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Only The Stubborn Strike It Rich In Russia


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ONLY THE STUBBORN STRIKE IT RICH IN RUSSIA

Foreign companies eager to tap Russia's rich trove of natural resources face monumental problems. These range from bureaucratic hang-ups and arctic weather to roving gangs and alarmed reindeer herders. But after three years of struggle and an investment of $385 million, U.S. petroleum giant Conoco Inc. has struck oil in Russia's frozen north and is pumping 25,000 barrels per day. In contrast, Cyprus Amax Minerals Co. is just beginning its pioneering effort, expected to cost at least $180 million, to strike it rich in the Siberian gold fields. The experiences of the two companies and their Russian joint ventures follows.

CONOCO: TAPPING

AN ARCTIC OIL PATCH

Seen from a helicopter, the tundra of Timan Pechora stretches like an endless green- and rust-colored sponge above the Arctic Circle, about 1,600 km northeast of Moscow. Finally, an oil-field complex looms into sight--a collection of slender derricks, silver tanks, and red, boxy buildings connected like a Lego set.

Welcome to the largest foreign investment in Russia. Begun three years ago by Conoco Inc. and a Russian partner, the $385 million oil-processing facility has just started pumping 25,000 barrels of oil daily from the big but remote and largely untapped Timan Pechora oil basin. That's a major achievement. To bring the wells in, Conoco not only had to overcome harsh arctic conditions but also the stifling bureaucracy and political risks of conducting business in Russia. Conoco's hard-won achievement will be studied closely by other foreign oil companies in search of gushers in the same region.

PAYOFF. As Conoco found out, Russia's chaotic switch to market capitalism creates a bumpy ride for foreign companies trying to set up operations in the country. In running the joint venture, called Polar Lights Co., Conoco executives learned the value of carefully choosing Russian partners, starting small, hiring young, prohibiting booze, and rolling with the bureaucratic punches. "We learned the importance of such mundane things as remembering to bring official rubber stamps when we went out of town to sign documents," says Billy Branch, a now-retired Conoco executive who was Polar Lights' first general director.

The payoff is starting to come. In late August, oil started flowing down a brand new, $57 million, 64-km pipeline that Polar Lights built to connect with existing pipelines. Conoco's daily share is 13,000 barrels. The remainder goes to the partner, Arkhangelskgeologia, an oil-exploration company that is based in Arkhangelsk.

The output is relatively small for such a big investment. Conoco and its parent, DuPont Co., put up $185 million while international development agencies chipped in $200 million. But the more important issue, says Archie W. Dunham, a Conoco senior vice-president, was to get a project going, learn from it, and employ the project as a springboard for much bigger opportunities in the area. "When you add up all of the oil, all of the minerals and diamonds in that region and ones nearby, you could see up to $106 billion in investment," figures Afatoly Kazakov, Arkhangelskgeologia's general director.

There's no shortage of foreign interest. Texaco Inc. is currently negotiating a huge oil project nearby that could be worth about $6 billion over 20 years. Along with Texaco, Arkhangelskgeologia is talking with Exxon, Amoco, and Norway's Norsk Hydro. The four companies have formed a consortium that may sign a production-sharing agreement with local authorities in late September, according to the Russian press.

SPECIAL HEATERS. Whoever joins the fray can look forward to hard going. "It's just like Alaska in the early days, but here the nearest roads were 50 km away," says Dunham. Road beds sink when the tundra thaws in spring, so Polar Lights brought in heavy machinery in the winter on roads it built out of ice. All buildings had to be placed on pilings 3 meters high because of the permafrost. Modular living quarters had to be shipped from the U.S. and lowered into place by giant Russian helicopters. Special fail-safe heating equipment was needed for the pipeline. Otherwise, oil would turn to viscous plugs in the -50C weather.

The biggest obstacles to overcome, however, are governmental. Conoco got assistance from former U.S. Ambassador Robert S. Strauss and current Ambassador Thomas R. Pickering to win exemptions from an onerous $5.50 per barrel oil-export tax. Should that exemption be lost, the numbers would turn sour and the project would likely have to shut down, says Dunham. Meanwhile, new Russian legislation that would define property rights and clarify energy taxes has been shelved until at least next year.

Conoco has already been burned by the vagaries of Russian politics. The corporation lost $7 million last year in an aborted attempt to join a natural-gas project located in the Barents Sea. It was a member of a Western consortium that was shunted aside in favor of a Russian group. But having come this far, Conoco seems unlikely to be frozen out now.

CYPRUS AMAX: DIGGING

FOR A MOTHER LODE

Under a larch-covered mountain slope in Russia's remote far east, 640 km from the grim port city of Magadan, lies the Kubaka gold deposit, one of the country's richest. So rich, in fact, that one U.S. company, Cyprus Amax Minerals Co. of Englewood, Colo., is braving Russian winters, rough operating conditions, and the risks of a first-of-a-kind joint venture to get

at it.

It seems like a well-timed foray for Cyprus and its five Russian partners, which include Geometal, a private company, and Dukat, a government agency. World gold prices have risen from $330 an ounce in January, 1993, to about $386 now, giving Cyprus faith that it can turn the mine into a moneymaker. The company hopes the mine will produce up to 315,000 ounces a year. On the Russian side, the government has been wrestling with ways to revive its flagging gold production, so it is eager for more efficient Western technology.

VANISHING GULAGS. The venture spells major change for Russia's mineral-rich far east, which remained largely off-limits to foreigners almost until the end of the Soviet era. Historians estimate more than a million people perished in a brutal network of Magadan gulag camps set up to mine the gold and other minerals. Today, the gulags are gone and the area is opening up, with direct flights linking the regional capital of Magadan to Anchorage, Alaska. The success of the Cyprus venture, called Omolon Mining Co. after a nearby river, could usher in even greater change. Says Marc D. Cohen, an analyst with Kidder, Peabody & Co.: "If they can make it work, I think it could attract other major gold producers into the area."

But even officials at Cyprus Amax, which has $2.5 billion in revenues, acknowledge the big risks involved. "This is the hardest project that I've ever worked on in my life," says Michael Harrington, a Cyprus vice-president for development who has made more than 30 trips to Russia. "How it's going to turn out, God only knows."

A big problem is logistics: No road connects Kubaka to the outside world except one of ice that's open only in winter. Cyprus, which has pledged to protect the delicate tundra, cannot build an all-weather highway. Another problem is the impact of inflation and unforeseen expenses on the estimated cost of the project, which has gone from $105 million to $180 million in one year. And Cyprus now says it will not open the mine in 1996, as originally envisioned.

An airstrip planned for the site should help. So will $105 million in loans from the European Bank for Reconstruction & Development and the U.S. government's Overseas Private Investment Corp., which has also insured the project for $150 million. Cyprus hopes it has won the goodwill of the local reindeer herders, known as Evens. According to Andre Khalkatchan, an Even native, Russian miners destroyed large stretches of pasture: "In those places, there are no animals and birds."

Cyprus promises the open-pit mine under construction will disturb only a tiny part of the tundra and will meet U.S. environmental standards. The joint venture also has flown native leaders to North America to visit mine sites, and it has vested the regional native association a 6.6% interest in the project.

The generosity of the native deal, as well as the other costs, leaves some in the U.S. wondering if Cyprus is imperiling the venture's profitability and setting a standard other U.S. outfits might find hard to match. "A lot of people think they gave away the store," says one U.S. mining official. Says Harrington: "If we didn't think we could make money, we wouldn't be there."

LATE FEES. One factor that could put the whole project at risk is the role of the Russian government, which remains the monopoly buyer of gold. Government payments to the mining industry are mostly in rubles and often come months late. With Russian inflation high, the payments often end up far less than the world price, according to Illya Rosenblum, the geologist who represents Cyprus Amax' Russian partners. The venture has negotiated the right to sell gold directly to international buyers if the government fails to pay on time. Of course, the government must still make good on that pact.

Then there's the risk of, literally, highway robbery. Some Russian studies estimate that as much as 30% of the Magadan gold is sold through the black market. Last January, Magadan militia arrested members of four gangs and charged them with carrying out attacks on the gold fields. Cyprus officials hope Kubaka's remoteness and their plan to fly the gold out will foil the brigands. However the project turns out, this is one case of gold fever that will cost plenty.Hal Bernton in Magadan, Russia JOSEF POLLEROSS/JB PICTURES


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