In September 2013 the board of directors of Transneft approved the company’s investment program for 2014 and until 2018. The document sets out the scope of funding for the construction and upgrade of the existing pipelines. Specifically, the program calls for allocating over 100 billion rubles in order to expand the East Siberia – Pacific Ocean (ESPO) pipeline system. For oil companies operating in East Siberia this news was long overdue, since the current throughput capacity of ESPO has long been maintained using oil pumped both to China and the port of Kozmino.
The investment program of Transneft notes that the bulk of funding will be directed towards the implementation of projects in Siberia and the Far East. It refers more specifically to the following four investment projects:
» The Zapolyare-Purpe trunk oil pipeline (about 199 billion rubles)
» The Kuyumba-Taishet trunk oil pipeline (120 billion rubles)
» Expansion of the ESPO pipeline to 30 million tons per year towards China (74 billion rubles)
» Expansion of the ESPO pipeline on the Taishet-Skovorodino line to 58 million tons per year (27 billion rubles)
In this way, Transneft intends over the next few years to debottleneck the delivery of Russian oil to the Pacific Ocean and China, a problem which has existed for several years. This situation arose due to an incorrect forecast used by the design engineers of the ESPO pipeline. Around the middle of the first decade of the twenty first century the design capacity of the line extending to the port of Kozmino was estimated at 80 million tons per year. However, the pace of development of fields in East Siberia and Yakutia was low, so to avoid being underutilized the pipeline’s throughput capacity was lowered to 50 million tons per year.
Admittedly, at the first stage of the pipeline’s operations there were some underutilization issues. They were resolved by rerouting some oil from West Siberia, and also the Vankor field to ESPO. Specifically, a decision was made not to lay a pipeline from Vankor to the shore of the Arctic Ocean and erect an oil terminal there. Instead of this, the pipe was extended southward to connect with Transneft’s system and then further with ESPO. After that, events started to unfold under a predictable scenario.
The deployment of a new oil transportation route to the promising Asia Pacific Region (APR) resulted in faster development of East Siberian oil and gas fields.
In 2013 LUKOIL and Surgutneftegaz, which had never gone public with such plans before, announced their intention to ship oil produced in West Siberia to the Pacific Ocean. Oil executives were quick to quantify the benefits offered by the new route. Pumping oil to the port of Kozmino would make it possible not only to deliver West Siberian oil to the promising APR region, but also make these deliveries more financially viable thanks to the ESPO network tariff. In addition, the price of ESPO blend pumped via this pipeline would trade at a premium to the Dubai crude which is widely used in APR countries. By contrast, West Siberian oil shipped to the European market trades at a discount to benchmark Brent crude.
Thus, by the end of 2013 the utilization outlook for the eastern trunk pipeline differs radically from the earlier projections made nearly a decade ago. The pipeline in its current state is clearly insufficient for delivering rising volumes of crude oil. Just how urgent the issue has become can be shown by an analysis of upstream projects in East Siberia and Yakutia, as well as the prospects for licensing in these regions. A recent RPI report entitled “The Oil and Gas Industry of East Siberia and the Far East” will be helpful in addressing this issue.
Turning point in 2009
Oil production in East Siberia got under way at the end of the 1990s as pilot production at a number of fields located in the northern Irkutsk region, southern Yakutia and the Evenk district of the Krasnoyar territory. At the end of 2009 the cumulative volume of oil extracted (including condensate) in the region amounted to only about 11 million tons. The situation began to change dramatically after the fine line of ESPO was commissioned in December 2009. As early as 2010 the sharpest spike to date in output volumes of crude oil was recorded at East Siberian oil fields – over 2.5-fold. Oil production remained on an upward growth trajectory during subsequent years in this region.
In 2011 the scope of oil and condensate production in East Siberia reached about 27.4 million tons. Of this amount, more than half (56%) came from the Krasnoyarsk territory, 24% from the Irkutsk region, and slightly more than 20% from the Republic of Sakha (Yakutia).
In 2012 the total volume of production in East Siberia and Yakutia reached 35.3 million tons. The main contributions to incremental production compared to previous years were made by:
» Vankorneft (the Vankor field)
» Lenaneftegaz (the Talakan field)
» Irkutsk Oil Company (IOC, mainly the Yaraktinskoye and Markovskoye fields)
» Verkhechonskneftegaz (Verkhechonskoye field)
Incremental production at these companies totalled 7.6 million tons (96% of total growth in the region) compared to 2011. The key growth driver at these companies was the application of new technology, first and foremost, horizontal drilling.
Consequently, starting in 2005 the volume of oil and condensate production in the region increased incrementally (see figure 1). Furthermore, the feedstock production curve shows two sharply different periods: the first marked by slow output until 2008 followed by the second period showing an exponential rise in production in 2009-2012.
As of the beginning of 2012 direct access to the ESPO was available only to a few large companies: Surgutneftegaz, TNK-BP (Verkhnechonskneftegaz), Rosneft (Vankorneft), and IOC. The Srednebotuobinskoye field (Tass-YuryakhNeftegazdobycha) was connected to ESPO in October 2012. Therefore, at least in the medium-term outlook output volumes will be entirely sufficient to keep ESPO running at full capacity.
A total of 14 operators were engaged in the production of liquid hydrocarbons as of the beginning of 2012. However, the three leading producers: Vankorneft, Lenaneftegaz (Surgutneftegaz subsidiary) and Verkhnechonskneftegaz accounted for the bulk of feedstock (over 90%). Ust-KutNefteGaz (Irkutsk Oil Company subsidiary) lagged considerably behind the top three.
Among the regional producers, also noteworthy are some second-tier independent companies with daily output volumes exceeding 50,000 tons, and showing rapid growth. These include Dulisma and Irelyakhneft. Admittedly, the latter’s output increase turned into a decline in 2012.
Of the fields under development, three of them – Vankorskoye, Talakanskoye and Verkhnechonskoye account for the lion’s share of oil and condensate production. The balance of power is unlikely to change anytime in the foreseeable future and these companies will remain the top three. In addition, a number of regional players have considerable output potential, first and foremost Vostsibneftegaz (Rosneft subsidiary, Slavneft-Krasnoyarskneftegaz, as well as two independent companies: Tass-Yuryakh Neftegazdobycha and Dulisma. According to the projects being operated by these companies, they intend over the next few years to boost production volumes to at least 1 million tons per year.
The scope of oil produced in East Siberia could broaden in the medium term due to the development of new license blocks. As RPI noted in its research report “The Oil and Gas Industry of East Siberia and the Far East”, the results of 31 subsoil tenders for fields in eastern Russia were announced from January 2012 through September 2013. In all, 28 blocks were tendered, three of which had already been put up for purchase on two occasions. And even though only a third of the tenders were declared valid, due to marginal interest in small fields, the rollout process of new blocks is still underway. The biggest deal during this period of time was the former TNK-BP’s purchase of the Lodochnoye field in the Krasnoyar territory, with the deposit having been assigned the status of federal significance.
All in all, the RF Subsoil Management Agency (Rosnedra) had officially scheduled tenders for 13 blocks in East Siberia and the Far East. The list of license block tenders slated for 2014 in East Siberia and Yakutia looks as follows:
» Chastinsky block– tender scheduled for first quarter;
» Zhuravlinsky block – tender scheduled for first quarter;
» Portnyaginsky block – first quarter;
» Belogorsky block – first quarter;
Republic of Sakha (Yakutia)
» Monulakhsky – first quarter;
» Srednebiryuksky block – first quarter.
Taking into account the prospects mentioned above, there is no threat of East Siberia and Yakutia experiencing a shortage of hydrocarbon resources anytime in the near future. What’s more, the issue of what to do with excess production could soon come up for discussion.
Pipe Not Big Enough for Everyone
Proof that this is the case can be found partially in official government documents. Thus, The Energy Strategy of Russia Until 2013 assigns East Siberia and the Far East the role of new oil and gas production centers which are to be used to offset the decline in production in the country’s main oil and gas production area – West Siberia.
This document refers to several large and unique fields as constituting the bulwark of the ESPO resource base: Vankorskoye, Talakanskoye, Verkhnechonskoye, Yurubcheno-Tokhomskoye, Kuyumbinskoye, and Srednebotuobinskoye. Alongside the core wells some smaller satellite wells are also to be put into commercial development, including Severo-Talakanskoye, Vostochno-Alinskoye, Taas-Yuryakhskoye, Markovskoye, Dulisminskoye, Pilyudinskoye, Sobinskoye, Payginskoye and a number of large prospective oil and gas production hubs:
» Vankorskoye (Vankorskoye + fields in the Bolshekhetskaya zone and within Kranoyarsk territory;
» Talakano-Verkhnechonskoye (both core fields + deposits located close to Severo-Talakanskoye, Alinskoye, Vostochno-Alinskoye, Vakunayskoye, Chayndinskoye);
» Yurubcheno- Kuyumbinskoye;
» Botuobinskoye (Srednebotuobinskoye, Taas- Yuryakhskoye, Irelyakhskoye, Stanakhskoye, Verkhnevilyuchanskoye, Mirininskoye fields);
» Sobinsko-Teterinskoye (Sobinskoye, Payginskoye).
Some industry experts identify as a separate group several fields in the southern Irkutsk region, the geographical position of which does not allow for them to be regarded as one of the above-mentioned oil production centers. These include the Yaraktinskoye, Markovskoye, Dulisminskoye and Pilyudinskoye fields. The latter three are linked by a common transportation infrastructure. The largest fields of this group are Yaraktinskoye and Dulisminskoye
As of January 1, 2012 the total scope of recoverable oil reserves from prospective oil and gas production centers (core + adjacent fields) in East Siberia and the Republic of Sakha (Yakutia) under category ABC1 amounted to 3,151 million tons of oil, 8.47 trillion cubic meters of gas and 333 million tons of gas condensate.
The Vankor oil and gas producing center offers the strongest potential. In the foreseeable future, the Vankorskoye field will be the main source used to supply ESPO. Rosneft expects to reach peak oil production of 25.3 million tons in 2013 and maintain production at this level until the end of 2018. After that time, output is expected to gradually decline.
A further decline in production at the Vankorskoye field is expected at a later time to be offset by the commissioning of reserves located in close proximity to the Suzunskoye, Tagulskoye and Lodochnoye fields. According to Rosneft’s plans, these fields could be put into commercial production in 2016-2017.
The second largest area in terms of oil and gas production is the Talakansko-Verkhnechonsky center. By 2015 Surgutneftegaz plans to bring into development eight fields with combined potential output of over 8 million tons of oil per year. Verkhnechonskneftegaz intends to reach peak production of 7.7 million tons of oil per year in 2014 and maintain this level until the end of the decade.
In light of the conclusions drawn in the report “The Oil and Gas Industry of East Siberia and the Far East”, the expected total scope of annual oil output at the two core fields of the Talakansko-Verkhnechonsky center will reach about 15.7 million tons in 2016-2017. According to current estimates, the small and medium-sized fields lying in close proximity to the core wells could yield an additional 3-4 million tons of oil production. The Chayandinskoye field is expected to be the key contributor to incremental output, and Gazprom Neft intends to commence production at the oil rim of this field in 2014.
Compared to the Vankor and Talakano-Verknechonsky oil producing centers the outlook for development of the Yurubcheno- Kuyumbinsky center looks far less certain. According to an estimate by Vostsibneftegaz, commercial development of fields in the Yurubcheno-Tokhomskaya zone will start no earlier than the end of 2016. Based on initial target volumes of oil production at the Yurchenskoye and Kuyumbinskoye fields, the total scope of output of the Yurubcheno-Tokhomsky oil and gas producing center could reach approximately 7.5-10 million tons by 2020.
Also classifiable as an oil and gas producing center are Slavneft’s large and already distributed license blocks where commercial production has not yet started:
The Botuobinsky oil and gas producing center includes the Srednebotuobinskoye, Tass-Yuryakhskoye, Irelyakhskoye, Machchobskoye, Stanakhskoye, Verkhnevilyuchanskoye, and Mirinskoye fields which are in various stages of the development process. The most extensive reserves (over 90 million tons of C1 category and over 40 million tons of C2 category as of January 1, 2011) and production potential are to be found in the Srednebotuobinskoye field. The maximum level of output amounts to 6 million tons and it could be reached in 2015.
The Yaraktinsko-Dulisminskaya zone. In 2012 Irkutsk Oil Company (IOC) extracted 2.2 million tons of liquid hydrocarbons at its fields. IOC’s production target for 2013 is about 3 million tons of oil. The plans of the operator of the Dulisminskoye field provide for ramping up production to approximately 850,000 tons per year by 2015.
The Sobinsko-Teterinsky center holds the smallest oil production potential (gas accounts for the main hydrocarbon resources here). According to the current estimates, the maximum scope of oil output in this area will be about 0.5 million tons per year. The insignificant potential of the Sobinsko-Teterinsky oil and gas producing center, as well as its remote location from ESPO make commercial production of this center unlikely until the end of 2020.
Two Scenarios for East Siberia
According to the report “The Oil and Gas Industry of East Siberia and the Far East”, in view of the current environment, the forecast for oil production in East Siberia and Yakutia implies two scenarios: one high and the other moderate. The high scenario proceeds from the assumption that all of the above-mentioned projects will be implemented within the designated timeframes. The moderate scenario provides for the possibility that the implementation of some projects could be delayed and this would mean a smaller amount of production than had been anticipated.
In line with the high scenario, the scope of oil production in East Siberia and Yakutia will reach about 54-55 million tons in 2015 and 72-73 million tons in 2022. The moderate scenario provides for oil output in the range of 52-53 million tons in 2015 and 69-70 million by 2022. Under either of the two scenarios this oil is expected to be moved via ESPO.
The total amount of oil production should also include another 5-7 million tons of export West Siberian liquid hydrocarbons and 30 million tons of oil per year perhaps at a later time from West Siberia to be supplied to Rosneft’s future Primorsk petrochemical complex. This oil should also be loaded into the eastern pipe.
Given the alignment of projects set out in Transneft’s investment program the expansion of ESPO may still prove to be insufficient.
In East Siberia and Yakutia it will be necessary as quickly as possible to coordinate the development of feeder pipelines and ESPO, especially the section that leads to Kozmino.
It should also be noted that Transneft is actively engaged in the deployment of feeder pipeline infrastructure in this region. However, funding is always an issue along this route. The oil pipeline monopoly offers subsoil users two options to resolve this problem:
» Building infrastructure facilities using own company funds;
» Asking subsoil users to attract outside investments to pay for Transneft services.
Both options, aside from monetary funds, require extensive time commitments. And until a solution to the problem is found, it will be at best quite difficult to move oil out of production areas. And while the issue of feeder pipelines is one way or another solvable, and only a matter of who will pay for them, the problem of insufficient ESPO trunk pipeline capacity appears to be highly complex.
As a matter of fact, this pipe has changed from being an incentive to boost production in the eastern part of the country into a major impediment. There are only two ways out of this situation: either artificially slow down the pace of field development in East Siberia and Yakutia, or else rapidly expand ESPO capacities. Luckily enough for the Russian energy industry, Transneft seems likely to opt for the second scenario.
For more information please contact Daria Ivantsova:
+7 (495) 502-5433 / 778-4597
Or e-mail: Daria@rpi-inc.ru