Return of the small company boom?

by David Flanagan

While consolidation and moves towards merger among the big players of the Russian and former Soviet oil market have been in the headlines, smaller companies are enjoying a quiet but nonetheless concrete renaissance in their fortunes.
Away from the eyes of market observers, who are watching the moves of Transneft and LUKoil like hawks, some of the smaller players seem to have decided it is time to move back into the market in a bigger way.

Large company mergers, the pressure of consolidation and increasing internationalization can leave gaps in the market at ground level. Since the 1998 liquidity crisis in Russia -- which unavoidably spilled over into the former Soviet economies -- only the strongest in the market or those with the deepest pockets have really been able to push forward into any new projects with a great degree of confidence.
Yet some of the smaller projects that the big boys might disregard have created a vacuum, and such vacuums are soon filled. But Russian enterprises are not the only ones that seem keen to pick up the contracts and new business -- although there is strong evidence of a revival in the small company sector in Russia, and in Georgia as well. Opportunities seem to be cropping up for small Western firms and capital to move back into the market. In both cases, it is smaller operators that are making pioneering moves into the oil sector.

Among the domestic Russian enterprises now rapidly expanding is Rosneftegazstroi - Russia's "other" pipeline company, which has pushed forward out of obscurity in the last 12 months or so. The company was formed on the basis of the Russian Ministry for Oil and Gas Enterprises Construction Industry and has built around 16 pump and compressor systems over the last four years. Rosneftegazstroi hit the news a month or so ago by picking up a high-profile new deal from the Caspian Pipeline Consortium (CPC) for compressor system construction. The company is now negotiating for contracts on construction projects in Chechnya. Rosneftegazstroi indicated that details of these new deals would be released soon.
As for overseas interests, the Caucasus region is also poised to attract a lucrative new investment on the upstream side. The US-controlled Frontera Caucasus Corporation has just about secured financing for its role in the development of upstream resources in Georgia and Azerbaijan. Georgia's Block 12 in the southeast of the country contains six fields of note, and Frontera will conduct well workovers, rehabilitation and new drilling. Frontera will work in collaboration with state-controlled local oil concern Saknavtobi (also known as Gruzneft), and may be joined in the project by Lasmo of Great Britain. Frontera Resources Azerbaijan Corporation will rehabilitate and develop the Kyursangi and Karabagli fields in cooperation with an affiliate of the State Oil Company of Azerbaijan (SOCAR) and Delta Hess.
Frontera is now waiting for financing. At the moment, its proposals are being looked at by the European Bank for Reconstruction and Development (EBRD). It is likely that the bank will approve the financial backing for the projects in the near future.
There may be more of the same to come in Georgia, which is keen to liberalize its energy sector. Tbilisi has tried of late to speed up the reform process in the local oil sector, and this policy may be beginning to yield results. Georgia's Deputy Minister for Fuel and Energy Michael Menteshashvili told during a recent visit to London that his country was keen to push forward with market reforms. "[Our] moves in oil pipeline development and other fields of energy show that our energy market is developing", he said. "There are good possibilities for foreign companies to enter the Georgian energy market", Menteshashvili added.

It is clear that some of the smaller and more pioneering companies see growing opportunities in the Russian and Georgian regions. And now that the Chechen conflict has been contained (or at least isolated), these new small-company projects may serve as a sort of a peace dividend for the Caucasus region. True, the projects about to be embarked upon by Frontera and Rosneftegazstroi are comparatively small-scale; but there have to be little acorns before anything on the order of oak trees can be noticed. At the very least, these projects should serve to generate confidence among others that you don't have to be LUKoil to do anything new on the FSU oil market.