Can Russia Maintain Current Oil Production Levels until 2020?

From Oil Price

Uncertainty whether Russia can maintain its high level of oil production continues – 10.7 million b/d in 2012 to date on average. A new more benign tax regime that has recently been put in place and significant industry investments may plausibly enable the Russian Bear to extend its “plateau production” to 2020.

The post below outlines how this impressive achievement has been made possible, given that the decline of existing production is plausibly 6% or more every year for most old giant fields in West Siberia. In other words, the Russian oil industry needs to invest substantially in pushing more oil from existing fields (lowering decline rates) and new field developments to keep production steady.

How long production levels can be maintained beyond 2020 is a difficult question, and one that I have left to answer another day. A view of ongoing developments and things to come up to 2020 is available below the fold.

This post was informed by a presentation by TNK-BP’s Oleg Mikhailov held at the unconventional gas conference 27-28 November in Aberdeen, with additional information from investor presentations of major Russian oil companies, a few peer-review studies, and a recent study on the Russian Oil & Gas Sector by Wojciek Kononczuk of the Center of Eastern Studies in Warsaw which I recommend reading.

Although TNK-BP recently became a part of Rosneft, making Rosneft the biggest oil company in the world, (see investor presentation) it will be referred here as TNK-BP.

The current state of Russia’s oil production

The background of Russian oil production is a story of rapid increase from 3 million in the 1960s to an enduring plateau ±11 mb/d in the 1980s, a rapid drop to 6 mb/d in mid-1990s due to the collapse of the Soviet Union, followed by a revival as investment began flowing again.

Russian and former FSU oil production Jan 2002 to Oct 2012
Figure 1 – Russian and former FSU oil production Jan 2002 to Oct 2012, including condensates and NGL. Datasource: IEA

Today Russia is at the point where the production output of many older giant oilfields in West Siberia is declining. It is not an easy job to maintain production given the maturity of these reservoirs. Significant continued investment is required in more difficult to produce reservoirs in West-Siberia itself, in more costly techniques to pour more oil out of mature fields, and in new regions. Thereby costs are driven up due to increasing distance (infrastructure needs), harsher climate, and more challenging reservoirs. To enable investment, favourable financial and oil price conditions are required.

shares of Russian regions in oil production
Table 1 – shares of Russian regions in oil production in 2010. Source Wojciek Kononczuk 2012

map of Russian oil production
Figure 2 – map of Russian oil production. Source: Wojciek Kononczuk 2012

Keeping West Siberian declines in check

Related Article: Three Dilemmas Awaiting OPEC in the Future

To ensure continued high flow rates, a lot of investment is being made by the industry in venturing into remote oil regions and difficult reservoirs to keep production flowing. In the words of Mikhailov, “We are relying more and more on either tight reservoirs or even venturing into unconventional and shale type plays.” Two key developments, investment in difficult reservoirs and tax regime changes, show that the industry and government are indeed making a substantial effort.

The industry has focused development in mature regions on what is called “challenged reserves” (TNK-BP now Rosneft) or“Hard to Recover reserves“ (Gazprom Neft) which were previously uneconomic. These can be classified into various categories including:

•    Low permeability formations with highly irregular reservoir properties
•    Under saturated reservoirs in low-permeability reservoir rocks
•    High-viscosity oil deposits with gas caps
•    Remaining oil reserves in high water cut fields
•    Unconventional reservoir rocks
•    Thin reservoirs (couple of meters thick)

To recover more oil from these poor quality reservoirs, a range of technologies is deployed combining multiple leg horizontal drilling, multi-stage hydrofracking, and other technologies. TNK-BP alone has about 10 billion of technically recoverable resources in such fields, and is targeted to exploit 4.5 billion of these under its new “challenged reserves” recovery program, which focuses on 7 development projects. To give an order of magnitude, TNK-BP was the third biggest oil producer in Russia, and total Russian annual oil production is equal to approx. 3.8 billion barrels.

The combination of these technologies with brute drilling force (many wells with lots of rigs in use) is what allows production in West Siberia to not decline as rapidly as would otherwise be the case. To make this happen, technical expertise is drawn from service companies like Halliburton and Schlumberger by TNK-BP, and joint ventures with players like ExxonMobil and Statoil by other players. “TNK-BP had 130 multi-stage fracking operations versus 15 last year, and going forward need to do 1000 well drilling operations or even more per year to access these reserves. Such drilling requires 30%-40% growth in drilling activity. A factor of 5 – 10 for multi-stage operations. We need contractors to invest in this equipment. To expedite this we are working with key oilfield service providers Schlumberger, Halliburton and others,” as stated by Mikhailov. For an example of such projects, here is an interesting news item with quantitative bits on the Severo-Khokhryakovskoe field being developed by TNK-BP and Schlumberger.

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