Russian production looks to technology for growth
Expanding the use of enhanced oil recovery methods could offset output declines
The contamination of the Druzhba pipeline with organic chlorides in April 2019—which became the most serious interruption of supplies in the history of Russian oil trade—had a profound impact on the country’s export volumes. But despite deliveries only fully resuming on 1 July, crude oil exports to Europe for the first eight months of 2019 exceeded those during the same period of 2018.
It was a different story for petroleum product exports. These totalled 2.8mn bl/d for the first eight months of 2019, 10pc less than in 2018. The main reasons for this decline were an increase in export duties on heavy oil products and slowing European demand. As of the end of 2018, 11.16mn bl/d of oil and gas condensate were being produced in Russia, 1.6pc higher than in 2017.
During 2020, Russian oil output will depend on the rate of production decline at existing brownfield sites, the launch of new projects, increases in production at greenfield sites and the duration of the Opec+ deal.
Declining output on brownfield sites is a major threat to the sustainability of Russian oil production. However, several subsidiaries of the vertically integrated oil companies—including Yuganskneftegaz, Purneftegaz-Rosneft, Surgutneftegas—have achieved good results from their efforts to intensify output.
These firms managed to achieve decline rates of about 2pc per year over the past decade—compared to 5-6pc on average across the country and 10-15pc average decline rates in Western Siberia. This was obtained through employing physical methods that increased production rates at brownfield sites, including horizontal wells, lengthening of wellbores, side-tracking to restore wellbore integrity and the use of multistage hydraulic fracturing.
Greenfield sites are also performing well. Gazpromneft has increased output at the Novoportovskoye and Prirazlomnoye fields. Since 2016, the company has also been developing another major field, Vostochno-Messoyakhskoye, and expects its output there will exceed 100,000 bl/d in 2019 before reaching a plateau of 120,000 bl/d in the early 2020s.
Lukoil is focusing on hard-to-recover reserves that benefit from significant tax concessions. The company expects an increase in production at the Yaregskoye and Usinskoye fields over the next few years.
Russian oil output will depend on the rate of production decline at the brownfields
Rosneft commissioned the second stage of the Sredne-Botuobinskoye field in eastern Siberia at the end of 2018, which is projected to reach maximum rate of 100,000 bl/d by 2021. The Kuyumbinskoye field will reach its plateau of 60,000 bl/d by the same time. At the start of 2020, the Tagulskoye field should reach its maximum rate of 90,000 bl/d, which will compensate for the decline at the Vankor field. A little later, by mid-2020, output at the Russkoye field should increase to 130,000 bl/d.
Accounting for the commissioning of new fields, growing output from greenfields and the use of methods which increase production rates at brownfields, by the end of 2020 Russian oil output could increase to 11.35mn bl/d.
The Opec+ deal is a major obstacle to production growth. It is expected to remain in place into 2020, at least until the end of the first quarter. If Russia adheres to the current terms of the Opec+ agreement, oil output will remain at the 2018 level of 11,16 mn bl/d. Decline at least in the first half of 2020 is unlikely—although companies can curb production growth by delaying the launch of new projects as well as reducing drilling operations at brownfield sites.
Several subsidiaries of integrated oil companies achieved good results in intensifying brownfield oil output
Russia needs to actively expand its resource base and increase usage of the new technologies to bring hard-to-recover reserves into operation. The majority of new fields and enhanced oil recovery methods require additional tax incentives to become economic. In 2018, 51pc of Russian oil was produced under different tax exemptions according to the Russian Energy Ministry. However, further reducing this tax burden would result in much lower revenues.
As for refining, a further drop or stagnation in petroleum export products, primarily to Europe, is expected in 2020. This is due both to a further increase in the export duty on heavy petroleum products and growing competition in the shrinking European market. According to Skolkovo School of Management’s Energy Centre estimates, Russian petroleum product exports could be down 0.5pc in 2020.
There is still a huge potential for gas production and export growth. But production is limited by stagnant domestic gas demand and exports by international competition for the market share in Europe and Asia. With the successful commissioning ahead of schedule of the Yamal LNG project, LNG production capacities in Russia total around 29mn t/yr and function above 100pc of its nameplate capacity. Novatek is talking about plans to build up to 140mn t of liquefaction capacity by 2035 and Russia is focused on becoming one of the three leading LNG exporting countries.
Tatiana Mitrova and Ekaterina Gushevenko are directors at Skolkovo School of Management