Oil industry needs innovative breakthrough
The Russian oil industry is at crossroads, according to Anatoly Dmitriyevsky, Director of the Institute of Oil and Gas Problems at the Russian Academy of Sciences (RAN), Doctor of Sciences, Geology and Mineralogy, and RAN Academician.
Oil reserves at major fields are depleting, while private business is unable to develop alternative replenishment source, which is heavy and super viscous oil and bitumen, without active state interference and real assistance. The reserves are temptingly big and total close to 75 billion tons, but they are located in hundreds of difficult small and medium fields. A technological preparation system as thorough as with major fields is necessary to actively develop them. However production costs of a ton of oil grow as a result. Increased oil recovery demands new innovative technologies and a scientific breakthrough. And not only that. Russian oil business leaders believe it is necessary to revise state regulation principles in the industry in general and adopt a new oil law.
Oil reserves, which producers call “flowing crude”, have depleted to a third of total reserves. Two thirds are the so-called difficult and high viscosity oil. Moreover, out of the one third of light oil only 50-70 percent can be recovered, while 70 percent of heavy oil can yield some 20-30 percent. Crude is mostly recovered from “easy” reserves. The situation is deteriorating each year. Yet in the second half of the ‘80s of the past century oil production in the Soviet Union constantly decreased and dropped nearly two-fold. The structure of the reserves changed considerably as a result. The share of reserves at unique and major fields remains decisive, but is annually decreasing. The development of small fields demands the same investments into geological prospecting and construction as with major fields. Plus there is the modern requirement to recover associated petroleum gas which demands to build corresponding facilities.
The situation can be radically improved only by a state strategy that deals with the problem, offers tax benefits, promotes geological prospecting, innovations, and small business engagement in the sphere. The startup of small and medium oil fields that abound in Tatarstan, Bashkiria, Udmurtia, Samara and other regions of the country will increase total oil production volumes, create dozens of thousands of jobs, increase the load on related industries, and considerably raise tax payments to the state coffers.
SMALL FIELDS NEED BIG SCIENCE
Academician Anatoly Dmitriyevsky believes the problem has become the main one for the Russian oil industry. Despite the forecasted discovery of major and even gigantic fields in East Siberia and the Arctic shelf, it is time to understand that development of low-profitability small oil fields is of major significance today.
The historic development of the Russian oil industry has been successful until recently: there was a big number of major and even gigantic fields with light crude in natural reservoirs with good collecting parameters. Both fundamental and applied science, as well as practical activities targeted the development of such fields. The necessary technology was thoroughly perfected and supplied 99 and even more percent of all crude to the country for decades. Today the figure remains at 95-96 percent. The excellent technology allowed to choose suitable deposits from a big number of fields. They did not design new technologies for each field in various regions, but instead selected domestic fields which the existing technology could efficiently develop. Oil producers achieved outstanding results thanks to the technology.
The whole Soviet oil industry was based on crude produced by the technology. “Active” oil remains the major source of oil production in Russia. However in the ‘80s its reserves decreased to a half of all crude underground. Today they account for 30 percent and are rapidly depleting. Therefore, the task of developing fields with the so-called hard-to-extract reserves that demand new technologies came to the foreground. Small fields need big science, as the development of each of them demands specific technology. They offer points of growth as 60-70 percent of Russian regions can be engaged in small oil and gas production development. Oil production at small fields will encourage new technologies to refine petrol from crude, produce motor oil from gas, generate electricity at gas-turbine facilities, etc. Prudent and orderly small field development can guarantee Russia up to 30-40 percent of oil production for decades.
“I was in the United States in 1991 and met one of numerous independent oil geologists John Gray,” Anatoly Dmitriyevsky recalled. “He showed me his wells in Texas. He uncapped one of the wells and it dripped oil by drops. I said: John, in Russia wells yield 100-150 tons a day, and you have drops of oil... He responded: it has been dripping since 1939!” At present the United States is developing over 30 thousand oil and 20 thousand gas fields. Their average reserves comprise 1.9 million tons of oil and 2.2 billion cubic meters of gas.
OIL PRODUCTION COSTS TO RISE SHARPLY
Today small and medium fields in Russia with original extractable reserves less than 10 million tons account for 14 percent of balance reserves. The fair demand of the state to recover at least 95 percent of associated petroleum gas makes it necessary to build corresponding low-capacity facilities which ups production costs. Oil businessmen estimated that such investments either do not pay back at all or recoup in a very long time for private enterprise. Cash-squeezed producers do not want to develop small fields without government assistance. At the same time the Russian government forecasted that over 70 percent of small oil fields on the state balance will be developed in the coming three years.
They are mostly scattered on wide territories which demands expanded seismic prospecting, decreases wildcat drilling efficiency, and increases construction and transportation unit costs. To produce oil at such fields it is necessary to have the same wide transportation, collection and treatment system as for large deposits. At the same time oil production volumes at small fields are incomparable to major ones, as a rule. Production often quickly falls and water intrusion is rapid.
Wildcat drilling efficiency at small fields comprises 20-30 percent on average, i.e. one productive well for two empty ones at minimum. Oil producers insist the development of such fields is unprofitable with the current taxation system in the country.
Therefore, state auctions selling small land plots for oil development are of no interest for businessmen so far. However oil producers say everything can radically change if authorities closely deal with the problem. Oil majors Rosneft, Tatneft and LUKOIL sent a letter to the Russian government calling for state assistance to small field development. They expect radical measures from authorities, which include differentiated mineral extraction tax rates for small fields that will take extractable oil reserves into account; state program for prospecting and developing super viscous oil fields; zero rate of the export duty for super viscous crude; creation of a state regulation mechanism that ensures increased oil extraction ratio and rational use of recoverable crude reserves; economic encouragements for innovation technologies and technical means to increase oil reservoir recovery. Oil producers believe it appropriate to introduce zero rate of the mineral extraction tax for fields with reserves less than one million tons and a decreasing 0.25 coefficient for reserves of 1-3 million tons and a 0.5 coefficient for 3-5 million tons for the whole development period. Fields with reserves ranging from 3 to 10 million tons shall enjoy seven-year tax holidays. Fields with up to 20 percent of already extracted reserves are proposed to be listed as new ones. The measures would allow to additionally produce in a decade
5 million tons of oil at Volga region fields with original recoverable reserves of less than one million tons, 3.4 million tons at fields with reserves of 1-3 million tons, and another 3.7 million tons at other fields. Potential state support options could include financing through federal goal-oriented programs of geological prospecting and evaluation of bitumen and super viscous oil deposits.
According to preliminary estimates, the startup in Russia of new small oil fields will increase national oil production by 1.5 million tons in the first year of development and will add 6.2 million tons in three years. Additional state budget revenues will comprise 332 million and 1.4 billion dollars respectively. It is time for the executive and legislative authority to decide.
By Emma VERSHININA