RUSSIAN OIL AND GAS: A REALISTIC ASSESSMENT Ray Leonard YUKOS Exploration and Production Paper presented at the International Workshop on Oil Depletion, Uppsala University, Sweden, May 23-24th, 2002. An open evaluation of Russian Oil and Gas reserves has not been possible until recently for several reasons. In the Soviet Union, hydrocarbon resources were a strategic asset and as such, a state secret that could only be guessed at from the outside. Other organizations, such as the CIA and International Energy Association made educated guesses but from an ideological point of view; Soviet reserves were a threat from a security and market supply standpoint and were perhaps minimized. The only firm evidence came from Soviet production of oil, reaching 12 MMBO/D in the late 1980’s or about 20% of the world production. Either the reserve numbers were wrong or the Soviet Union was depleting its reserve base at an accelerated rate of about 8% per year. The accelerated rate was the view of the CIA and seemed to be supported by the collapse in production from 1990-1995 to 6 MMBO/D. However, in the late 1990’s production began to rise again, reaching 8 MMBO/D in 2001. YUKOS predicts that production will continue to rise to 14 MMBO/D by 2010, 75% in Russia and the rest in the Caspian region. This presentation will focus on Russia, as the projected rise in Caspian production is well documented (largely based on four projects; Tenghiz, Karachaganak, Kashagan and Azeri-Chirag-Gunashli) and will happen without the necessity of any new developments. The Russian evaluation is based on four factors; the current booked reserves, the production level of the reserves, oil and gas remaining to be found and export capacity. Russian Reserves: In the Soviet Union, (now Russia) after discovery and delineation, each oilfield was analyzed by the State Reserves Committee to calculate geological and recoverable reserves. The Categories A, B and C1 represented proven reserves. This was based on a proposed and approved development plan. The plan was based on existing technology, but with no economic “filter.” In recent years, Russian oil firms offering market shares have used internationally recognized engineering/audit firms to estimate their reserves. In the case of the four largest oil firms, the audited amount averages about 80% of the State Reserves Committee approved number. Including Russian majors, independents, condensate from Gasprom, state reserves and reserves of foreign companies operating in Russia, proven reserves are 100-110 billion barrels, or 80-88 billion if the 80% factor is taken into account. International convention usually takes a 50% reduction factor in counting probable (C2) reserves. Therefore, the Russian total of 30-40 billion probable would add an additional 10-15 billion. More detailed calculations are being made to refine the number, but 90-103 billion barrels is a reasonable estimate of Russian reserves. A comparison of outside estimates, audited reserves and state reserves for the ten largest oil companies is shown in Figure 1. Proven reserves of the Caspian states Azerbaijan, Kazakhstan and Turkmenistan are about 30 billion barrels, not including the Kashagan discovery, reportedly containing 1020 billion barrels recoverable. 100 90 80 70 60 50 40 30 20 10 0 bn bbl 81.8 93 46.5 40.2 World Energy Council (1998) Proved (internat. Proved (A+B+C1) Proved (A+B+C1) audited 99- 00 ) reserves of Top and 50% of C2 reserves of Top 4* 10** reserves of Top 10** Figure 1. Russia reserve estimates; speculation and fact Production Level: The production levels prior to the 1990’s were not based upon economic factors. As such, they probably do not conform to many models developed for production in the rest of the world. The production of 12 MMBO/D in the late 1980’s was based upon centralized planning, utilizing development programs with inefficient technology. The precipitous drop in production from 1990-1995 was due to a complete lack of investment but with a continuation of the old technology. The recent increases are a result of investment and application of modern technology. YUKOS provides an example; utilizing efficient drilling and production techniques, new wells produce three times the Russian industry average. Production has increased from 890,000 BOPD in 1999 to 1.3 MMBOPD at present. (Figure2). With current development of only 53% of proven reserves, this rate of increase can continue for many years. Figure 2. Upstream: Sustainable Growth Other Russian companies are discovering the same thing; utilization of modern technology will dramatically increase production. Predicted production of 10.5 MMBO/D in 2010 with existing proven reserves is actually a conservative estimate. The distribution of production from 1980-2000 and prediction of 2010-2020 in Russia and Central Asia is shown in Figure 3. It is important to note that the increase in Russian production will take place from fields already discovered. Significant exploration success should increase the predicted 10.5 MMBO/D rate. RUSSIA CURRENT PRODUCTION AREAS CENTRAL ASIA EAST SIBERIA RUSSIAN OFFSHORE 16 14 12 10 8 6 4 MMBO/D OIL 0,8 0,6 0,94 0,88 3,5 1,4 0,9 3 0,96 0,9 11,04 10,28 6,4 9 8,5 5,7 2 0 1970 1980 1990 2000 2010* 2020* * Source: YUKOS expert estimates Figure 3. FSU oil production increase Future Potential: Large portions of Russian sedimentary basins are unexplored. Lack of technology to explore offshore, limited investment in the past ten years and poor infrastructure in frontier basins are factors. Reviewing discovery curves for productive basins, a range of 30-40 billion barrels for future discoveries can be supported. Several offshore basins, such as the Kara Sea and Pechora Sea are extensions of existing producing trends, increasing that range. YUKOS is currently making a systematic analysis of discovery curves. It is likely that this study will result in a prediction of 40-50 billion barrels to be found by exploration in Russia. Export Capacity: Increase of production by 6 MMBO/D by 2010 requires expansion of export capacity in Russia and the Caspian by an equivalent amount. To a large extent, pipeline routes have already been identified. (Figure 4) Project planning, and in some cases pipeline construction has already begun. In the Caspian region, the Caspian Pipeline Consortium (CPC) has completed a pipeline with eventual 1.3 MMBO/D capacity. The Baku-Tblisi-Ceyhan project will add another 1 MMBO/D by 2005. To the north, a pipeline carrying oil from the Timan-Pechora Basin will add up to 600,000 BOPD capacity to the Baltic Sea and Northern Europe. The YUKOS-led China Pipeline will add 600,000 BOPD capacity, also by 2005. Sakhalin production, forecast at more than 500,000 BOPD will be carried by tanker to Asian and North American markets. Future routes will probably include a third new export pipeline from the Caspian Basin, marine transport from the Pechora and Barents Seas and an additional pipeline to China or the Pacific. Figure 4. Oil export routes. Up to this point, only Russian oil reserves have been discussed. However, it is accepted that Russian gas reserves are approximately equivalent to the total gas reserves of the Middle East. Furthermore, the Kara and Barents Seas are largely unexplored and predicted to contain several hundreds of trillion cubic feet of gas. With the predicted peaking of oil 35 30 25 20 15 10 5 0 1,69 2,93 3,74 22,59 19,06 20,47 20,47 4,87 1,94 1,41 1,06 3,88 2,82 2,12 5,82 9 1970 1980 1990 2000 2010 2020 RUSSIAN OFFSHORE RUSSIA CURRENT PRODUCTION AREAS CENTRAL ASIA EAST SIBERIA Figure 5. Increasing gas production production in the 2010-2020 time period the shift to natural gas will necessitate significant production increases from Russian fields in East Siberia, Northwest Siberia and the offshore. While the inefficiency in exploring for and producing oil in Russia is disappearing, gas is several years behind. With open competition and adequate investment, current production of 20 TCF/Year can be significantly increased, with a large portion of the new production moving by pipeline to the Far East. (Figures 5 and 6) A significant portion of the increase will come from Caspian fields. While Russian and Caspian oil and gas reserves do not solve the essential problem of oil depletion, they will push back the “day of reckoning” giving the world more time to develop alternate sources of energy. Figure 6. Gas export routes.