Outlook for Offshore Exploration in Russia up to 2025
Irina Chmeleva
In recent months, the discussions about the impact of foreign companies and technology on Russian oil production have intensified at all levels. State officials, ranging from the President to various Ministers, have highlighted the need to boost domestic production of equipment in order to substitute imports. Given that the participation of foreign capital is most significant in the segment of offshore field development, we decided to assess the actual need for equipment in Russia’s offshore ventures over the next 10 years and pinpoint the areas displaying the greatest demand.
About 15 giant hydrocarbon fields were discovered outside of Russia in 2013 and nearly all of them are classifiable as offshore deposits. It follows that offshore resources are becoming the main source for future global oil and gas production.
As the current production parameters show, legacy fields where development began back in the Soviet era, are nearing depletion and with each passing year the need to replace them with new hydrocarbon sources is becoming increasingly urgent. The new fields tend to be smaller in size and are not capable of replacing the depleted resources in full.
The Russian government repeatedly focused attention on the importance of replacing the country’s raw material base as a prerequisite for maintaining domestic hydrocarbon production. The statements particularly emphasized the need to localize the production and technology required for offshore production, invest 320 billion rubles in exploration until 2020 and strengthen Rosgeologia Holding.
The composition of current O&G resources shows that the most promising offshore fields are those where drilling is most likely to yield substantial flow rates. Whether or not this means that the scope of offshore exploration will rise considerably remains unknown. According to RPI assessments, development will mostly likely proceed within the limits of licenses issued by the state.
RPI materials traditionally illustrate two types of forecasts for offshore development – intensive and moderate. The former scenario suggests that such processes as license issuance, the search for contractors and partners should move forward at a rapid pace, while the latter scenario keeps to the status quo on the market. However, in light of the prevailing trends and the lack of indications that they will change, it is reasonable to say that the moderate scenario should be the baseline for Russia’s offshore development in the near future. This scenario factors in the risks that Russian companies can be expected to face, such as inaccurate estimates of reserves at the various license blocks, the lack of funds required to continue the work, and the unavailability of essential technology or equipment.
By providing a detailed analysis of the fields and license blocks, the conditions under which they are to be operated and the requirements for work to be performed there, the RPI study serves as a basis for gaining an understanding of the outlook for offshore exploration in Russia.
1. 2D/3D Seismic Exploration
All field study begins with geophysical surveys, including seismic exploration. The bulk of 2D/3D seismic surveys to be carried out within the next 10 years will take place in the Arctic Ocean – in the Barents Sea, the Pechora Sea and the Kara Sea. Over 60% of 2D and about 30% of 3D seismic will be conducted in offshore areas of these seas. However, the importance of these areas will not be constant. For example, the main work in 2014-2015 (60-70% of 2D and 40-50% of 3D) will be performed in the Kara Sea, while key operations will shift to the Barents Sea and the Pechora Sea from 2016 through 2020 (40-50% of 2D and 30% of 3D). These figures reflect the work schedules of the various operators and we will now analyze them in greater detail in order to lay the groundwork for the forecasts given below.
The main scope of offshore seismic surveys to be carried out in the Caspian Sea over the next 10 years will take place at the Severny block, as well as exploration work at the Inkhche-more field, and the Tyuleni, Dimitrovsky, Derbentsky, Sulaksky and Izberbashsky blocks. The bulk of exploration work has already been performed at the Severny block, although LUKOIL does not rule out that additional exploration may be required. The other blocs have been suspended. There is a strong likelihood that a new operator could be named there to recommence exploration. Exploration work at the Lagansky and Tsentralny blocks, as well as the Severo-Kaspiisky block is expected to be complete approximately in 2021-2023.
Seismic surveys are slated for continuation in the Tuapse Trough and the Zapadno-Chernomorky block of the Black Sea from 2014 through 2025 at roughly the same pace as in 2014. Seismic exploration at the Yuzhno-Chernomorsky block will begin in the near future, after the respective program has been approved. In addition, according to RPI, a new operator may take over at the Severo-Zapadny and Vostochny license blocks (likely Rosneft instead of Chernomorneftegaz), as a result of which seismic surveys will begin no earlier than 2018.
As regards work in the Sea of Azov, we assume that companies will adhere to their current targets for conducting exploration. According to the baseline scenario, do not expect any significant deposits to be discovered as a result of seismic surveys under the Temryuk-Akhtar project, and this work will be suspended by 2019. Likewise, work at the Paleozoic structure and the Visokosny block will be terminated by 2021.
In the Baltic Sea, LUKOIL will conduct the bulk of its seismic surveys at the potentially prospective D-29, D-33 and D-41 structures from 2014 through 2025 due to declining output at the Kravtsovskoye field. All seismic exploration work at these structures will have been completed by 2018.
The Barents Sea and the Pechora Sea are both unique in that their offshore areas contain a large number of blocks that were recently assigned to subsoil users as well as blocks that remain unallocated. It will be necessary for companies to conduct seismic surveys to confirm reserves and perform expert appraisals at blocks where licenses were issued recently, such as Zapadno-Matveevsky, Yuzhno-Russky, Yuzhno-Prinovozemelsky, Severo-Pomorsky and Russky. In addition, seismic surveys are being scaled up at the Dolginskoye field as well as the Medynsko-Varandeisky and Perseevsky blocks and will essentially be completed by 2020-2022. According to RPI’s baseline scenario, Barents 1-7 blocks (except for licenses issued for certain blocks) will likely remain unallocated.
In offshore areas of the Kara Sea, Gazprom is expected to conduct seismic surveys at blocks, for which the company was issued licenses bypassing the tender procedure in 2013. Exploration work will be carried out throughout the entire duration of the forecast period, since the total acreage of these blocks is quite large. These blocks include the Severo-Kharasaveisky block, Amderminsky, Zapadno-Sharapovsky, Nevsky, Obruchevsky, Sharapovsky, as well as a subsoil area including the Leningradskoye gas-condensate field.
In 2014, Rosneft will commence seismic surveys, which are expected to last two or three years, at the Vostochno-Prinovozemelsky blocks in line with the announced targets. A reduction in the scope of seismic exploration at blocks of Vostocho-Prinovozemelsky 1, 2 and 3 could be due to preparations for production drilling, or confirmation of the lack of prospectivity at these blocks. The company intends to conduct seismic surveys at the Severo-Karsky block until 2016 and could drill at least one exploration well by the end of 2025.
Gazprom will likely conduct intensive seismic surveys at its prospective blocks in the Ob and Taz bays throughout the forecast period. These blocks include Semakovsky, Antipayutinsky, and Tota-Yakhinsky, since they are located in direct proximity to the coast at a shallow sea depth and offer strong production potential. These surveys will begin at the Antipayutinsky block in 2014, at the Tota-Yakhinsky block in 2016 and at the Semakovsky block in 2017.
The bulk of seismic surveys in offshore areas of the Bering Sea are expected to be carried out at the Anadyr-1 block, since it has also been assigned to a subsoil user. The Anadyr-2, 3 blocks will likely remain unallocated in the coming years, which means that no exploration work will be carried out there.
In 2014-2025, seismic surveys at blocks in the Sea of Okhotsk will begin 2-3 years prior to the planned drilling of explorations wells. Rosneft, jointly with Statoil, will continue to conduct seismic exploration at the Magadan-1, 2 and 3 blocks, as well as the Lisyansky and Kashevarovsky blocks, supplemented with 3D surveys. Surveys of the Veninsky and Vostochno-Odoptinsky blocks, as well as the Astrakhanskoye more-Nekrasovsky block will continue as part of the Sakhalin-3 project.
In addition, during the forecast period Rosneft will begin to survey the recently received Amur-Limansky and Vostochno-Pribrezhny blocks. In line with RPI assumptions, litigation between the Rosneft/Gazprom JV and Rosnedra will end in the foreseeable future with a compromise decision and some of the Koryakiya-1, 2 and Kamchatsky-1 blocks will be assigned to the subsoil user for further development. Many other blocks are likely to remain unallocated.
Blocks located in the Sea of Japan (Sakhalin-8-9 and Khabarovsk 2-4) will be assigned to subsoil users near the end of the forecast period, after which seismic surveys might not begin earlier than 2023.
Over the next 10 years, a total number of 22-24 seismic vessels will be required in southern offshore areas concurrently, while 27-31 vessels will be needed in the Baltic and Arctic seas, and 8-12 vessels in Far Eastern seas. The total concurrent need for ships engaged in 2D/3D seismic exploration on the Russian shelf is 58-67 units under the baseline scenario.
2. Exploration Drilling
According to Vladimir Bogdanov, General Director of Surgutneftegaz, the total number of meters drilled would have to be doubled or tripled in order to offset depleted reserves. Western oil and gas producers allocate 3-4 times more resources to exploration than Russian E&P companies.
In the Russian sector of the Caspian Sea, it may be assumed that work will be terminated at blocks where no hydrocarbon inflows were revealed as a result of exploration drilling (e.g. at the Lagansky block).
The Severny block is currently the only block at which the timeline for commissioning fields has been accurately scheduled. LUIKOIL, which operates the Severny block, announced in 2011 the following timeline for the commissioning of its fields.
» V. Filanovsky – 2015
» Yu. Korchagin (phase 2) – 2015
» Sarmatskoye – 2017
» Rakushechnoye – 2020 (perhaps a little later)
Development of the Yu. Korchagin and V. Filanovsky fields is taking place in line with the schedule. The other fields in this block will likely be commissioned later than the expected 10-year timeline.
Under the moderate expansion scenario, only prospecting and exploration drilling will be carried out at the remaining blocks in the Russian sector of the Caspian Sea over the next 10 years. These include the Tsentralny, Inchkhe-more, Tyuleni, Dimitrovsky and Derbentsky, Sulaksky and Izberbashsky, Lagansky, and Severo-Kaspiisky blocks.
An operator of the Tyuleni, Dimitrovsky and Derbentsky blocks will likely be assigned as early as 2014, and this subsoil user will probably be Rosneft. The latter company gained a controlling equity stake in the Lagansky block around the end of 2013.
Since drilling did not show hydrocarbon inflows in the Russian section of the Yalamo-Samursky block, work there has been halted. Development of the Yu. Korchagin and V. Filanovsky, Sarmatskoye and Rakushechnoye fields will likely move forward on schedule, whereas commercial development of the Khvalynskoye field will be rolled back until after 2025 due to legal and organizational issues.
Prospecting and exploration drilling at the Abrau structure in the Tuapse Trough of the Black Sea will begin no earlier than 2014. Rosneft announced these plans at the end of 2013. By contrast, drilling at the Severo-Zapadny and Yugo-Vostochny acreages will get under way no sooner than 2017 due to licensing uncertainty facing Russian Chernomorneftegaz and the likelihood that its licenses will be reassigned to Rosneft.
The main focus in the Russian sector of the Sea of Azov from 2014 through 2022 will be on the interpretation of seismic data acquired and drilling exploration wells. We assume that the drilling results will not lead to the discovery of significant hydrocarbon deposits.
The purpose of exploration work in the Baltic Sea is to identify new oil reserves at blocks D-41, D-29 and D-33 in order to offset the decline in oil production at the Kravtsovskoye field. LUKOIL is expected to drill at least two exploration wells from 2015 through 2018, after which the company will decide whether the new structures are promising enough to proceed with further operations.
Blocks with differing degrees of readiness for exploration are located in the Pechora Sea and the Barents Sea. Specifically, all work has already been completed at the Prirazlomnoye and Shtomkanovskoye fields and only production drilling will be carried out in these locations.
Under the baseline scenario, according to which earlier unallocated blocks will not find an owner in the near future, Severneftegaz will conduct exploration drilling at the Kolsky blocks, Gazprom Neft at the Dolginsky block and Rosneft at the Perseevsky block, the Medynsko-Varandeisky block, the Yuzhno-Prinovozemelsky, Zapadno-Matveevsky, Russky, Yuznho-Russky, Severo-Pomorsky-1 and other blocks under the terms of licenses issued.
Rosneft will likely drill exploration wells in the Kara Sea over the next 10 years as a result of reserves studied at the Vostochno-Prinovozemelsky blocks and the Severo-Karsky block; Gazprom will conduct exploration drilling no earlier than 2017 at blocks for which licenses were issued last year.
In offshore areas of the Ob and Taz bays, we assume that commercial development of the Severo-Kamennomysskoye, Kamennomysskoye-more and Obskoye fields will begin slightly behind schedule, i.e. after 2022, but that no additional exploration work will be carried out. Exploration work, including drilling, will be conducted at other prospective blocks that Rosneft recently received.
Under RPI baseline scenario, exploration drilling will be carried out at the Anadyr-1 block in the Bering Sea to find no significant hydrocarbon reserves there, after which the work will be halted. The Anadyr-2, 3 blocks will not likely be assigned to subsoil users, or will be assigned after 2020-2021, as a result of which the beginning of exploration drilling would be rolled back beyond 2025.
In the Sea of Okhotsk, Gazprom will likely assess its expenditures for compliance with the environmental requirements on the West-Kamchatka shelf as overly high, given the strong likelihood that commercial reserves will not be discovered (after work performed earlier). For this reason, we expect offshore operations to be suspended.
Exploration operations are planned at the Magadan-1, 2 and 3 blocks as well as at the Lisyansky and Kashevarovsky blocks. Whether or not to proceed with production drilling there will be clear on the basis of work performed.
Rosneft will drill an appraisal well at the Veninsky block (Sakhalin-3) and based on the appraisal results will decide whether to move forward with the development of this block.
Only exploration drilling will be performed at the Vostochno-Odoptinsky and Ayashky blocks under Sakhalin-3 until 2025, while the decision on further development of these blocks will be taken on the basis of these results after 2025.
Exploration wells are slated for drilling at the Lebedinsky block and the Astrakhanovskoye-more – Nekrasovsky block. The interpretation of results and the decision on prospectivity of these deposits will take place after 2025.
Rosneft will not switch to drilling exploration wells at the Amur-Limansky and Vostochno-Pribrezhny blocks over the next 10 years.
In line with the baseline scenario, development of the Yuzhno-Piltukhsky block under the Sakhalin-2 project will not continue or move to the drilling stage.
Rosneft will likely relinquish its license to the Sakhalin-5 field in the foreseeable future without conducting any additional exploration due to the difficulty of developing such a geologically complex block.
Under the baseline scenario, Sakhalin-4 blocks, the Lopukhovsky block, the Sakhalin-6, 7 blocks, Koryakiya-1, 2, Kamchatsky-1, Khabarovsky-1, 3 and Sakhalin-7 blocks will not be assigned to subsoil users over the next 10 years.
Exploration drilling will most likely not begin in the Sea of Japan due to the fact that the Sakhalin-8, 9 and Khabarovsky-2, 4 blocks still remain unallocated. In case they do find operators, such a development work at these locations would not begin before 2025.
3. Need For Drilling Rigs
A forecast of the need for drilling rigs in offshore areas of Russian seas was built on the basis of the respective depths of subsoil blocks, as well as company plans (confirmed and unconfirmed) based on these data.
Taking into account depths of the Caspian Sea, we assume that 1-3 jack-up drilling rigs will be required to drill exploration wells at the Severny, Dimitrovsky, Derbentsky, Sulaksky, Severo-Kaspiisky and Izberbashsky blocks in 2014 and 2015.
In the column related to the Caspian Sea, the figure 4 illustrates the need for drilling rigs when drilling exploration wells, as well as onshore drillings rigs for development of the Inchkhe-more field.
One semi-submersible drilling unit (SSDU) will be needed to drill fields at the Tsentralny block in 2014-2015. One or two modular drilling rigs will be sufficient for operations at the Lagansk and Tyuleni blocks. Drilling at the Inchkhe-more field could be carried out via an onshore drilling rig with a load capacity of about 600 tons, similar to the Yastreb drilling rig that is being used on Sakhalin Island to drill horizontal wells over 9 km long.
One or two drilling rigs similar to a drilling vessel will be required for exploration drilling in offshore areas of the Black Sea, depending on the specific sea depths. These drilling vessels could be leased in any area of the World Ocean.
One, jack-up drilling rig, JDR will be required to perform exploration drilling in offshore areas of the Sea of Azov from 2016 through 2020. Earlier, a similar rig was leased from Ukrainian Chernomorneftegaz (owns four JDR ’s, two of which are being repaired).
Depending on actual depths of the Baltic Sea, we assume that one JDR and one EMDR will be needed to drill exploration wells at the D-29 and D-33 structures from 2014 through 2025. The JDR will be used to drill several wells at different times.
Provided that exploration drilling in offshore areas of the Barents Sea and Pechora Sea begins on schedule with the plans announced by operators, three types of drilling rigs will be required: jack-up drilling rigs, semi-submersible drilling rigs and drilling vessels (for drilling at the Perseevsky block). The biggest need for drilling rigs will be in 2017 and 2020, up to three units concurrently.
Two SSDR at most will be needed for drilling operations in the Kara Sea in 2019, while one rig will suffice during other periods.
Gazflot is expected to develop its prospective structures in the Ob and Taz bays over the next 10 years and the company will drill about one exploration well per year. One JDR will be sufficient to perform this work.
Only one SSDR will be required for work at blocks in the Bering Sea.
Three types of drilling rigs will be needed in the Sea of Okhotsk: jack-up drilling rigs, semi-submersible drilling rigs, and onshore drilling rigs. As a result, the concurrent need for drilling vessels over the next 10 years will not exceed five units. And, according to RPI, this need will appear in 2019 only.
No exploration drilling is expected to be carried out in the Sea of Japan, so there will be no need for drilling rigs.
Under the baseline scenario, the maximum need for all types of drilling rigs will be in 2019 and 2020, when 14-15 units will be required, 5-6 of which will be needed for drilling in offshore areas of Southern seas, about 5 in the Baltic Sea and Artic seas, and 5 for Far Eastern seas.
The need for drilling rigs is precisely the main way sanctions can impact the development of Russia’s subsoil resources. The sanctions could give rise to technological risks that would mainly apply to drilling operations carried out on the Artic shelf. For example, a situation arose in autumn 2008 on Russia’s Artic shelf when there were no free domestic drilling rigs in offshore areas of the Barents Sea and the Pechora Sea, since all available units had been leased out abroad. Notably, only Gazflot, a Gazprom subsidiary, has its own drilling capacities that could be used for exploration of Arctic blocks at shallow sea depths. And while this factor has become less critical following the purchase of several rigs, the state has recently focused on creating incentives for this segment of the shipbuilding industry. The risk of insufficient processing equipment for field development or exploration of license blocks is lower on the Far Eastern shelf, since these facilities can be leased and shipped from such countries as Malaysia (Sakhalin-3 project) or Brazil (Sakhalin-4, 5 projects).
Indirect confirmation of a potential shortage of technological capacities could be such an alliance as Rosneft and ExxonMobil, the purpose of which, among other things, is to explore three license blocks in the Kara Sea. These alliances are one way to solve the shortage of technology, but as practice has shown, such ventures are also formed with foreign companies and there are currently no alternatives on the Russian market.
Market players need to work out a new business model geared towards unlocking domestic potential and ensuring that foreign partnerships yield the required multiple functions. Thus, at a recent meeting of the Fuel and Energy Complex commission, the Russian President tasked the government with working out an action plan with specific measures to localize production in a way that is consistent with the existing investment plans and needs of O&G companies. The president noted that import substitution could help ensure reliability in the implementation of many projects.
So far, the previous incentives created specifically for shipbuilding have proven to be unsuccessful, therefore VOICs are forced to continue purchasing or leasing offshore facilities abroad. External challenges may well turn out to be a game-changer as regards the future of marine shipbuilding in Russia, especially now that the need for offshore development has become so clear.
