Latest Oil and Gas News Russia

By Alastair Ferguson
Deputy Executive Director, Gas Business Development, TNK-BP

Introduction

It is well understood by now that one of the key challenges facing the Russian oil industry today is reversing the negative historical legacy of the practice of flaring of associated petroleum gas (APG). Economic and social repercussions of this problem have included environmental damage and valuable resource waste. TNK-BP believes that in Russia this challenge is not only going to be addressed, but can be turned into an opportunity for all stakeholders. The key here will be cooperation between focused investment and commercial activity on the part of the industry (TNK-BP is a leader in this regard) and support from the State in the form of a balanced regulatory framework. This framework should be based on international best practice combined with measures designed to address issues unique to the Russian energy sector.

Reversing A Negative Historical Legacy

According to official statistics, today around 14 bcma of associated gas are flared in Russia, while various unofficial sources make much higher estimates. This unfortunate situation is in considerable part a product of history.

The oil industry inherited from the Soviet Union was one that reflected an overall low level of priority given to associated gas in general. The poor state of gas gathering and processing assets today is, to a degree, a reflection of this fact. In the early 1990s the overall APG utilization levels were not much higher than what they are today.

Politically and economically turbulent 1990s did not help improve the situation. The seismic transformations in the sector kept both managers and state officials largely preoccupied with more pressing matters. Besides, the overall business climate (especially low gas prices and reduced gas demand) was not favorable to associated gas projects.

However, over the past decade the tide has gradually begun to turn and a number of important transformations have emerged including:

• More stable investment climate leading to more long-term planning in the industry
• Robust economic growth and accompanying increase in demand for natural gas
• Decrease in non-payments and increases in regulated gas prices
• Increasing environmental awareness on the part of the public, industry and State (e.g. Russia’s ratification of the Kyoto Protocol)
• Strengthening regulatory institutions

The result is that today conditions are in place to reverse the negative historical legacy of APG flaring in Russia. The Russian oil companies are working hard to increase the efficiency of their resource use and first and foremost on increasing their APG utilization levels. In this critically important effort TNK-BP is making giant strides.

TNK-BP Associated Gas Utilization Program

TNK-BP's commitment is best expressed by our $1.2 bln investment program which aims over the next 4 years to achieve a 95% utilization rate across the company. In recent years TNK-BP has substantially grown production of oil and APG. However, APG resource addition rate is higher than production growth rate because fields with a higher gas content are being put into production. APG resources will continue to grow even if production remains flat across the company.

To solve this problem the company has launched several large projects. Main activities under APG utilization program include:

• Construction and expansion of infield APG gathering systems.
• Expansion of interfield gas transportation systems.
• Expansion of gas processing capacity (JV with SIBUR Holding in Nizhnevartovsk and expansion of the Zaikinsky Gas Processing Plant in the Orenburg Region).
• Project to build the 3rd block of the Nizhnevartovsk Power Plant in the JV with OGK-1.
• Construction of power plants using APG as feedstock.

TNK-BP especially values its activities within JVs with Sibur and OGK-1 and sees them as two tangible examples of the new type of APG utilization projects which signal a way for future solutions to the flaring problem.

In 2006, TNK-BP and SIBUR Holding created a joint venture Yugragazpererabotka to process APG produced by TNK-BP and other companies in the Nizhnevartovsk Region. By end of 1Q 2008, a year after it commenced operations, the JV processed 6.981 billion cubic meters of APG, supplied 5.875 billion cubic meters of dry lean gas to Gazprom's Unified Gas Supply System (UGSS), and produced 2.052 million tons of natural gas liquids products.

Dry stripped gas is supplied to the Nizhnevartovsk Power Plant, the city of Nizhnevartovsk and transported to a large number of consumers through the Parabel-Kuzbass gas transportation system.

JV with SIBUR allowed TNK-BP to start investments for expansion of our gas processing capacity. In May 2007 the Board of Directors of Yugragazpererabotka approved the project to restore the lubricants absorption unit no. 3 at the Nizhnevartovsk Gas Processing Plant. This will increase initial APG intake by 700 million cubic meters annually, and by another 800 million cubic meters per year after additional processing capacity has been put in place. There are other plans to develop this gas processing complex by 2010.

In June 2007 The Board of Directors of TNK-BP approved the company's participation in a joint investment project for construction of a new steam-gas combined-cycle unit with capacity of 800 MW at the Nizhnevartovsk Power Plant. The JV will include two existing units of the Nizhnevartovsk Power Plant with combined capacity of 1,600 MW, and will build the third generating unit.

The new power-generating unit will use dry gas supplied by TNK-BP under a 15-year contract. Currently, TNK-BP supplies 3 billion cubic meters of gas a year to the two existing units of the Nizhnevartovsk Power Plant. The new power-generating unit will consume another 1.2 billion cubic meters of gas a year. TNK-BP will purchase power generated by the third power-generating unit in the amount of approximately 6 billion kilowatt a year under a 15-year contract.

Both JVs represent local solutions and achieve a number of strategic goals:

• achieve 95% utilization target
• monetize available associated gas resources
• provide additional gas and electricity supply for regional needs

The Role of the State: A Balanced Regulatory Framework

Just as industry is moving forward with its plans for APG utilization, the government is in the midst of putting together a comprehensive program to assure better regulation of associated gas utilization. We believe that the measures developed in a growing dialogue between the State and industry should reflect international experience and best practice from such countries as UK, Canada, Netherlands and Noreway, which successfully dealt with their APG utilization problems. Our review of the international experience in APG utilization yields the following broad lessons:

No quick fixes. There are no short-term administrative solutions and no quick fix to the flaring problem. As can be seen in Figure 3 it took more than a decade to reach high levels of APG utilization in the UK. Creating the right environment to deliver economically viable solutions in the long-run is the best incentive for APG utilization with almost guaranteed success.

Figure 3. Utilization rate in the UK (1980 -2005)



Need for flexibility of regulatory approach. There are no generic solutions for all types of oil fields. For some green field projects favorable environment is effective only in conjunction with tailor-made regulation taking into consideration specific technical complexities and individual characteristics of oil fields. These can include gas content, size of the field and distance to the nearest pipeline network (this is especially critical for Russian green field projects in Eastern Siberia). Tailor made solutions developed in a transparent dialogue between regulator and resource holder have been critical to the APG utilization success stories.

"Demand-side measures" are key. International experience has shown that the most important driver for APG utilization is the state of the natural gas market in the country. Overall increase in gas demand and access to gas market have been key stimuli for APG utilization. For example, in Alberta APG utilization growth was directly linked to the upgrade of the existing pipeline network and creation of an independent network operator that ensured fair access and prices for all producers of APG.

Given the accumulated international experience we believe that caution needs to be exercised when it comes to adjusting overall utilization standards, metering equipment requirements and increases in fines or taxes for flaring (see Figure 5). Over-reliance on and misuse of punitive measures can undermine basic economics of high-cost oil production that can cause even greater problems such as:

• disruption of existing oil production
• reduction of available tax base
• unstable environment for complex projects

Figure 5. Administrative/punitive Measures at the Disposal of the Government


In our view the key message to the regulatory reformers should be that successful regulation has to be a balance: punitive measures need to be balanced by economic incentives. The most important economic incentives are:

Market pricing. Low regulated gas prices in Russia have been one of the key disensentives to investing in APG utilization projects. Liberalization of APG prices in early 2008 was a positive step. However, the economics of APG utilization projects are primarily driven by dry gas prices. In this regard, sticking to the targets of gas price liberalization set by the government in November 2006 is critically important for investors in APG projects.

Guaranteed access to infrastructure and markets. One of the key risks faced by associated gas projects today is lack of guarantee that the key product of AG processing (namely dry gas) will actually receive access to main gas pipelines. An adjustment to existing regulation that will prioritize access for dry gas will go a long way to stimulate associated gas utilization.

Full use of the Joint Implementation (JI) mechanism for AG projects. JI mechanism allows selling of CO2 quota limits created by the dedicated investments. JI implementation allows to upgrade many non-economic projects to positive economic levels and makes company decisions to invest easier and faster.

Labels: APG, Flare Gas, Recovery, Russia, TNK BP

posted by The Rogtec Team @ 13:56 

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