Russian gas A Frozen Partnership

Deep inside Siberia, Germans and Russians are putting political tensions aside to ensure gas keeps flowing from the region's huge reserves. But will the harmony endure?
An Achimgaz drilling site near Novy Urengoy.

At the end of the world, 30 kilometers south of the Arctic Circle near the Russian city of Novy Urengoy, the sun shines in a cloudless sky and everything is covered with snow.

For six workers on a 56-meter high drilling tower, the conditions are almost unbearable, with temperatures of minus 33 degrees Celsius (minus 27 Fahrenheit).

The workers have already drilled 1,200 meters (0.75 miles) down into the Siberian earth. For the first 400 meters, they struggled to pierce the hard-frozen permafrost layer. It took ten days.

Now they have to drill 3,000 meters deeper, with conditions getting steadily more difficult – the rock layers are thicker and the pressure greater as they dig down. In another two months, they hope to reach their goal – the Achimov Formation and its rich reserves of natural gas.

“The work here is especially demanding,” said André Kamenski, a 54-year-old mining engineer who is responsible for 45 drilling sites in the Achimov Formation. For the last two years, he has been the drilling director of Achimgaz – a joint venture that is both a source of contention and beacon of hope for Germans and Russians working together.

Mr. Kamenski is employed by both the Russian natural gas giant Gazprom and the German chemical company BASF, the largest in the world.

Achimgaz is the only enterprise to which Gazprom has admitted a Western partner.

Achimgaz is the only enterprise to which Gazprom has admitted a western partner. As Europe and Russia battle over the Ukraine crisis and Western sanctions, it is a symbol of cooperation in difficult times.

For BASF and its oil and gas subsidiary Wintershall, Achimgaz is a success story. Three years ago, the partners began commercial operations and are now on track to reach their main goal ― to bring 8 billion cubic meters of natural gas out of the ground in 2018. That would be enough to cover 10 percent of German gas consumption.

In 2014, production rose by more than 40 percent, to 3.4 billion cubic meters of natural gas and 1.5 million tons of condensate. In 2015, it expected to rise by a third again, to more than 4 billion cubic meters.

“The current production figures exceed our expectations,” said Ingo Neubert, deputy general director of Achimgaz.

Since 2011, the 45-year-old German has lived 40 kilometers away from the drill site in Novy Urengoy,  the self-proclaimed “gas capital.” Despite the harsh weather conditions, he wants to stay until at least 2018.

Frozen Outpost-01 (2)

 

Relations between the manager and his Russian boss, general director Oleg Ossipovitch, are good. Political tensions are not an issue in the Siberian venture, Mr. Neubert said. And Achimgaz does not need to worry about sanctions. Up to now, extracting gas on land has not been affected ― and even if it were, that would not be a problem.

Almost all the suppliers come from Russia, he said, and the Chinese are also eager to do business here. Only subcontractors are having isolated problems with financing because of Russia’s economic crisis and credit crunch.

But the 120,000 residents of Novy Urengoy are feeling the crisis. Many products are missing from store shelves, and the ruble has drastically fallen in value, more than 50 percent in one year.

The joint venture, however, tries to promote international understanding. Working together here are Russians, Germans, Argentinians, Tartars, Scots and Ukrainians. Politics? Sanctions? Mr. Ossipovitch says he’d rather not get involved.

BASF and Wintershall have tried to balance cooperation while reducing dependence on their Russian partner.

But at Wintershall's headquarters in Kassel, Germany, and at its offices in Moscow, the tensions between Russia and the European Union are indeed a problem. Earlier this month, all participants were affected when Gazprom unexpectedly canceled the South Stream natural-gas pipeline to southeastern Europe.

BASF and Wintershall have meanwhile tried to balance cooperation while reducing dependence on their Russian partner. For 25 years, Wintershall and Gazprom have jointly managed the gas distributor Wingas, which brought Russian gas to Germany and Western Europe. Now Gazprom is taking over the company completely – including many gas-storage facilities in Germany.

Wintershall does not intend to abandon Russian operations, but it is expanding in other areas as well, including in Germany, Norway and the North Sea. North Africa and the Near East are also becoming increasingly important.

But other undertakings are no substitute for the wealth of the Siberian reserves. “Our projects in Russia are not only performance-strong, but also cost-efficient,” said Mario Mehren, a member of the managing board for Russian operations.

Chilly work:

 

Gazprom knows and values that. The Russian giant, which controls more than a fourth of the world’s gas reserves ― around 44 trillion cubic meters ― needs partners with know-how and capital to maintain its production.

Nowhere is this more apparent than at Novy Urengoy. Gazprom built the city in the 1970s so it could open up the huge gas fields surrounding it. The company enticed workers from all over the former Soviet Union to the inhospitable region, which in winter sees average temperatures of minus 30 degrees Celsius, and in summer humid air and swarms of mosquitoes.

But the gas-rush days are over. After decades of exploitation, the deposits nearer to the surface are running low. Now Gazprom must invest in new deposits to satisfy the demands of its traditional customers in Europe and new ones in Asia. The company can go further east and significantly beyond the Arctic Circle ― or it can drill deeper beneath the tundra in Urengoy.

A video showing Achimgaz's drilling operations near Novy Urengoy. Sergey Vlasov was Oleg Ossipowitsch's predecessor as director gerneral of Achimgaz.

Hence boring 4,000 meters down to the Achimov Formation. But each drilling costs around €10 million, or $12.3 million, experts say, and more than 100 drillings are planned. Gazprom and Achimgaz are investing a total of €2 billion.

Gazprom sought out Wintershall as a partner because its engineers are experts in extended-reach drilling and hydraulic fracturing, or fracking. While fracking is not allowed in Germany, it is necessary in Siberia at a depth of 4,000 meters.

Mr. Ossipovitch also praises German project management, budgetary and health and safety skills, especially as the Achimgaz project is on schedule and within budget.

“The future belongs to Achimov ― and we are the pioneers,” said Mr. Neubert.

 

Jürgen Flauger covers the energy industry for Handelsblatt. To contact the author: [email protected]