territory. We need a new model of behavior in the world oil market, which would agree with our national interests.

Ed.: How soon will Russian oil diplomacy begin working?

V.L.: The experience of the election campaigns proves that Russia is not making serious political decisions at this point. First we do one thing, and only then do we do what's next. But we are ready to work on our decisions today.