Ocnus.Net
Business
Westerners Move Into Russia
By GREGORY L. WHITE, WSJ 30/9/04
Sep 30, 2004, 12:38
NIZHNEVARTOVSK, Russia -- On a snowy morning last week, Oleg
Chukcheyev, an engineer with BP PLC's $7 billion joint venture here,
bounced over the rough roads of the vast Samotlor oil field, climbing
out of his Toyota Land Cruiser at well 5689.
Oil tinkled audibly against the blue steel pipes as it surged out of
the ground more than 10 times as fast as it had before an overhaul of
the well last month. It's the sound of a revolution in Russia's oil
fields that is shaking the global oil business.
Not long ago, the Samotlor field on the edge of this dingy Siberian
city seemed a symbol of all that was wrong with the Russian oil
industry. Haphazard pumping by Soviet and then Russian concerns meant
production had been falling for most of the past two decades. What
comes out of the ground now is mostly water.
But as BP and other Western oil giants got a chance to work Samotlor
and other Siberian fields in the past few years, a strange thing began
to happen: Not only were they able to get oil out of the ground
faster, but their estimate of what remained underground began to
multiply, too. All it takes is relatively cheap technology that's long
been standard issue in the West -- such as stronger pumps and
more-powerful tools to crack open the underground sandstone that
contains the oil.
Some industry experts now think that Russia could actually have two to
three times its current proven reserves of 70 billion barrels, enough
to make it jump from No. 7 in the world to No. 2 behind Saudi Arabia.
In April, BP's normally conservative Chief Executive John Browne
bragged that the company's Russian venture, TNK-BP, which now reports
six billion barrels in the ground, could hold as much as 30 billion
barrels of reserves -- about as much as the entire U.S.
DeGolyer & MacNaughton, the respected Dallas company that audits
reserve totals for most of the Russian oil industry, said this week
that West Siberia alone could hold twice as much recoverable crude as
currently estimated. That's enough to allow Russia to produce 10
million barrels a day "for the next 50 years and beyond," according to
Senior Vice President Martin Wiewiorowski.
For an industry racing to find new oil to replace what it is now
pumping and wracked by scandals about overstated reserves in other
parts of the world, those numbers are impossible to ignore. Even as
the Kremlin tightens its grip on the sector, Russia is still the only
country where such huge reserves are available to foreign investors.
Even before oil reached the $50-a-barrel range, all the majors were
looking for deals here. ConocoPhillips yesterday announced a $2.4
billion deal for a 7.6% stake in OAO Lukoil, Russia's No. 2 oil
company. Conoco officials highlighted the reserve potential as a major
reason for the deal.
[barreling back]
For Russian President Vladimir Putin, Russia's emergence as the
world's largest oil producer outside the Organization of Petroleum
Exporting Countries has been a major contributor to Moscow's
heightened international clout. Much as Western leaders called on his
nuclear-armed Soviet predecessors in times when the world appeared on
the edge of war, Mr. Putin's colleagues in Europe and the U.S. have
been picking up the phone to the Kremlin as world oil prices have set
new records in recent months.
To be sure, the Kremlin's steady tightening of its grip on the energy
sector could ultimately squeeze foreigners out. Last year, Russian
authorities jailed Mikhail Khodorkovsky, the then-CEO and largest
shareholder in Russia's largest oil company, OAO Yukos, on fraud and
tax-evasion charges. The move, followed by a wave of back-tax claims
against Yukos, was widely viewed as a politically motivated effort by
the Kremlin to rein in the ambitious oil tycoon. Mr. Khodorkovsky now
faces up to 10 years in prison and Yukos appears headed for a breakup
and sale as a result of the tax claims.
Industry executives say the Kremlin seems determined to ensure that
control in any major venture in the oil business remains with the
Russian side. For example, Conoco's deal caps the U.S. company's stake
in Lukoil at 20%.
BP has also run into difficulties with the government. Russian
officials have threatened to challenge the production licenses for a
major gas project in East Siberia that was a key reason for BP's
investment in TNK-BP. They cite potential violations of some of the
terms. BP officials say they remain optimistic the project will go
ahead, though they are discussing how to make room in the project for
the state gas company.
Despite surging oil production and intense lobbying from potential
clients in the U.S. and Asia, the Kremlin has been slow to approve new
pipelines to bring that crude to international markets. Industry
executives warn that further delays could cap future production growth.
The government's slowness is driven in part by a tradition of caution
about reserve estimates common to veterans of the Soviet industry.
Leonid Fedun, vice president at Lukoil, a company run by a former
Soviet oil-field boss, says he thinks most of the reserve gains will
come from new areas. "We're very conservative about our reserves," he
says.
Still, many of Russia's big oil companies have reported increases in
reserves over the past two years. The gains come mainly from improving
performance at existing fields, since new exploration has so far been
limited, according to industry officials.
"Russia has been able to extract much more oil than was expected from
the existing fields," says Francois Cattier, an analyst with the
International Energy Agency in Paris. "We are still expecting that
trend will continue."
That's not even including the vast tracts of eastern Siberia and
Russia's offshore, oil-rich areas where there has been little
exploration to date because the prospects were so good in less-remote
areas.
In his 30-year career here, Mr. Chukcheyev, 52 years old, has seen
both the explosive rise and two-decade fall of Samotlor. The BP-TNK
engineer's office on Industrial Street is just steps away from that of
his boss, Tom Mhire, also 52, a Louisiana native whose 30 years of
experience in the oil business came with Amoco and BP in places like
Egypt and Venezuela.
Heading up a unit of BP's venture, this unlikely pair is part of the
reason for the 14% increase in production expected at Samotlor this
year, the biggest the field has seen since its heyday in the 1970s.
For most of the 1990s, the conventional wisdom in the industry was
that fields like Samotlor were dying slow deaths. Even BP, when it
began shopping around for Russian oil assets about four years ago,
initially passed over TNK International, the company that owns the
licenses to develop Samotlor, figuring the assets were too old and
damaged. But after a closer look at the fields, BP executives say they
saw a spectacular turnaround opportunity.
Today, thousands of wells at Samotlor still stand idle, while rusting
pipes break the landscape and the white bark of the birches are
stained black by the oil that slicks across the ponds. Only the
eternal flame on the towering 1978 statue of an oil worker on the edge
of town stands as a reminder of the field's glory days.
But through his windshield, Mr. Chukcheyev points to signs of
progress. Crews are cleaning the oil spills, some decades old, which
dot the landscape. In an area first explored in the 1970s, a
three-story-high rig is drilling new wells.
Because there's no way to tell just how much oil is in the ground
without taking it out, counting oil reserves is something of a black
art. The industry breaks them into three categories: possible,
probable and proven. Only the last is considered solid enough to be
considered a bankable asset, although securities regulators allow
U.S.-listed oil companies to book only a part of that category on
their balance sheets. Some oil-field data are still classified as a
state secret in Russia, complicating the task of assessing reserves.
In some cases, adding to reserves can be as simple as getting the blue
official stamp that extends a production license or drilling a well to
confirm the existence of oil, even if the well is then capped. New
technologies can also boost proven reserves, by making it possible to
pump out deposits that were once thought to be too expensive to retrieve.
In the vast expanses of Siberia, small improvements multiply into big
gains. If TNK-BP can show it can tap just one more percentage point of
the oil now in the ground, the company is entitled to book another 750
million barrels of reserves. "If you found a 750-million-barrel oil
field in the deep water off Angola or the Gulf of Mexico, you'd say
this is a super-giant field," says Richard Olver, BP's deputy CEO.
ON SEPT. 17, YUKOS ANNOUNCED THAT ITS MAIN SUBSIDIARY COULD HAVE AS
MUCH AS 94 BILLION BARRELS OF RESERVES, NEARLY FIVE TIMES WHAT IT
CURRENTLY REPORTS AND MORE THAN RUSSIA'S TOTAL PROVEN RESERVES.
Before its recent run-in with the Kremlin, Yukos was the most
aggressive at bringing in foreign oil men. Two veterans from Tulsa,
Okla., and Denver set up a training center in Moscow, eventually
overhauling how Yukos produces oil. They brought young engineers from
the Siberian production units for sessions of pizza and long hours in
a special room. With the help of 3-D glasses and high-powered
computers, the engineers could see how to improve the flow of oil at
their wells.
"Russia is another Mesopotamia," says Don Wolcott, the Coloradan of
the pair, referring to the vast oil reserves of the Middle East.
That may be an overstatement, but Yukos has upped its audited-reserve
totals every year since the pair started. The latest announcement
reflected the results of a multiyear study. Yukos officials say the
study showed it was possible to affordably extract oil from a layer of
deposits previously thought to be too hard to develop by using a new
technique for cracking open the rock formations.
At TNK-BP, the man behind the technology drive is James Dupree, a
44-year-old Texan.
Although Samotlor has pumped more than 17 billion barrels of crude
since production started in 1969, he says the field is only about a
quarter depleted. "Most of the rest of the world gets 45% recovery out
of these types of reserves," says Mr. Dupree.
Getting the rest out isn't turning out to be very hard. "It's the very
basics we're implementing here," he says.
Sometimes it's as simple as providing filters for water pumped into
wells during certain procedures. Before BP came, the dirty river water
used in the fields often clogged the fine pores in the underground
sandstone, slowing the flow of oil.
To help spread the technology message, Mr. Dupree has set up teams of
specialists from his own group and the Siberian production units to
focus on ways to improve performance. Backed by recommendations from
these teams, engineers in the field say, it's much easier to get
proposals approved.
Veterans say breaking the old habits is hard. Under the Soviets, the
five-year plan set targets for everything from crude output to how
much water had to be pumped into the field. Beating the plan just
meant the bar was set higher the next time, while missed targets meant
missed bonuses.
"Our ideology used to be conservative," says Firdaus Galeyev, an
executive with nearly 30 years' experience in Nizhnevartovsk. "If a
well was producing 10 tons [73 barrels] a day, that was fine, nobody
bothered with improving it."
"It's a huge organizational-behavior problem masquerading as a
technology problem," Mr. Dupree says. And the cost? "It's dirt cheap,"
he says.
In a smaller field east of Samotlor, Mr. Dupree's team boosted
production by 1.8 million barrels a year at a cost of 13 cents for
every additional barrel. In the rest of the world, added production
can often cost $5 or more per barrel.
The team used geologic analysis to show a big boost in production from
pumping water into the ground through some wells that had been used to
pump oil out. Because the easy oil that flowed up out of the ground is
long gone at Samotlor, oil men must pump water in to sweep the
remaining oil out.
Russian oil men traditionally stuck to the Soviet patterns of placing
wells along straight lines or in simple hexagons on the tundra, paying
little attention to how the oil was deposited underground. As a
result, the water that was pumped in often missed the oil it was
supposed to sweep out.
In addition to boosting production, which brings millions in revenue
to BP, these improvements also can mean the company can book more of
the Siberian oil as proven reserves, since the company has shown it
can get more oil out of the ground.
High-volume electric pumps are another priority. Older wells at
Samotlor now yield mostly underground water, and Russian-made pumps
aren't powerful enough to handle the volume needed to get what oil is
left out of the ground.
In his office on Industrial Street, Mr. Mhire pulls out a graph
showing the results of the pump campaign in the first seven months of
this year. About $1 million in pump upgrades has delivered about 2.2
million barrels of added annual production, three times the result of
the year before. "We've gotten more aggressive about it," he says.
His Russian colleagues agree. In the past, they say, ordering the
expensive imported pumps required extra approvals and took months of
lobbying. Now, the campaign is being pushed from headquarters in
Moscow, and local engineers get special bonuses for ideas that boost
production at low cost.
Across the Samotlor field, TNK-BP is looking for more oil from
existing deposits, studying the whole area with advanced seismic
equipment that will provide three-dimensional images of the
underground rock formations. In the past, that kind of costly analysis
was reserved for new fields in Siberia.
BP is pinning some of its highest hopes at Samotlor on a series of
relatively shallow oil deposits speckling the field called "ryabchik,"
after a local wood hen known for its mottled feathers.
Because the isolated deposits and the structure of the underground
sandstone made it hard to get the oil out, Mr. Chukcheyev says, "Those
reserves were never even considered recoverable before."
Now BP is pushing a technique to crack the underground rock formations
wide open, allowing more oil to flow out. The results of the new
approach have been striking, like the huge jump in production at well
5689.
"All you can hear is the sound of oil pumping," Mr. Chukcheyev says.
Source: Ocnus.net 2004
