Russian oilfields production continues to climb
If Moscow doesn't do more to boost investment in its ageing conventional oilfields production could quickly turn south
Russia's huge Siberian conventional oilfields have defied the critics for years. Analysts have repeatedly predicted the ageing Soviet-era oilfields will finally give up the ghost and start dragging oil production lower. The country, after all, gets 90% of its production from fields discovered before 1988. Yet Russian oil production has continued to climb steadily over the past decade, surpassing Saudi Arabia as the world's largest oil producer and setting a new record of more than 11 million barrels a day (b/d) late last year.
The combination of new technology helping to stem production declines at mature West Siberian oilfields and new development in East Siberia have helped Russian output keep ticking higher. West Siberia has been one of the world's most prolific oil provinces for decades, and the engine of Russia's oil industry, but recovery rates from the region's fields were historically only around 35%, well below international averages.
That made the West Siberia fields prime candidates for new technologies as Russia opened its oil industry to more foreign involvement over the past decade. The results have been impressive. West Siberia has been producing since the late 1960s and most of the largest fields are more than 70% depleted, yet producers over the past decade have managed to fend off significant production declines.
Rosneft's Yugansk producing region - acquired from Yukos in an opaque 2005 sell-off for $9.3 billion after the company was dismantled and its chief executive Mikhail Khordokovsky jailed - is a poster child for what new technology has been able to do for West Siberia's oilfields. Rosneft has invested billions of dollars in new exploration and enhanced oil recovery (EOR) at the field.
The payback has been substantial. Output at Yugansk, which includes the huge Priobskoe field, has risen from round 1 million barrels of oil equivalent a day (boe/d) in 2005 to its production now of around 1.3m boe/d. Yugansk accounts for around a third of Rosneft's overall production.
Yugansk, though, is also an example of the limits of new technology. Rosneft says that production has most likely reached its peak and forecasts a slight fall in output at Yugansk over the next few years.
The outlook is bleaker at the company's other major West Siberian field, Samotlor, which accounts for about 10% of the company's total production. Samotlor's output peaked at just over 600,000 boe/d in 2008 and has fallen to around 450,000 boe/d. Rosneft plans to throw everything its got at the field, including more horizontal wells with multi-stage fracturing and more sidetrack wells to tap into small isolated oil and gas pockets. Still, output is expected to continue its swift decline. Rosneft expects Samotlor production to fall to less than 400,000 boe/d by 2017 and thereafter to decline at around 5% a year.
Lukoil has also been investing in new technologies to try to stem production declines in West Siberia, which accounts for 55% of the company's total output. The company says that increased water cut is the biggest problem it faces in the region, with water accounting for as much as 90% of production at some older wells. The company says that new water flooding technologies and increased drilling have helped it slow decline rates, but it continues to see its West Siberia production fall. Output slipped to 996,000 boe/d in 2013, down 2% from the previous year.
From 2005 to 2012 West Siberian output fell by about 1% a year, from around 6.6m b/d to around 6.25m b/d, an impressive rate for a province that has been producing for more than four decades - but still worrying for an economy that relies so heavily on its oil production. Russian producers have managed to offset these losses by bringing new barrels on stream from East Siberia.
Rosneft's huge Vankor field in East Siberia has been the most important development in Russia's oil industry for decades. The field, which covers a vast 415 square km area in Eastern Siberia, was brought online in 2009 and has rapidly ramped up production to more than 420,000 b/d of oil. Vankor holds more than 3.5bn barrels in reserves and production is expected to peak at more than 500,000 b/d. Surgutneftegas's Talakan field has been another key development in East Siberia that has helped offset declines from other mature regions.
The opening of the Eastern Siberia-Pacific Ocean (Espo) crude pipeline has been crucial to encouraging development of these remote East Siberian oilfields. The 600,000 b/d pipeline offers producers an outlet to the energy hungry markets in China and beyond. The pipeline could be expanded if new reserves are found to fill it. The Espo route could be carrying as much as 1.6m barrels a day of crude to Asia by the mid 2020s.
While those new projects have helped, they will not be enough on their own to make up for declines from mature fields. Lukoil, in a report last year, said that Russia would need to bring three to four new fields the size of Vankor into production every year to offset the depletion.
However, Lukoil says, because of previous delays in awarding licences for new fields there will be a dearth of new greenfield conventional oil projects until at least 2016. Reforms to the burdensome tax code to encourage more short-term investment in mature fields is needed to head off an imminent decline in production, the company argues. "In order to maintain stable production in the long term the government needs to take additional steps to reform the tax regime for the oil industry. Otherwise decline in production is likely to begin as early as 2016-2017."
The Russian government has offered some tax breaks, but they are mostly focused on encouraging investment in frontier offshore and unconventional projects. Operators at conventional fields, analysts say, still face a high tax burden and little economic incentive to invest in more advanced, and costly, EOR techniques.
A move last year to increase the mineral extraction tax has worsened upstream conditions, says EY, a consultancy. A typical project utilising advanced EOR technologies now faces a breakeven price of around $110 a barrel. "The US, Canada, UK and other countries already benefit from a favourable fiscal framework that guarantees an acceptable level of return on investment and promotes a wider use of EOR technologies," argues EY. "Why not try it on pilot projects where EOR methods are used?" There is little doubt that the long-term fortunes of Russia's oil industry will turn on its ability to produce its challenging Arctic and shale fields. But the industry's present and near future depends on squeezing the most out of its ageing oilfields.