Russia Stuck In Heavy Oil

02.11.2009 — Analysis

Serious fall of gas prices casts doubts on the profitability of the development of Shtokman field. Experts reckon that the economic crisis will make the development of hydrocarbon deposits harder not only in the Barents Sea but in the south of the Eastern Siberia. It is possible to cover the shortage of resources through non-traditional sources of hydrocarbons, but the production is hindered by the lack of technologies and inefficient taxation. The RusBusinessNews observer found out that as a result of this Russia might lose control of domestic energy resources in the foreseeable future.

Shtokman gas condensate field with the reserves of more than 3 trillion cubic metres of gas and 27 million tons of oil was discovered as long ago as 1998. It is located in the central part of the shelf of the Russian sector of the Barents Sea 600 kilometres north-east from Murmansk. Russia began the real development of the field only in the 2000s. Having declared the development of the field the Government based its decisions on the fact that in the nearest 10 to 12 years the gas demand in the USA (the main recipient of Shtokman reserves) will double and that the prices will steadily grow.

The prices in the North America and Great Britain have practically crashed, however, and the demand for gas in the European Union has decreased by 7-8% in 2009, according to the data provided by Konstantin Simonov, the Director of National Energy Security Fund.

The revolution in the non-conventional hydrocarbons production technologies has affected the fall of prices as well as the economic crisis, reckons Tatyana Mitrova, the Head of the Centre for Studying Energy Markets of the Institute of Energy Research of RAS. In particular, in the last year and a half the methane production from shale has grown nine times in USA having reached 9% in the gas balance of the country.

The US Department of Energy asserts that the reserves of this gas found in cracks of hard rock are huge. Test drilling demonstrated that it would be worth producing this gas in the Eastern Europe as well. It is possible that there are deposits of this gas in Russia, this would need certain studies to be completed first. According to the expert Gazprom at the moment is just carefully studying the information and making sense of the price declared by the Americans - 150 dollars per thousand cubic metres of gas.

Gheorghiy Bulatov, Head of Laboratory at the I. M. Gubkin Russian State Oil and Gas University, reckons that the Americans are bluffing. According to him, they are talking, most likely, about the gas production from pyroshales by drilling method used for producing methane from coal beds. If this is so, then it is impossible to increase the production nine times in a year and a half, the yields are too low for this.

Russian analysts, however, are taking this information from the US Department of Energy very seriously. Tatyana Mitrova reckons that it is too early to talk about the consequences of the technological revolution in gas production, but the effect of this event on the hydrocarbons market is evident: the need for imported fuel in USA has decreased and the development of Shtokman field will, most likely, be postponed.

Maksim Chernega, an analyst from Octane Investment Group, pointed out in this connection that the Shtokman field might never get developed if Russia's foreign partners do not want it: the country has neither finances nor technologies for the development of this type of fields.

Vera Yakutseni, Doctor of Sciences in Geology and Mineralogy, however, predicts a rapid end of the era of traditional hydrocarbons. Oil reserves recovery in the country as a whole has reached 53%, claims the Chief Specialist of FSUE "Russian Oil Science and Research Geological Exploration Institute". About 70% of reserves in West Siberia, the main oil producing region of the RF, are concentrated in fields with falling production. The final stage of hydrocarbon production, at the current production rate, will come in 20 to 40 years. However, the production of fuel has been exceeding the growth of reserves for a long time.

The expert reckons that in the situation when production of raw materials is falling, we seriously need to start the development of non-conventional sources of hydrocarbons. In Russia these include hydrocarbon production from low permeability oil and gas bearing strata, extraction of heavy crude, and gas from coal beds. These resources (except for coal gas) are located in West Siberia.

Heavy crudes, according to Vladimir Mirgorodskiy, Project Manager at NizhnevartovskNIPIneft, can be found in the Nizhnevartovsk district of Ugra and in Yamal. The most significant fields are Russkoye, Van-Yeganskoye, and Fyodorovskoye. The main problem hindering their development is the transportation of highly viscous oil. There are not that many options for the solution of this problem: either the heavy crude has to be mixed with normal oil and then pipelined or processed at a bitumen plant. Some years back Ugra authorities declared that a state of the art bitumen plant will be built in the region. 

Since British Petroleum has the best experience in the production of heavy crude, this company was invited to develop the Van-Yeganskoye field. The Brits, having pumped the normal oil off still have not started the production of heavy crude. According to Mr Mirgorodskiy BP specialists said that methods which have been employed in a similar situation in the US cannot be applied in Russia. 

There still is no technical solution for lifting highly viscous oil, and the problem will not be resolved in the next year or two, claims the NizhnevartovskNIPIneft Project Manager. This is why the heavy crude processing plant has not been built yet.

Vera Yakutseni is convinced that the development of non-traditional hydrocarbons is being ruined by the tax legislation. The same rate for all resources and regions resulted, in the expert's opinion, in the situation that Kuzbass decided to use natural gas from West Siberia while having vast reserves of methane in coal beds.

To be fair it is worth mentioning that Gazprom has already started drilling, according to Vyacheslav Chvoro, Assistant to the Director General of Gazprom Dobycha Kuznetsk Ltd, the official production will start at 7 wells this December, and that this gas will be used as fuel for vehicles. It is planned to increase the number of wells to a thousand by 2010, envisaging supplying the gas to power plants. The volumes, however, will not be significant, only in the distant future the company plans to produce 4 billion cubic metres per year.

Experts think that Gazprom is not interested in the development of the non-conventional source of hydrocarbons which will inevitably lead to winding the project down. Vladimir Kashirtsev, a Corresponding Member of RAS mentions the methane production from coal beds in the past tense altogether, "They develop this sphere very seriously in the world. We also had a programme. It is not dead yet."

Gheorghiy Bulatov, however, points out that the project has a future in any case, it is best to use local fuel sources than build a pipeline from Yamal. Naturally, this experiment can only be a success if the legislation is corrected and if there are technologies for the development of small deposits.

It is unlikely, however, that in today's Russia the resources required for serious work on the non-conventional hydrocarbon resources development will be found. Vladimir Mirgorodskiy says that most of the attention in Ugra is given not to highly viscous oil but to associated gas processing. The country's Government has set precise dates for when 95% of this gas must be utilised. This is why hundreds of millions of roubles must be found and loads of technical and organisational problems must be resolved.

The combination of problems Russia is faced with today will not allow strengthening the raw materials base by 2030 as prescribed by the RF Energy Strategy. The country has neither the required capital nor technologies for this. The experience of the development of Shtokman and heavy crude fields demonstrated that foreign companies will not pass them to Russians if it harms their own interests.

This means that in the mid term future Russia will either have to deal with shortages of hydrocarbons or be forced to transfer the extraction of own resources to technically advanced foreign companies. Either of these scenarios will drive a stake through the heart of ambitions of the country that claims a status of one of the world's energy powers.

Vladimir Terletski