The third major terrorist action in Saudi Arabia enhances the relevance of Russia’s petroleum reserves and that country’s contribution to global oil supplies in the future. Most recent comments on the prospects of Russian oil focused on the pipeline bottlenecks as the primary constraints on future exports or on the evolving relationship between the government and the industry in the wake of the Khodorkovsky affair. The meteoric rise in oil extraction since 1999 shoved any geological and geographic constraints, never stressed much at any rate, into limbo. Nor is there much thought given to the lead-times these constraints engender. Given the significance of the issue, I am sending you a small portion of a longer work I presented at an April conference.
University of Kansas
The Present Oil Boom.
After dropping nearly 50 percent from its Soviet era peak, Russian oil output soared again to exceed 440 million tons by the end of the current year. These figures include gas condensates, but the upsurge still represents some120-125 million tons of crude. The question is how much of this oil originated from long-worked fields with old wells, how much from these deposits with new wells, and how much came from known fields put on line since the late1990s? Finally, and most important for the future, where will new oil come from by the end of this decade and beyond? Answers to these questions are essential in predicting the future of the industry in the next 15 years and beyond. The issue is not the physical presence of oil. The issue is whether the remaining resources can be proved up, delineated, accessed and delivered in the time frame of the next 15-20 years.
All evidence points to the fact that the recent upsurge in oil extraction represents mostly the oil NOT lifted during the chaotic years of economic decline plus the oil left behind by the perverse extraction practices of the 1980s. Assuming that the 1992 yearly output had been maintained for the rest of the decade (just shy of 400 million tons, it was already a drop of 116 million from the 1990 level), an additional 280-290 million tons were left in undamaged reservoirs during the period 1992-1999 alone and simply not produced, given the chaos in the industry during the 1990s. In addition, 50-70 million tons may be extractable for a few years in clearly under-producing, damaged reservoirs.1 Summing all these, I come up with a very conservative estimate of at least 400 million tons of oil not produced during 1992-1999 and by-passed in previous years. This oil would be accessible in working deposits, where the infrastructure is already present. Most of it would be recovered through new wells but some through well restoration and reservoir stimulation as well. More generous assumptions about the volumes not produced and by-passed (since the end of the 1980s, for example) could easily double the volume theoretically available. Increased application of horizontal drilling may recover still more in these same deposits over a decade, but by that time many of the newly stimulated reservoirs and restored wells would run dry.
We don’t have much information concerning new fields and extraction technology. In the three years from 1999 through 2002, Russian oilmen brought on line 110 new fields (most of them small), which in their first year on line produced a total of only 1.3 million tons (Beskhmel’nityn , 2002 and 2003). More meaningfully, the increment from fields and horizons brought into service in the five years prior to the end of 2000 reached 16.1 million tons and may be double that today (Fomin, p. 45). It seems, therefore, that most of the increase and the bulk of the yearly output from 1999 through the end of 2004 have originated from deposits and strata in exploitation at the end of the Soviet era. This claim is confirmed by a number of sources. Russian companies have teamed up with Western service firms, such as Schlumberger, Halliburton, Parker Drilling, and Pride International, to apply new technologies, such as well perforation and well stimulation in restoring idle wells and maintaining production there. To maintain, let alone augment current extraction levels, therefore, very significant new capacity must be put on line in the very near future. A senior British energy analyst draws parallels between the current Russian upsurge and what happened in the North Sea in the mid-1990s through the application of similar technologies. The latter managed “to dramatically increase the productivity rate of the wells themselves and the fields to which these were applied, ……making a substantial impact for two to three years,” to follow again with production decline....... “For the increase in Russian production to be sustainable, we need to see much more drilling…...We need to see new fields developed and brought into production.” (Bransten, 2002). The IEA (International Energy Agency) also expects the average decline rates of wells to increase, especially in the short term, as more intensive production techniques are applied and more and more small fields are tapped. The Agency anticipates that replacement capacity will have to make up a full 85 percent of all capacity addition until 2030 (IEA, 2003, p.148).
Ahead of examining the long term, it is instructive to look at recent data on the efforts of Russian companies in drilling for new oil versus extracting by-passed oil from deposits and reservoirs already developed in the Soviet era. In the year 2000, Surgutneftegaz accounted for nearly 44 percent of output from these new fields, while another 21 percent was produced by small and mid-size non-integrated firms. (As a rule, the latter are licensed to work only small new fields or are let into the best prospects only after the majors have abandoned them). In 2000 the contribution of these non-integrated companies at new deposits (on line for five years or less) was more than twice as significant than in aggregate petroleum output. With an unfavorable tax environment and a wave of takeovers and mergers hitting independent producers, the latter still managed to raise output to 24 million tons in 2002, although their share in aggregate oil extraction declined to 6 percent that year (Korzun, 2003). What is most striking, however, are the meager efforts the largest Russian companies invested in drilling and well completion at new fields, with the exception of Surgutneftegaz. In particular, Yukos, then the second largest integrated major and most admired by Western financial analysts, added less than 2 percent of wells (a mere 22) on new fields in 2000. Sibneft’ and TNK (Tiumen’ Oil Co.), two other majors privatized by the loan-for-share auctions and managed by financiers rather than former oilmen, accounted for a mere 1% -5% of aggregate drilling at new deposits (Fomin, p. 45).
Other evidence also suggests that these three firms, driven by their financial performance, concentrate on maximizing extraction from the best reserves developed already in the Soviet era. Yukos, for example, was clearly engaged in skimming off the easiest oil to maximize its short-term bottom line. In large part this explains why its average well yield exceeds so much those of its rivals and why lifting costs at Yukos (as well as Sibneft’ and TNK ) dropped between $2 and $3 per ton, as opposed to $35 for Lukoil and Surgutneftegaz. Although Yukos increased extraction rates in 2002-2003 phenomenally, it let 35% of its wells idle. (The average for the USSR at the end of the Soviet era was 6%. Izvestiia, 24 November 2003, p. 7). The financial statements of these firms also reveal astonishing miserly outlays on prospecting and exploration. In the first 3 years of this decade, Yukos spent less than 2 percent of its investment resources on exploration; Sibneft’ and TNK spent less than 2 and 5 percent respectively during 2001-2002. Yukos, Sibneft’and TNK also pursued tax avoidance schemes aggressively right up to the border of legality and beyond (Menshikov, 2003). And the minimization of their tax base clearly contributed greatly to their stellar financial performance.
So how long can growth be maintained? Where will the oil come from for the rest of this decade and during the next? This brings me to what I call the rapidly widening entropy gap in the physical dimensions of the oil industry, represented by worsening geographical and geological constraints. And whereas geological conditions would counterbalance the worsening spatial entropy until the early or mid-1980s, in the past two decades geological and geographical constraints are acting in tandem to push the oil sector in the same downward direction in the longer term. The coupling of geological and geological constraints is unmistakable on the northern reaches of West Siberia (in sharp contrast to the Middle Ob’ region during the 1970s and much of the 1980s), but will manifests itself with a vengeance on the East Siberian-Far Eastern platform. In the case of the Sakhalin shelf, global position and geology combine more favorably. However, environmental difficulties put exploitation beyond Russian capabilities; hence the ongoing product sharing schemes.
The End of Easy Oil and the Conjunction of Geographic and Geological Constraints
It is essential to note how mature Russia’s petroleum provinces are west of the Yenisei River. Russia ranks second in the world both in cumulative withdrawal from its deposits and in the number of wells drilled, second only to the US. The European provinces of the Russian Federation and West Siberia cumulatively contributed ca.16 billion tons so far, as against some 23 billion in the US. Russian oilmen also drilled roughly one million wells, exceeded only by the 3 million in the US, whose extreme well density, for historical and geographical reasons, is entirely anomalous in world experience. In fact, I have shown that Russia has pumped from these provinces a lot more oil per square km of prospective sedimentary strata than the US (Kuznetsov, 1998; Bakhtiari, 2002, p. 25; Dienes, Dobozi, Radetzki, p. 220). Moreover, the disintegration of exploration work led to a decrease of explored reserves themselves despite declining extraction in the 1990s. In the ten years before 2003, such reserves diminished in the country as a whole by 13 percent and in West Siberia by 17.5 percent. Altogether, a quarter of reserves worked today have 80 percent of the producible oil already lifted and must be replaced in the immediate future (Beskhmel’nitsyn, 2003, p.165).
The trend towards smaller deposits is accelerating. In the ten years from 1991 through 2001, Russian petroleum reserves in small fields (less than 10 million tons) increased by nearly 37 percent, while reserves in those of more than 30 million tons decreased by more than 22 percent, a net shift of almost 17 percent for all explored reserves to these small deposits. (The shares of reserves in fields of the mid-sized, 10-30 million ton category increased minimally).2 As a rule, smaller deposits demand far more investment per ton lifted; they also tend to have more rapid decline rates and thus require reserve replacement in the near term. Some 420-425 of West Siberia’s 634 deposits (1994-1995 data) contain less than 100 million barrels (14 million tons) of reserves, with more than half of these less than 40 million barrels (5.5 million tons.DOE/EIA-0617, p.15). Today over 220 fields of the region are under exploitation, and assuming that with few exceptions the larger ones are brought on line first, the great majority of new fields will have reserves of less than 40 million barrels. Such fields can produce no more than one million tons per annum for a few years, before their output drops sharply. Most of the larger ones that will be hooked in are located north of the 64th parallel (Nadym-Pur and Pur-Taz regions) or just east of the Urals (Frolov region) where the geological characteristics of deposits are far more difficult and the flow rates of wells much lower.
Geographic accessibility and the sheer size of fields represent two of the physical dimensions of oil wealth which translate into producible volumes and the delivered cost of petroleum. The increasing dispersion of reserves and the unavoidable necessity of shifting to harsher and more distant regions represent the type of geographic or spatial entropy noted above. Reservoir characteristics, combined with the quality of the oil, makes up the third of the physical dimensions. Today, the Russian oil industry is experiencing sharply worsening conditions on this dimension as well, representing a kind of geological entropy. Russian specialists distinguish between high flowing, “active,” and so called “hard to recover” reserves.3 More than three-fourths of the latter yield oil at a mere fraction of daily rates characteristic of “active” reserves, thus requiring far greater number of wells. The increasingly hard pressed “active” reserves accounted for all but a few percent of the cumulative total at the end of the Soviet era, while Russia’s Institute of Oil and Gas Geology suggested recently that nearly all the oil lifted during the 1990s continued to originate from these very same reserves.3 As a consequence of that continued pressure on the most productive reservoirs, average well flow in Russia has dropped to 7.6 tons per day, six tons lower than even in 1990, with West Siberia not much higher. Such yields, of course, would be very satisfactory in Oklahoma or Texas, near major markets and superb infrastructure, but not here, especially in West Siberia’s northern half. The rapidly aging fields in the British sector of the North Sea still produced 72 tons per well and those in the Norwegian sector produced almost 371 tons per day in the early years of this decade (Andrianov, 2002).
Indeed, the irony of the production upsurge in recent years is that the most profitable privatized companies, whose shares soared most on the stock market, are the ones which squeezed the cream of their reserves the hardest. While it is true that more advanced technology has now been employed to recover the oil in place (horizontal drilling, enhanced recovery etc), these were applied only to draw down the most easily exploitable reservoirs and at the expense of balanced drilling on new sites. According to the Energy Ministry, the holders of 250 licenses (with commitments to drill for new oil) ignored their obligations (Sadovnik, 2002, pp. 12-20). The inevitable consequence of this strategy is the decrease of reserves in the top of the reserve pyramid. In Soviet times, the short-term pressure of plan fulfillment damaged the performance of the industry for the longer haul. In the past few years similar “creaming” is evident by those companies that are managed by financiers with an eye on short term stock performance.
The bulk of “hard to recover reserves” (as much as 70 percent in West Siberia) are associated with three specific geological complexes (Jurassic, pre-Jurassic and the Achimov Formation). In the early 1990s a leading geologist told me that high hopes for these have turned to great disappointment, and in his opinion only a small fraction of the oil will be recoverable. A much more recent source confirms that at the end of the 1990s this was still the case, and more than 90% of the oil accessed in those deposits had to be left in the reservoirs.(Dienes et al. 1994, p. 222 and Kuznetsov, 1998). Greatly expanded horizontal drilling and enhance recovery technology no doubt will yield up more of these reserves but only after considerable lead-time and much additional capital. And in the northern half of the West Siberian Basin, where 15 percent of Russia’s proved oil reserves and 60 percent of gas condensates are located, the geographical and geological constraints coincide.
However it is on the East Siberian-Far Eastern petroleum province where geographical and geological constraints converge with vengeance. According to the revised version of the officially promulgated Energy Strategy, East Siberia and the Far East must account for most of the increase in output after the end of this decade. No one expects the giant projects on the Sakhalin shelf to yield more than 30 million tons of petroleum even 20 years from now. This means that the East Siberian province needs to provide nearly half of all new oil, both for replacement and for any net increase by the early years of the 2010 decade (Sadovnik, 2002, p.18). The convergence of these severe and independent constraints will, on the one hand, delay contribution from this new frontier significantly. On the other hand, it will push Russia’s oil industry unto a much higher cost plane, which--in view of the over such long time horizon--may further slow development. This is especially true, since the largest portions of capital outlays in the new East Siberian province will coincide with sharp deterioration of field conditions and consequent investment demands in West Siberia itself.
The East Siberian petroleum frontier
The geographic obstacles of developing the East Siberian petroleum province need little elaboration. Even the most promising sections for hydrocarbon exploration lie 500-700 miles further east than the oil producing centers of the Middle Ob’; they are 700-1000 miles from the steel and machine building industries of the Urals, as the crow flies. Real distances for supplies via the TransSiberian Railway and river transshipment during the short summer season are far greater, and only primitive winter roads and helicopters can approach the sites themselves. Mean January temperature over these prospective areas range from minus 20 to minus 35 Celsius (minus 4 to minus 31F). Population densities fall below one person per square km except in the smallest southernmost area. Such geographic constraints are unmatched in its history of Russia’s oil industry.
What makes these constraints worse, however, is that they coincide with very challenging geological complexities, in contrast to the first decade and more of the industry’s experience in West Siberia, where geographic obstacles were more than counterbalanced by magnificent deposits with unproblematic geology. James Clark, a leading expert on Siberia’s petroleum geology, notes that all the 23 oil-gas reservoirs so far found in this province are complex and have no consistent properties. Anomalously low formation temperature and pressure characterize the pay zones here, resulting in consequent accumulations in mostly non-anticlinal traps. In the Lena-Tunguska province, 80-85 percent of the anticlines disclosed by geophysics turned out non-productive. Clark writes that “while the sedimentary section of the East Siberian craton [platform] has a very high hydrocarbon potential, and a significant portion of this is oil, [M]ost of this will probably be in non-anticlinal traps”(Clark, 2000). Non-anticlinal traps are far more difficult to locate and delineate, especially in such a harsh and remote province, with its total lack of infrastructure.
Access to the markets of Pacific Asia is a sine-qua-non of oil field development east of the Yenisei. Regional demand is limited and is widely dispersed. Remoteness from domestic centers of consumption and existing export outlets, combined with the intervening location of the much more developed West Siberian Basin, rule out the westward shipment of this oil. Orientation to Pacific Asia, however, result in consequences with momentous economic and geopolitical implications. It casts the issue of oil (and gas) development here into the whirlpool of domestic and international politics which I take up elsewhere but ignore in the present note.
1 Sufficient geological data for 204 reservoirs enabled colleagues at the Kansas Geological Survey to run complex regression and multidimensional scaling models of reservoir properties for me on 204 reservoirs. They examined ca. 900. Dienes, Dobozi, and Radetzki, 1994, pp.53-55 and 112-115. 2 In 1990, small fields with explored producible reserves contained 10.1 % of Russia’s total, fields with more than 100 million tons 58.7 % (half of that in unique giants larger than 300 million tons). Deposits in the 10 to 100 million size range accounted for 31.2 % of reserves. As noted, the country’s explored reserves actually decreased during the 1990s. A 22 % downward shift of reserves from the 100 million category works out to a 17% net shift of aggregate reserves from the two largest to the smallest field categories. Percent of reserve shift from Korzun, 2002, p. 58. Reserves by size categories for 1990 and previous 15 years were obtained by me from Russian petroleum specialists in the early 1990s. 3.Hard to recover reserves are reserves with permeability of less than 50 millidarcies; with viscosities of less than 30 millipascals and without heavy gas cuts. 4 Dienes et al., p. 221. In West Siberia, the Neocomian strata alone yielded more than 90% of all cumulative oil, including most of the 1990s. Institute Geologii Nefti i Gaza, ZapSib Filial, 2001; www-sbras.nsc.ru/win/sbras/rep/rep/2001/nz/z2/z2.html html
Andrianov, Valerii, “Nadezhdana odnu piatuiu,”Neft’ R ossii, No. 6, June, 2002. http://www.oilru.com/nr/101/
Bakhtiari, Samsam, A. M., “Expectations of sustained Russian oil production boom unjustified,” Oil and Gas Journal, April 29, 2002, 24-26. Beskhmel’nityn, M. I., “OTCHET po proverke vliianiia razvitiia neftianogo kompleksa Rossii na formirovanie federal’nogo budzheta Rossiiskoi Federatii, Biulleten’ Schetnoy palaty Rossiiskoi Federatsii, No. 004, April , 2002, pp. 107-144.
Beskhmel’nitsyn, “Ob ekonomicheskom i finansomom sostoianii iestestvennykh monopolii (Analitichenkaia zapiska),” Biulleten’ Schetnoi palaty Rossiiskoi Federatsii, No.008, August 2003, pp. 163-191. Bransten, Jeremy, “Russia: Boost in Oil production Grabs World’s Attention, But Can It Be sustained?” Radio Free Europe/Radio Liberty, Weekly Magazine, 26 March 2002.
Clark, James, “Capillary-Sealed Oil and Gas Pools of East Siberia.” Internet Geology Newsletter No.56, July 31, 2000. www.geocities.com/internetgeology/l56a.html
Dienes, Leslie, I. Dobozi, and M. Radetzki, Energy and Economic Reform in the Former Soviet Union. London and New York : MacMillan Press LTD and St. Martin’s Press, 1994.
DOE/EIA0617, Oil and Gas Resources of the West Siberian Basin (US Dept of Energy:November 1997), p. 15.
Fomin, Igor, “Novoi neft’kot naplakal,” Neft' i kapital, No. 2, 2001, pp, 44-46.
Korzun, Elena, V., AssoNeft’, US-Russia Government Energy Dialogue. Energy small & medium sized enterprises workshop. Washington, D.C., April 7, 2003.
Kuznetsov, Viktor, Vladimirovich, “Teoreticheskii fundament neftedobychi,” NG-Nauka, No. 2, February 1998. Elekronnaia versiia prolozheniia. Address: http ://dlib.eastview.com/sources/article.jsp?id=332953 Menshikov, Stanislav, “Strukturnye problemy i resheniia v rossiiskoi ekonomiki,” EKAARROSSIIA. Inequality and Development. Seminal in Moscow, Sept. 30-Oct. 1, 2003. ECAARRUSSIA Newsletter, #8, November 2003. www.ecaar-russia.org/newsletter8_r.htm
Sadovnik, PNtr, V. (Deputy Minister of Natural Resources), “O merakh po vosproizvodstvu mineral’no-syrevoi bazy uglevodorodov,”Mineral’nye resursy Rossii. Ekonomiki i upravlenie, No. 4, April 2002, pp. 12-20.