RUSSIA ENERGY: A WINDOW ON THE WORKINGS OF A SMALL

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 004583 SIPDIS SIPDIS DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT DOE FOR HARBERT, HEGBORG, EKIMOFF DOC FOR 4231/IEP/EUR/JBROUGHER NSC FOR MCKIBBEN E.O. 12958: DECL: 09/04/2017 TAGS: EPET ENRG ECON PREL RS SUBJECT: RUSSIA ENERGY: A WINDOW ON THE WORKINGS OF A SMALL U.S.-RUSSIAN OIL JOINT VENTURE REF: MOSCOW 3529 Classified By: Econ MC Eric Schultz for Reasons 1.4 (b/d) -------------- SUMMARY -------------- ¶1. (C) Describing his experiences working in a small ConocoPhillips(CP)-Lukoil joint venture, a CP employee said his Russian counterparts cling to inefficient central planning approaches to business operations. He also noted problems of favoritism, corruption, and a disregard for principles of worker and environmental health and safety. He said that CP intervenes when it can, but that changing the working culture in Russia is an uphill battle. End Summary. -------------- NO TOLERANCE FOR DEVIATING FROM "THE PLAN" -------------- ¶2. (C) Econoff met on August 28 with CP employee Jamie Gilfoil (protect),who works for a CP-Lukoil joint venture, Naryanmarneftegaz (NMNG),in the oil region of Naryanmar in the arctic Northwest of Russia. Gilfoil's role is to forecast the costs of the JV's oil-field development project. Gilfoil provided a snapshot of life at the working-level of the Russian oil industry. He was careful to qualify his statements as stemming only from his limited experience, but added that expat colleagues in other companies have shared similar concerns. ¶3. (C) Gilfoil's main complaint is that his Russian colleagues and bosses will not deviate from an established plan, regardless of changing circumstances. Adjustments are common and flexibility is necessary in large, expensive projects of the kind NMNG is developing, so Gilfoil said he spends much of his time trying to convince his Russian counterparts to accept new projections based on rising costs. ¶4. (C) However, his Russian colleagues use annual budgets for cost estimates instead of actual costs as forecasted and updated for the entire project. For example, if Gilfoil tries to justify a needed increase in expenditures due to the skyrocketing prices of inputs from steel to human resources, the typical response is that the costs cannot be higher because "that's not in the budget plan." ¶5. (C) Gilfoil said the result is cost estimates that simply don,t correspond to reality. He described in some detail the months-long process of coming to a tentative agreement on overall costs for the project. Originally forecast at about $2.1 billion, the project's estimated cost has now reached $3.6 billion by CP's reckoning. However, a Lukoil executive has demanded that the final cost estimate be set at $3 billion, regardless of the facts. -------------- "THAT'S NOT HOW WE DO IT HERE" -------------- ¶6. (C) Gilfoil also complained of inefficiencies due to a lack of pre-engineering designs to optimize project execution. A U.S. firm usually spends several million dollars on "front-end engineering design" (FEED),in order to set the parameters of upcoming multi-billion dollar investments. According to Gilfoil, Russians skip that step and jump right into project engineering and construction, resulting in costly and sometimes permanent mistakes. ¶7. (C) Gilfoil said that when he tries to share his previous experience with Russian colleagues, he typically receives a response of "that's not how we do it here." A culture of leadership through fear also hurts effectiveness. Internal assessments at odds with what senior managers "want to hear" do not make their way up the management chain. Since the response to bad news is the possible firing of the messenger, subordinates keep quiet. -------------- DRINKING ON THE JOB AND OTHER PROBLEMS MOSCOW 00004583 002 OF 002 -------------- ¶8. (C) Gilfoil said that perhaps the most shocking aspect of working in a Russian oil and gas project is the lack of occupational health and safety standards or environmental protection. He said there have been six deaths on this project since it began in 2005, with only four reported. He said injuries are also frequent. Drunkenness on the job, while against policy, is common and persists despite management efforts to combat it. Environmental pollution issues are only dealt with at the insistence of CP, Gilfoil said. The Russian attitude is one of total disregard, coupled with complaints about the costs of clean up and mitigation. ¶9. (C) While Gilfoil has not seen any overt corruption, he cautioned that the scope of his job is limited to cost projections, not auditing. He said there are questionable charges in budgets -- such as tuition for the daughter of one of the project managers, prices that seem (to him) exorbitant for certain inputs, and untracked direct payments to the local government for "community development." There is also favoritism within the organization and in contracting, with friends and associates of managers and government leaders getting preferential treatment -- "costs to the company and quality of work are less important than connections." -------------- EYES ON THE BIGGER PRIZE -------------- ¶10. (C) According to Gilfoil, CP is doing business in such an environment because it wants to maintain the goodwill it enjoys in Russia in order to pursue the much larger and more lucrative projects on the horizon. That said, Gilfoil added that CP's participation does have an effect on Russian partners who are &coming around" to the need for changes in how they do business. -------------- COMMENT -------------- ¶11. (C) Gilfoil's description of life on a Russian oil field, while personal and not necessarily applicable to all such projects, is consistent with other anecdotal evidence we have heard. Western company presidents have described, more generally, similar concerns about their operations in Russia (reftel). Instilling greater professionalism and bringing international standards of health, safety, and environmental protection to the job is an uphill battle against an ingrained corporate culture at odds with Western practices. ¶12. (C) As a minority partner, CP is shielded from the selective application of bureaucratic regulations which forced other western companies to give up majority stakes (e.g. Sakhalin 2, Kovykta). However, it also has less operational control and therefore cannot apply its expertise and best practices wholesale. That said, CP's involvement is moving the operation in the right direction, including improved managerial oversight and insistence on environmental protection. U.S. companies like CP are agents of change in Russia, even if that change is sometimes slow. Burns