Twenty years of development and still no oil:

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1 Twenty years of development and still no oil: Prirazlomnoe - Russia s troublesome first Arctic offshore project Working paper by Lars Petter Lunden and Daniel Fjærtoft This working paper is a product of the research project RUSSCASP Russian and Caspian energy developments and their implications for Norway and Norwegian actors, financed by the PETROSAM program of the Research Council of Norway. The project is carried out with the Fridtjof Nansen Institute, the Norwegian Institute for International Affairs and Econ Pöyry as consortium partners and also includes other institutions and researchers as participants.

2 Contents 1 Introduction Project history Cooperative effort in the first phase Gazprom s long push towards completion Planning and delays Lobbying for tax breaks Russian Management Culture Top- down information flows Knowledge sharing Punishing mistakes: resulting in inaction and late disclosure Virtue of being self- sufficient Time value of money and preference for short term savings Project delay explanations External circumstances Influence of Russian management culture on the Prirazlomnoe project Conclusions... 15

3 1 Introduction The Prirazlomnoe field was discovered in 1989 and development commenced three years later. However, more than twenty years have since passed and the field has yet to start producing oil. Dates for first oil production have repeatedly been announced by the various company structures responsible for field development, only to be postponed later on. At the end of 2012, the latest update suggested that production would commence fourth quarter The question is obvious: why has this project run in to such a lengthy delay? This paper attempts to answer this question by analyzing the impact of Russian management culture on the project. Specific traits of Russian management style include top-down information flows, resistance to share knowledge, punishing mistakes, a preference for self-sufficiency, low focus on the time value of money and high focus on short-term cost savings. In addition, project development will be juxtaposed with exogenous macro-events impacting the investment climate in Russia. By investigating the Prirazlomnoe project from these angles the paper aims to determine to what extent project delays can be explained by bad luck (exogenous macro-events) and how Russia-specific project management has impacted project development. Prirazlomnoe was Russia s first Arctic offshore field to be put into development and the project reveals some tendencies, which are important to be aware of and take into consideration when planning partnerships for developments on the Russian shelf. Not least because of the special role entrusted to Gazprom on the Russian shelf, whose offshore project execution experience to a large degree can be related to Prirazlomnoe. Nonetheless, drawing implications for future project developments should be done with caution. Our investigation represents the first review of Prirazlomnoe from a project management perspective and several other offshore projects have been launched and completed since work on Prirazlomnoe first started. The methodology applied in this analysis can be divided in three parts. Firstly, project history is systematically reviewed based both open information and a set of monthly reports complied by the Norwegian suppliers association INTSOK over the period Secondly, relevant aspects of Russian management culture are highlighted based on a literature review. Lastly, the reviews of both project history and management culture are supported by information drawn from a series of in-depth, semi-structured interviews conducted in the period of June-October persons were interviewed among Russian and Norwegian supply industry stakeholders and outside-observers of the Prirazlomnoe field development. Norwegian petroleum supply industry has and continues to supply a significant share of the equipment installed at Prirazlomnoe. Interviews with Norwegian sources, brings forward new insights that otherwise would not be accessible. All interviewees have requested to remain anonymous. Corruption-related mismanagement is an important potential explanation factor. A surprisingly critical Pravda article from 2004 goes a long way in arguing that the fatal decision to buy the British Hutton platform was the result neither of bad judgment nor inexperience, but a cynical act of embezzlement. 1 However, systematic information collection on this field has not been possible forcing potential corruption to be omitted from the analysis. The article is structured as follows. Chapter 2 gives an overview of key events in the development of the Prirazlomnoe field while Chapter 3 provides a section on Russian management practices. Chapter 4 discusses the relevance of Russian management culture for the Prirazlomnoe project. Chapter 5 concludes. 1

4 2 Project history Prirazlomnoe was discovered in 1989 by the Murmansk-based exploration company Arktikmorneftegazrazvedka and is located south of Novaya Zemlya in the eastern part of the Pechora Sea some 60 kilometers from the shore. 2 Sea depth at the site is about 20 meters. Total recoverable reserves are 72 million tons, i.e., some 540 million barrels. Production is expected to peak at 135 thousand barrels per day. 3 Crude oil will be shipped from the platform all the year round with the maximum level of 126 thousand tons per day. 4 The platform is a so-called Offshore Ice-Resistant Fixed Platform and is placed on the seabed at the site. The platform measures 126 by 126 meters and has an un-ballasted weight of 117 thousand tons. A total of 40 wells will be drilled and the platform will have a storage capacity of 855 thousand barrels of oil, i.e., just over 6 days at peak production. 5 The general contractor for construction of the platform was Sevmash, a government-owned company traditionally involved in constructing military vessels such as nuclear submarines. On-shore infrastructure includes a base camp and helipad near the Varandey oil terminal on the Pechora sea shore, an office and amenity compound in Usinsk as well as an offshore supply base in Murmansk. The Prirazlomnoe project is reportedly designed to be able to serve other fields in the area such as Dolginskoye and Gulyaevskoye. Prirazlomnoe would thus serve as a production hub for the area and consequently lower the amount of investments on the other fields. Figure 1 Field Location 2.1 Cooperative effort in the first phase In May 1992 CJSC 6 Rosshelf was created to capitalize on Russian defense industry capabilities to develop offshore oil and gas fields. Among the 19 founders of Rosshelf were Gazprom, Sevmash, Rubin, Kurchatov Institute and Severstal. In March 1993 Rosshelf was granted the licenses for the right of the resources at 25-year license for the right to develop and produce both the Prirazlomnoye and the Shtokman fields. An overview over key events in the project history is provided in Table 1 below. Table 1 Project History Year Events Partners 89 Discovery 2

5 92 Rosshelf established 93 Rosshelf granted prod.license 94 Sevmash chosen as construction contractor, Enigineering commences by Morneftegazproekt, Rubin and Corral Rosshelf signs JV-agreement with Gazprom. Austrailian BHP Petroleum enters into development cooperation with Rosshelf. 95 Ceremony at Sevmash, launches construction. Completion time estimated at 3 years 98 BHP Petroleum withdraws from the project Wintershall enters project as Gazprom partner 01 Sevmash, Rubin and other supply industry shareholders leave Rosshelf 02 Platform readiness estimated at 15 %. New development concept launched involving utilization of topside from Hutton platform. Hutton topside disattached in Murmansk. Estimated first oil Topside delayed in Murmansk due to complicated commissioning of equipment with nuclear isotopes. 04 Sevmash delayed on caisson block-construction. Topside refurbishment delayed from mid to end Sevmash completes 3rd caisson block in H1. Total investment reported at USD 380 mln Gazprom claimed financial difficulties due to USD 19 bln debt burden. 06 Prirazlomnoe receives 5 year environmental approval. Topside mated to completed caisson. 07 In February Sevmash announces plans to finish construction by year end. In April the plan is to finish in In June Gazprom announces delay to Total investment by end 2007 estimated at USD 1.4 billion. Living module contract transferred to Vyborg. Wintershall leaves project having spent USD 45 mln. Sevmorneftegaz est. as JV between Rosshelf and Rosneft- Gazprorm JV Rosneft- Purneftegaz Rosneft leaves Prirazlomnoe and Sevmorneftegaz Sevmorneftegaz becomes 100% Gazprom subsidiary 08 Contract with Sevmash redefined to EPC. Delay to 2010 announced in February. Delay to 2011 announced in April. 09 Living module mounted to platform. Sevmorneftegaz renaimed to Gazpromneft-shelf 10 Platform towed to Murmansk for ballasting 11 Platform towed from Murmansk on August 15. Platform arrives on site in September. 12 Environmental approval expires. Production delayed to Dec 12 / Jan 13 in May. Production drilling postponed to October In 1994 Rosshelf signed a joint venture agreement with Gazprom and Sevmash was chosen as the general constructor. The same year the Australian company BHP Petroleum entered into an agreement with the license holders to cooperate on development of the Prirazlomnoye field. Platform engineering commenced the same year. In December 1995, a 3

6 ceremony marked the construction launch of the Prirazlomnoye platform at Sevmash s slipway in Severodvinsk. At the time, the estimated construction period was 3 years. In 1998 BHP Petroleum withdrew from the project after it ran into severe problems. The construction was delayed due to both technical problems as well as numerous design changes and it was also difficult to attract sufficient financial sources 7. Reportedly BHP left with a non-working interest of 5 percent that would be activated once production commenced. 8 In 2000 a new foreign partner, Wintershall, was attracted to join Gazprom in developing the Prirazlomnoe field. 9 However, only two years later they too left the project siting it as too risky 10 after spending at least 100 million marks, i.e., roughly 45 million USD. 11 The plot thickened in 2002 when Rosshelf and Rosneft-Purneftegaz (a subsidiary of Gazprom and Rosneft) set up Sevmorneftegaz owning fifty percent each. Sevmorneftegaz was the first Russian company focused on development and operation of offshore arctic oil and gas fields. 12 Rosneft brought new dynamics to the project. In early 2002 the platform's readiness was only 15 percent completed and 4 years after the platform was originally planned to be operative, Sevmorneftegaz launched a new concept for construction. The new plan, masterminded by Rosneft and involving a Norwegian broker, was to buy the Hutton platform, which was being decommissioned after 30 years of service on the UK continental shelf. 13 The topside was to be removed, modified and placed on the caisson that had been under construction at Sevmash s yard since Kellogg Brown & Root performed the feasibility study while Rubin and Coral were responsible for design. Sevmash was chosen to construct both the caisson as well as integrating the topside onto it. Initially, the idea was to utilize some 70 percent of Hutton s in-place equipment. The Hutton platform was towed to Murmansk in 2002 where the topside was to be dismantled since the waters around Sevmash were too shallow. The dismantled deck was to be towed to Severodvinsk in It was estimated that 200 thousand tons of sediments had to be moved from the seabed around Severodvinsk in order to move the platform out of the bay after completed construction. In 2003 it was estimated that platform construction would cost USD 800 million while total expected capital expenditure amounted to USD 1116 million. 14 In 2003, Sevmorneftegaz spent some USD 180 million on platform construction and Rosneft provided the bulk of this sum. 15 The remaining amount for construction was estimated above USD millions. At the time, Rosneft top officials attempted to attract USD 700 million loans form Russian and foreign banks to complete platform construction and purchase two tankers plus one icebreaker. In 2003 the project ran into delays caused by technical stumbles. The topside was held back in Murmansk due to complicated Russian procedures commissioning equipment with nuclear isotopes. 16 And in December 2003 it became clear that Sevmash was not on schedule constructing the last two caisson blocks and that the yard intended to subcontract one of the remaining blocks. The plan at the time was still to tow the platform to the site by mid However, topside refurbishment was delayed from mid 2004 to end of The topside s poor condition and non-compatibility with field development requirements forced the original plan to be scrapped and warranted a new round of designs. 19 By early 2004 the estimated start of production was However, some experts compared real progress achievement in platform fabrication and duration of procurement processes against the initial time schedule and concluded that production would rather commence in An explanation offered was that the official plan was based more on practical politics rather than on common sense. 20 In 2005, Rosneft left the Prirazlomnoye project and in 2006 Sevmorneftegaz became a 100 percent subsidiary of Gazprom. This ended the multi-stakeholder ownership structure of the 4

7 project, which subsequently has been developed by Gazprom alone. In 2009 Sevmorneftegaz was reorganized into Gazprom Neft Shelf limited liability company (LLC). 2.2 Gazprom s long push towards completion In 2005, USD 380 million was supposed to be invested in platform construction. However, Gazprom being now the sole owner simultaneously reported to have financial challenges with a total debt burden of USD 19 billion. Nonetheless, the project inched forward and the same year the topside was mated to the finished caisson in a technically demanding, but successful operation. 21 In 2007 a range of news regarding project time frame were published. In February, Sevmash announced its plans to finish the platform by the end of the year. However, in April, the platform completion was pushed forward to Then, in June Gazprom officially announced a further delay until Independent experts were skeptical about Gazprom s statements. 22 Substantial cost overruns were revealed and the Hutton acquisition was pinpointed as the main cost driving factor: it turned out only 10 percent of the equipment and steel frameworks purchased could be reused. 23 In September 2008 it become clear that total investment incurred by end of 2007 amounted to USD 1.4 billion, with still two years of construction time remaining. 24 Sevmorneftegaz was seriously concerned by the delays at the Sevmash yard and planned to transfer design and fabrication of the the living module to the Vyborg shipyard in order to assemble the living quarter by the end of In 2008, the contract for constructing the platform was changed into an EPC (engineering, procurement and construction) contract, which transfered more responsibility to the contractor. Importantly, finance responsibility was shifted from Sevmorneftegaz/Gazprom to Sevmash. In February 2008, a new delay from 2009 to 2010 was announced, only to be extended to 2011 two months later. 25 To speed up construction, Sevmorneftegaz required Sevmash to increase the number of workers on the yard. Nevertheless, the lack of manpower was still estimated to some workers. Morneftegazproekt, the company responsible for project documentation, was also given a reprimand for its slow processing in engineering drawings. 26 At the end of 2008, total cost of constructing the platform had increased to USD 3 billion, roughly doubling the estimate from During the summer of 2009 the total amount of workers reached 2 500, and the living module was installed. However, the operation required a unique foreign crane and the Sevmash had to lobby a special government decree in order for it to gain access to the military yard. Construction of the first stage of the platform construction was completed in 2010 and the platform was towed to Shipyard 35 in Murmansk in November for ballasting, which was completed in August Although it was not completely finished the platform left Shipyard 35 on August 15th 2011 and towed to the site. In September 2011 the platform had arrived on site and the protective berm around the platform had been installed. The platform was claimed to start production in 2011, but as many times before, the date for first oil was postponed. In May 2012 a statement from Gazprom said that production would start in December 2012 / January In October 2012 signals were sent that production drilling would not start until October Installation of new, foreign equipment for the drilling campaign and lack of environmental approval, which expired in 2011, were provided as explanations for the delay. Moreover, technical documents had to be rewritten as equipment not included in the original plan had been purchased. According to Greenpeace Russia the oil spill response plan had not been handed over to the authorities for approval and it was not clear when this would be done. 30 In 2011 the General Director of Gazprom Neft Shelf stated that some 4 billion USD had been invested in the project, almost three times the expected figure back in At the time of writing, the project s future remained uncertain. 5

8 2.3 Planning and delays A feature of Russian project management is to decide on a high level of detail early in in a project s life cycle. As Figure 2 illustrates, Ormen Lange a Norwegian offshore development, went through a long planning period, while construction was comparatively shorter. While developing Ormen Lange approximately five years were spent on development and concept selection, two years on detailed engineering and construction planning and three years on construction. Construction of the Prirazlomnoe platform, on the other hand, was launched in 1995 after only one year of design work and has continued ever since. When the project got its second start after Rosneft bought a share in 2002, the time for planning was also limited. Already the same year, the Hutton platform had been both procured and towed to Murmansk. Figure 2 Planning and construction stages of Prirazlomnoe versus Ormen Lange Level of detail Construction stage Prirazlomnoe Planning stage Ormen Lange Discovery Source: Sigra Group Time Figure 3 below reveals an interesting pattern relating to the time spent on planning and construction as well as to the subsequent delays. Both in 1994 and in 2002, the time spent on planning before construction activities were launched was one year. The expected time to first oil was three years in both cases. No delays were observed after the project s first launch, it simply halted sometime between 1995 and After the second start however, at least 7 distinct delays were announced. Each one had the effect of putting first oil off for just one more year. The double occurrence of three-year construction time frames and repetitive year-by-postponements is quite remarkable. If the timeframes were estimated based on a progress plan that was based on the actual status of the project, one would expect timeframes to vary more. 6

9 Figure 3 Planning and delay overview Planned Completion Time Delays Initial design Time to first oil Hutton design 1 Hutton Design 2 Hutton Construction Iinitial timeframe Delay 1 Delay 2 Delay 3 Delay 4 Delay 5 Delay 6 Delay Source: Sigra Group 2.4 Lobbying for tax breaks Prirazlomnoe has been lobbying for improved fiscal terms for many years. In 2003, Sevmorneftegaz seemed to have secured an agreement on a PSA with the Government and it was sent to the Duma for approval. 31 However, four years later the agreement had not been signed and Sevmorneftegaz gave up securing a PSA for the Prirazlomnoe development. This implied that import taxes for all the equipment purchased abroad had to be paid 32 and the failure to secure a PSA stoked concerns on the project s economic attractiveness. In 2012, however, a rebate on the export tax was finally secured. Prirazlomnoe oil is to pay 1,5 times lower, i.e., 66 percent of the standard rate for export tax. 33 Moreover, in October 2012 A. Miller, CEO of Gazprom, asked the government to include Prirazlomnoe in bracket 3 in the new tax code for offshore projects. Category 3 implies 10 % mineral extraction tax for 10 years compared to 15 % for 7 years, which applies for bracket Field development has continued throughout the lobby campaign. This is somewhat puzzling since activity normally halts when a project is not economically viable. For Prirazlomnoe, all tax breaks were granted after most investments were made. This is not standard procedure since the reason for granting a tax break normally is to enable the launch of a project that is not viable under the initial fiscal terms. Prirazlomnoe thus differs from other arctic projects that are believed to require tax concessions to reach positive investment decisions. 3 Russian Management Culture This paper argues that distinct traits of Russian management culture have influenced the Prirazlomnoe project. The overview in Table 2 below lists some tendencies believed to be of potential consequence for project management in organizations where a Russian management culture dominates. Table 2 Distinctive Traits Trait Top-down information flows Explanation The organization is propelled by commands 7

10 from above only and relies to limited degree on management s reaction to feedback from below. Reluctance toward knowledge sharing Punishing mistakes Preference toward self-sufficiency Inclination toward short-term savings Limited attention toward time-value of money Information is regarded as an asset that may be used strategically against others. Hence information is shared with hesitance between organizations and also between departments of one organization. Mistakes are not accepted as learning points, but suffice as grounds for punitive action from superiors. Organizations prefer to maintain internal input production and equipment maintenance capacities rather than rely on subcontractors. Little attention is given toward long run performance of equipment. It is preferred to minimize upfront investment expenditure rather than life cycle costs. Little sense of urgency receiving an amount, i.e., its value is independent of time. Both the literature review and our interviews support the notion that the traits listed above are characteristic to what may be called a distinctive Russian management culture. At the same time it is imperative to bear in mind that Russian management culture context is an abstract construction and its distinctive traits are not equally applicable to all organizations. Furthermore, the traits discussed here are what is perceived to distinguish Russian management culture from other cultures, and should therefore not be interpreted as an exhaustive description. Moreover, we have focused on the aspects of Russian management thought to be most relevant to the Prirazlomnoe development and omitted others. Lastly, management practices in Russian organizations are changing. The compilation above builds in part on studies of management in Russia during the late Soviet period, but interviews confirm that it is perceived as relevant in today s setting. 3.1 Top-down information flows To discuss both top-down information flows and knowledge sharing it is useful to introduce what Lawrence et al call a hierarchy of Structural Task Units - STUs (podrazdelenia). Figure 4 below provides an illustration of the STU organization model, the defining properties of which are that all STUs are encompassed in other STUs higher up in the hierarchy until the organization culminates at the enterprise level STU lead by the enterprise s general director. The manager of a STU at any level in the organization is completely responsible for the actions and achievements of all sub-units. At the same time managers are granted sovereignty over their realm of STUs for which they are responsible. 35 8

11 Figure 4 STU Organization Chart Source: Lawrence et al (1990) The STU culture facilitates organizations where the dominant share of information flows from top to down. Commands are issued on what goals should be reached. Since the on-goings within lower-level STUs are considered the responsibility of the respective STU leader, expectations of feedback on progress and interest in the preconditions for successful completion is limited. Strong dependence on the immediate superior fosters a management-is-always-right culture. If you are higher up in the hierarchy you are by definition more competent than employees further down. Managers find it hard to accept they can learn anything from their employees, which is exemplified by the dissatisfaction observed by Husted (2002) when Russian managers participate in company training programs.36 Accordingly suggestions from below may be interpreted as criticism and a challenge to authority. No creativity beyond defined duties is expected or required from managers and workers at lower levels. Welsh et al. (1993) even found that participative management practices such as involving lower echelons of workers in making suggestions for improving productivity, safety measures and so on could be counterproductive in Russia. In an experiment, the workers chose to work less hard after the management tried to involve them in decision-making since they assumed their bosses must have had an hidden agenda since they chose to involve their subordinates. Furthermore, Russian workers could avoid feeling frustrated by being rejected or ignored if they refrained from information sharing.37 The challenge for an organization with an imperative chain of command is that in all cases, for which there has not been described a specific course of action, decisions are pushed upward through the system to avoid what management might perceive as wrong decisions. In result decisions either accumulate at the top or stall in mid-level echelons to consider whether a decision relates to their sphere of competence. 9

12 3.2 Knowledge sharing In general, the more people know about what s going on in the organization, the greater is their feeling of common belonging and the greater is their ability to consider the needs of the organization in their everyday behavior. For this reason organizations hold information meetings, develop IT-based information-sharing tools and encourage lateral networking within the organization. These practices are far less common and the value of knowledge sharing is less recognized in Russia. Knowledge sharing is generally not reflected in reward mechanisms and predominance for departmental thinking hinders knowledge transmission. 38 According to Lawrence et al. (2002) Russian managers do not share information without clear explicit instruction and rarely volunteer information. A respondent in Husted et. al (2002) claimed that Everybody in Russia was trained to keep things confidential. The tendency not to share information was amplified by fear that the receiver could, perhaps even deliberately, misinterpret the information thus harming the transmitter. When loyalty is linked primarily to the STU, it hinders intercommunication and integration between STUs, which would help the company pull in the same direction (Lawrence et al. 1990). Michailova and Hutchings (2006) observe a pattern of organizational behavior in Russia where people define in and out groups comparable to the STU loyalty described in Lawrence et al. (1990). 39 Intergroup conflicts that occurred in the study were for example selective perception about one s own group and distortive perceptions of other groups, winlose positioning and increased hostility towards rival groups as well as decreased interaction and communication between groups. STU organization and in-group/out-group dynamics makes lateral cooperation between organizations and STUs within organizations less common in Russia. When two units within an enterprise need to cooperate in Russia there is normally a need to involve a common boss. This Russian practice is heavy on paperwork and also vulnerable to imprecise information exchange because a boss who does not have firsthand knowledge makes decisions, rather than personnel directly involved in the situation (Lawrence et al. 1990). Though cumbersome, involving a common boss makes sense within the STU organization model since helping someone in an out-group could evoke the wrath of your superior because he would prefer the resources were spent on some other task for which he is accountable. 3.3 Punishing mistakes: resulting in inaction and late disclosure A key trait of Russian management behavior is that managers and workers are penalized when they make mistakes. This has deep historic roots where there have been detailed procedures for all aspects of organizational life ever since the 15 th century. Compliance with the rules has been awarded whereas personal risk-taking through initiative is best avoided. 40 Making mistakes is not connected to learning, but treated only as negative occurrences. For example, Husted et al. (2002) found that sharing problems and talking about mistakes are taboo and in their research highlighted the quote We are here to learn, not to talk about our problems. This is contrary to the western belief that mistakes are unavoidable since you and the organization have to stretch beyond your comfort level to perform. Thus, making mistakes and turning them into learning points is an integral part of growing an organization. In Russia, punishment is needed to discourage vigilantism, since superiors bear responsibility for subordinates actions even when these are not ordered. Since mistakes often comes as a result of stretching beyond the strictly prescribed area of duty, making a mistake would often come a result of violating the order of command. Another phenomenon is that unexpected events and problems are often best kept hidden from the management as long as possible if there is a chance to make it right. If the punishment is independent of time of disclosure, it is rational to wait as long as possible trying to either fix the problem or simply hope that some last minute miracle solving the problem would occur. This obviously creates problems for the management who wants early 10

13 warning of unexpected delays and problems in order to make alternative arrangements and corrective action. 41 Fey (2010) mentions an example where employees where aware of the flaws of the foundations where a paper machine was to be installed, but did not warn anyone because they were afraid to be seen as criticizing the management. The project was delayed for months, amplified by the lost months of alternate planning that could have been undertaken. Another explanation for late disclosure is that it could be better to let a crisis evolve in order to trigger an adequate response from the authorities with the required resources and power to solve the problem (Lawrence et al. 1990). The unwillingness to provide early warnings may also be related to a sense of collective responsibility. Ledeneva (2006) discusses variations of this this at length under the term krugovaia poruka, an institution which existed in its original form to the late 19 th century and was related to the European concept of frankpledge, but has come to mean both joint responsibility and mutual cover-up. In the current context the important issue is that tradition to keep a solution to a problem within a closed circle collectively responsible for the output or outcome, has long traditions. When a problem arises, the in-group will attempt to solve it rather than informing outsiders. Because the group is collectively responsible, failure will bring punishment upon the whole group. Informing out-siders, i.e. warning higher-level management in our context, would be considered an attempt to avoid negative sanction and disloyalty to the in-group. 3.4 Virtue of being self-sufficient The Soviet economy was characterized by a shortage of inputs. This situation continued into the 1990s due to supply chain disruptions and cash shortages. Maintaining in-house input supply and maintenance capacities thus became a crucial part of supporting production. As a result Russian organizations attempt to build or integrate needed capacities into their organizations using ownership as a steering mechanism rather than contractual relationships. Organizations strive to cover all input areas instead of specializing on narrowly defined corebusiness and building capacity through working relations with specialized technology providers. Accordingly, service and maintenance contracts are less common in Russia. Rather, organizations prefer to master the equipment used and conduct maintenance with own resources. After purchasing a piece of equipment, the company chooses to develop its own capacity to maintain its capital stock rather than relying on service contracts which are more common elsewhere. This is rational behavior in a the supplier is always right environment where support from service personnel requires long waiting, is costly and perhaps also unreliable. The potential negative impact is that self-trained personnel may repair and maintain equipment without the necessary training and equipment resulting in more frequent breakdowns in the longer term. Regarding the adaption of new practices, Husted et. al (2002) points out the not-invented here syndrome. It refers to a skepticism toward new ideas that often results in explaining to foreigners this will not work in Russia. Often the skepticism is motivated by a need to protect current position. If the new information/knowledge is better than the one currently possessed, forces work against implementing new ideas as existing knowledge subsequently will be worth less. Thus, even though the supply side of the Russian economy has improved markedly since Soviet times and the 90s, strong forces within organizations that were built up during this period, work against restructuring toward specialization, which would make them redundant. 3.5 Time value of money and preference for short term savings In the Soviet economy simple payback time was the only economic criteria for capital decision-making. Metrics such as internal rate of return, hurdle rate and net present value were not used. (Lawrence et al. 1990) By discarding discount rates project economics becomes independent of construction delays. 11

14 Moreover, delays during Soviet times did not threaten market positions since product demand was secured by government orders. Thus focus in project planning was directed more at composing budgets (costavlenie smety) than timing procurement and construction. In a tight supply situation, construction progress was dictated by when inputs arrived, which could be unpredictable, leading to sequential project execution rather than parallel work streams which have become common elsewhere. Importantly, limited attention to the cost of delays in terms of postponed production has resulted in rigid budget procedures, that do not leave room to increase costs in order to meet time frames. The use of simple payback and practice of financing investments with own resources, i.e. over the companies cash flow, rather than credit financing has caused investment decisions to be linked to the required upfront payment instead of annualized cost of the investment. A preference for short-term savings has developed reducing the budget and increasing the chance of the investment being approved. Lower upfront investments however often come at the expense of higher operational costs due to more expensive operation and increased maintenance requirements. 4 Project delay explanations The Prirazlomnoe project has been underway for some 20 years. Development, however, has not been continuous, but can rather be separated into two separate attempts. Rosshelf made the first attempt in the 1990s and the second attempt was made by Gazprom together with Rosneft starting in Both attempts have suffered from unfortunate external circumstances that cannot be directly linked to management culture. Interviews identify examples of the distinctive management traits outlined in Table 2 that may have aggravated the challenges related to keeping progress. 4.1 External circumstances The first attempt suffered from an unfortunate configuration of Rosshelf and funding problems. Rosshelf was not established by the initiative of an investor with primary goal to bring the field into production. For Gazprom the configuration was a forced marriage devised by Sevmash to use Prirazlomnoe to save Sevmash from certain demise. 42 Thus the company suffered from a clear conflict of interest between companies on the receiving end of the investment budget and the main budget sponsor, Gazprom. With the backdrop of an increasingly difficult financial situation for Gazprom throughout the 1990s it is therefore not surprising that funding was erratic and finally came to a full halt after the 1998 meltdown in the Russian economy. All in all, in the period from 1995 to 2000 only 20 percent of the work was completed and it was unclear when production could be expected to commence. The second attempt has been branded by Rosneft s 3-year, double-edged involvement. On the one hand Rosneft got the project-back into motion with new capital and managerial focus. Many of the contracts with foreign suppliers were awarded in the years However, Rosneft was also the mastermind behind the Hutton purchase. This move proved to be both rash and devastating to the project. It was the single most important cause of delay as Sevmash and Gazprom ended up spending four years slowly picking it apart. Gazprom has had to bear the consequences of this decision ever since. From Gazprom s viewpoint, the forced-marriage with Sevmash has not just been a happy one. As the Director of Gazprom-Neft-Self put it at a conference in Murmansk in November 2012, Cooperation is important. Before I joined the project in 2008 Sevmash was trying to solve all issues by itself, that s why we got the never-ending construction (dolgostroi). When I attracted four-five competent partners, that s when the project started moving ahead. 12

15 4.2 Influence of Russian management culture on the Prirazlomnoe project The interviews revealed a strong influence of top-down information-flows in the Prirazlomnoe project organization. An example illustrates the concentration of decision-making power and progress dependence on the presence of this authority. In a meeting with a Norwegian supplier one of the Russian managers was generally considered to be the boss. He repeatedly left the room during the meeting to answer phone calls. When he was not present, the other Russian participants went quiet and nothing happened before the manager rejoined the meeting. In general, the organization was often not receptive to feedback on issues discovered on the ground level. For example, one respondent claimed a senior manager at Sevmash cost the yard millions of dollars simply by refusing to listen to advice from subordinates and foreign suppliers. Sevmash was considered to have very tight information barriers between hierarchical levels. Management was often unavailable, and the lower levels were not in position to communicate priorities and decisions to the suppliers. To ensure project progress it was therefore important for suppliers to bridge the information gap by building trust with engineers in the Russian companies who were able to solve documentation issues in a pragmatic way. Respondents remarked that very little information on project progress and design circulated regardless of companies efforts and requests to be informed, which made it hard for them to make timely preparation. Many of the supply companies had contracts with Sevmorneftegaz, but in order to plan and install their equipment they were required to have contact with Sevmash directly. Respondents experienced that Sevmash was not very attentive to the delivery conditions agreed with Sevmorneftegaz and were willing to interact with the suppliers only when deliveries were required for construction to proceed to the next step. One respondent pointed out that one of Rosneft s major positive contributions in addition to capital, was that the company assigned a team of people that started collecting information from the various participants sourcing this information to other participants to help their progress. In the respondent s opinion, this really helped get the project moving. Informationsharing was insufficient at later stages as well. When the platform was moved to Murmansk in 2010 for ballasting, some 2000 workers had to be flown in from Severodvinsk. However, according to a representative of the logistics company in charge of accommodation, they were only made aware of the need once the platform had left dock at Sevmash. Accommodating 2000 workers on such short notice was mission impossible and created a chaotic work situation the first months in Murmansk. Decisions migrated up the system and were made in an approval council reportedly counting some 30 members. Every member needed to be present when decisions were made on project progress, which implied that some 6 months routinely passed between each session. Often, the council requested information on a topic to be delivered on short notice. Suppliers would then work intensively to deliver by the short deadline, but thereafter, they could be left waiting for months for approval and comments. After documentation was sent to management for formal feedback all work processes regularly ceased until further notice with no exchange of information neither on when a decision was excepted nor what it could be expected to be. The power vertical was so strong that no enquires upwards were conducted, regardless of whether the feedback ran in to lengthy delays. A Russian interviewee pointed out that the collective decision-making came as a consequence of punishing mistakes that lead to an aversion towards personalized responsibility at the management level as well. After being approved by the management council contracts were signed by typically signatures rather than by one authorized manager. By linking the decision to the council it would be harder to blame one particular person if the decision went wrong. As pointed out above, the ritual of collective decision-making routinely put project participants on hold for several months at a time. Respondents also witnessed rigidity in project execution and procurement that they related to the fear of making mistakes. For example, procurement was based on lists of approved 13

16 equipment. However, these were so detailed and inflexible that purchasing an item off the list was excluded, even if the new item was superior to the former. If a piece of equipment had been improved since the procurement lists were compiled and was offered at the same price as the former, the superior version was not considered since it was not on the list. Thus, a potentially project-improving procurement would not be made as the ordering personnel would operate beyond its mandate. An example illuminates the rigidity of the procurement policy. A company wanted to include some safety equipment not demanded by the Russians in their delivery. The company considered this equipment crucial and increased the price of the equipment without the safety equipment to a level they considered to be sufficiently high to ensure that Sevmash would buy the equipment including the safety features. But Sevmash bought the former anyway. Several examples were provided revealing a preference for self-sufficiency at Sevmash. One respondent claimed that a drill package had been completely dismantled at Sevmash in an attempt to copy the technology. Other examples of self-sufficiency ambitions and high estimations of do-it-yourself capacity raised concern among respondents for the safety of operations on the platform. Equipment has often been lying around uncovered at the yard prior to installation. The equipment manufacturer normally conducts or at least oversees the installation of its equipment. Moreover, upon installation some parts need to be routinely inspected and possibly changed after some years, for example rubber hoses and other sensitive material, but this has often not been allowed. A different respondent recalled how his company repeatedly contacted Sevmash to supervise the installation of the platform s oil off-loading crane. However, one day they suddenly received information that installation was completed. Since that, no one has been allowed to visit the site to check whether the installation was done properly. Moreover, consumable parts have been ordered, but there is no information on whether the parts have been installed correctly. Over ten proposals and warnings about the necessity of an inspection prior to production start to prevent oil spills have been left without answer. This fix-it yourself mentality implies lower (short-term) costs since service contracts with equipment manufacturers can be circumvented. However, the risk of accidents and equipment malfunctions inevitably increase with untrained personnel operating the equipment. In addition to the purchase of the Hutton platform, which was motivated by, cost savings, the shunning of service contracts was put forward by interviewees as an indication of a preference for short-term savings. Moreover, in the very beginning the project organization was very cost conscious and selected the procurement-responsible offering its services at the lowest cost. The chosen organization was not a competent reviewer of tender documents and caused a series of bad procurement decisions. Furthermore, the development pace has been tightly linked to the budget process of Gazprom and other owners. Additionally discounts for bulk procurement were not obtained since the purchases followed budget allocations. Thus, even though it was clear that more units were required, due to the rigidity of the budget process costly one-time purchases were preferred. As a paradox, many contracts were awarded because of short delivery times. In hindsight, taking into consideration the time of development, it is clear that short delivery times were often not needed and that this factor rather increased costs by lowering the amount of tenderers while doing little to shorten development time At the latest stages, costs seem to have been of less concern than maintaining progress. Vladimir Putin visited Sevmash four times in and many regard the move to Murmansk as an attempt to show politicians that something was being done. Although representatives of Gazprom-Neft-Shelf have repeatedly claimed that moving the platform to Murmansk was the plan all along, industry insiders in Arkhangelsk considered the move unwise and asserted that the work being done in Murmansk could also have been done at Sevmash. Moving the Severodvinsk construction crew mounted to nothing but increased costs. 14

17 The decision to tow the platform out to sea in 2011 was perhaps of even greater economic consequence. A well-known postulate in management of offshore projects is that whatever you do, do not bring the platform out to sea to keep schedule if it the platform is not ready. Any work that can be done onshore should be completed before the platform leaves. Norway made the same painful experience at Statfjord in the late 1970s. The platform was prematurely towed to site after being delayed initially for one year. Total costs of the Statfjord A platform ended up 4 times the initial estimate. 44 A deputy director of Sevmash claimed that the platform was 94.2 percent completed upon dismissal from Murmansk. 45 However, the Murmansk news agency Nord-News cited sources working on the platform claiming that the platform in reality was no more than 50 percent completed. 46 Why was it towed to sea? Interviewees and press sources claim this move was made to appease a timeframe set by Putin. 47 One-month after the platform left Murmansk, press reported that Putin would take part in the launch of the project on September during the Arctic Forum in Arkhangelsk. 48 This did not happen, but Deputy Prime-Minister Sechin was at the platform in the Pechora Sea and hosted a video link with Prime Minister Putin in Arkhangelsk, reporting on the ecological safety of the platform. Director of Gazprom- Neft-Shelf, A. Mandel, reported to Sechin that construction was on schedule and proceeding without interruption. 49 As one inteviewee pointed out, everyone on the platform at the time knew this to not be true. As it may seem, aversion towards reporting bad news has caught those involved in krugovaia poruka style cover-up with a shared destiny. 5 Conclusions Despite its superficial nature, our study of the Prirazlomnoe project has yielded some indication that the project has been influenced by Russian management culture. The project organization has been characterized by limited information sharing and top-down information flows. Bad news seems not to have been communicated upward and upper levels have made statements as well as decisions on false premises. Moreover, lengthy and cumbersome decision making procedures, stoked by fear of taking responsibility, have caused inertia and cyclical progress, in particular in the project s early stages. Aversion towards knowledge sharing and supplier involvement in production processes has also caused delays and potential risk related to future production. Since Sevmash has done much of the construction and installation the organization s understanding and skills have been averaged out across all elements of the platform, rather than being concentrated on fewer tasks. Budget-based financing caused abruptions in the early phases and led to sub-optimal procurement policies throughout the project. The purchase of Hutton was also an attempt to cut-corners in favor of short-term savings and proved to be very unwise. A main sticking point for Prirazlomnoe dates back to its conception. The idea of using an oilfield to save a military shipyard reflects a sub-optimal approach to economic management, where maintaining capacity is more important than the purpose that this capacity is meant to serve. From a soviet manager s background this is understandable since demand in the enterprises equation was defined by the authorities and the challenge at all times was to have the resources at hand needed to deliver, but it was not necessarily an optimal way forward for Russia on its transition to a market economy. Western partners in Russian Arctic endeavors should be particularly attentive to differences in management culture when planning their project partnerships. At Prirazlomnoe both BHP Petroleum and later Wintershall have entered (and left) the project, pocketing nothing but costs. On this note, it is important to underline that management, and project management in Russia is undergoing a rapid development from practices in the late Soviet period. The different defining traits in this study will not be equally valid in all organizations and interviewees confirm that the defining traits are more persistent in state-owned organizations 15

18 like Gazprom and military-related organizations like Sevmash compared to private organizations. A suggestion for further study could be comparative analysis of the Prirazlomnoe and Kirinskoe projects, both of which are being developed by Gazprom substructures, combined with studies of offshore oil projects developed by other companies. Gazprom and Rosneft have been awarded all offshore licenses in the Arctic, and the pace of Russian offshore production will rely on the capabilities of these companies pushing projects forward. A comprehensive review of project execution capabilities across a wider selection of Russian oil companies could help indicate to which degree the findings in this paper are projectspecific or constitute a potential pattern that could stall developments in Russia s arctic for years to come. 1 Aprelev, S. (2004). Ecological and political challenges of oil industry. Pravda (English version), , accessed Intsok tender news bulletin 5 6 CJSC refers to a closed joint stock company 7 Moe, A. and Rowe, L., Petroleum Activity in the Russian Barents Sea: Constraints and Options for Norwegian Offshore and Shipping Companies. FNI-Report 7/2008, Intsok tender new bulletin Intsok tender news bulletin 15 Intsok tender news bulletin 16 Intsok tender news bulletin, October Intsok tender news bulletin, June Intsok tender news bulletin, December Intsok tender news bulletin, March Intsok tender news bulletin, October Intsok tender news bulletin, February, April and June Intsok tender news bulletin, June Intsok tender news bulletin, September Inntsok tender news bulletin, April and February Inntsok tender news bulletin, August Inntsok tender news bulletin, November Intsok tender news bulletin, Novermber Intsok tender news bulletin, Novermber Lawrence, P. and Vlachoutsicos, C., Behind the factory walls: Decision making in Soviet and US enterprises, p , Husted, K, and Michailova, S. Knowledge Sharing in Russian Companies with Western Participation, Management International 6(2), Welsh, D., Luthans, F. and Sommer, S. Managing Russian factory workers: The impact of U.S.-based behavioral and participative techniques, Academy of Management Journal, Vol. 36, No 1, p , Husted, K, and Michailova, S. Knowledge Sharing in Russian Companies with Western Participation, Management International 6(2), Michailova, S. and Hutchings. K., Knowledge sharing and national culture: a comparison between China and Russia, Journal of Management Studies Volume 43, Issue 3, pages , Elenkov, D., Can American Management Concepts Work in Russia? A Cross-Cultural Comparative Study, California Management Review Vol. 40, No. 4,

19 41 Fey, C. And Shekshnia, S., The Key Commandments for Doing Business in Russia, Organizational Dynamics, Volume 40 Issue 1, 57-66, accessed

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