As the firm starts managing the overseas assets that it acquired from BP last year, TNK-BP vice-president for international projects and exploration Chris Einchcomb tells Argus about some of the challenges that lie ahead
How big a challenge is the offshore Vietnamese project that you acquired from BP?
Up until now. TNK-BP has not had any offshore drilling projects, so our offshore experience is concentrated in Vietnam through our subsidiary TNK Vietnam. Currently, operations are straightforward. The reservoirs are relatively simple and "well behaved". It is nothing we have not faced before. But the next phase of activities at this project is going to be more challenging. As you go deeper, the pressure and temperature rise. Drilling much deeper into older formations will indeed be challenging — it is different from the conditions under which we work in Russia.
Planning the wells will be very challenging, but the technologies for such high-pressure and high-temperature wells do exist. We will find the right people to manage and execute that project, and we will bring in international specialists to help.
What are you going to start with?
There are two young drillers coming from Russia to support the start-up of the Lan Do operation (FSUE, 25 November, pi). For the next six months, they will spend time in the office planning how to drill the offshore wells, as well as time offshore on the rig. And we will bring in engineers from our Russian operations and put them on vessels here so that they can see how the project develops.
Which companies are involved in drilling?
Diamond Offshore is the principal drilling contractor, with support from Schlumberger, Baker Hughes, Expro, Weatherford and others. The rig is arriving mis week, in fact. It is a fourth-generation drilling rig used with some success in the Gulf of Mexico.
Is Vietnam's tax regime favourable?
One of the reasons that we have come to places such as Vietnam is that tax rates are comparatively favourable. I would say the margins at our overseas projects are higher man in Russia. It all depends on the price of oil. of course, because at high oil prices Russia takes 90pc of the benefit. The exact margins are confidential, but tend to be higher in Vietnam than in Russia. Still the investment levels are much higher in Vietnam. When you are dealing with offshore projects you must invest a lot.
For TNK-BP's portfolio, this project is unique. It is a production-sharing agreement (PSA). You are able to recover the cost of investment and the rate is fixed for the lifetime, 25 years in this case, of the contract. It is not like Russia — or other places, such as the UK and US — where tax rates change as the oil price increases and decreases. It is a very stable environment and we appreciate that.
The PSA terms in Vietnam are more balanced than in other countries. There are caps on cost recovery — the percentage of what you can use to recover costs in any one year is fixed at around 50pc. You pay a fixed royalty. Also. there is variable profit sharing, depending on the amount of oil and gas that you produce in a particular year.
Is it fixed in dollars?
Yes, the returns are in dollars. There is the fixed cost in terms of cost recovery and profit sharing in the PSA. Each gas sale contract has a fixed gas price, with an "escalation rate". So you know at the beginning of any investment what
the terms and conditions will be.
Will the fixed gas price influence the PSA terms?
Cost recovery is linked to the costs you face during one particular year, not to the ultimate gas price. If you end up with a higher gas price you will recover your costs much more quickly. But you will always recover the cost. I think the interesting thing about the Vietnamese is mat they have a very good balance between producer and government.
TNK-BP has said that it wants lOpc of its production to come from projects outside Russia. How will that be split between Vietnam, Venezuela and Brazil?
That is going to be an interesting challenge. If you look at future TNK-BP production, lOpc will be around 190,000 b/d of oil equivalent (boe/d). Today, we have 25,000 b/d in Venezuela and 17.000 boe/d in Vietnam. A lot of expansion will be necessary to hit lOpc. I suspect mat it will take at least five to 10 years to get mere, unless we buy other major assets. Looking forward. Brazil is likely to make up the major part of it, but it all depends on what we manage to find during exploration drilling. It would be good to have a quarter from Vietnam and a quarter from Venezuela, and maybe half from Brazil.
What are the big challenges at overseas projects?
Organisation is our major challenge. These projects represent a new ;ire;i for us — offshore in Vietnam and heavy oil in Venezuela. Brazil is more aligned with the exploration and development skills that we have in Russia, but we are working in an environmentally sensitive area, in the Amazon. So. generally, access to skills and getting the skills in the right place internationally is the biggest challenge. Some skills will come from Russian TNK-BP staff and some will come from the countries in which we are operating, so we will be hiring top Vietnamese. Venezuelan and Brazilian talent.
