RPI Reports: The Number of Offshore Subsoil Users Should Be Increased
At the end of November 2012, the Deputy Prime Minister of Russia Arkady Dvorkovich said that “the question concerting the list of companies authorized to work on the Russian shelf will be discussed until around February 2013. A number of companies have shown interest in joining this work. A final decision has not yet been made”. Meanwhile, resolving the issue of expanding the range of subsoil users allowed to develop Russian offshore fields appears to be a key to accelerated development of the country’s shelf resources. If nothing is changed, the Russian Ministry of Natural resources estimates that given the current pace of exploration and commercial development of Russia’s new offshore discoveries, this process may take approximately 150 years.
There is a significant obstacle in the path to serious change in the existing approach to offshore operation licensing, which de-facto grants access exclusively to Gazprom and Rosneft, with third party operators playing only junior partner roles. The obstacle is the positions of Gazprom and Rosneft themselves. In late September 2012 their heads – Alexei Miller and Igor Sechin – sent a letter to the Russian President Vladimir Putin expressing their concern over the plans of “liberalization of private companies’ access to the development of subsoil blocks on the continental shelf.”
The letter said that “draft bills seeking amendment of articles 2.1 and 9 of the Law On Subsoil and expansion of the list of subjects of these legal relations by granting access to private companies, including those with foreign capital, to the offshore licensing procedure were introduced by the Ministry of Natural Resources to the Government of Russia”.
The letter claimed that “given the current situation with the development of this draft bill and lack of a single opinion of all concerned parties on issues that are critical to the petroleum industry, the deliberation and passing of this bill will cause direct damage to Gazprom and Rosneft, as well as their shareholders.” Further, Alexei Miller and Igor Sechin asked the Government to instruct the authors to refine the draft, citing a number of reasons, including the need to “eliminate the identified risk of [potential] amendments of the current laws seeking to increase capitalization of a number of private companies with foreign ownership rather than to support offshore development.”
Thus, the state-owned companies’ annoyance over potential access by competitors to the development of offshore hydrocarbon resources showed through very clearly in the letter.
Moreover, many petroleum industry experts say that Gazprom and Rosneft are interested primarily in the lucrative projects in Eastern Siberia and on the Yamal Peninsula, while offshore projects have been put on the backburner. The experts add that these companies engage in offshore operations mostly to increase their capitalization.
Indeed, as of the end of 2012, Russia’s largest offshore oil and gas production projects were being implemented either in the country’s Far East, around Sakhalin Island, or in the Caspian and Baltic seas. And it is non-government-run companies – i.e., LUKOIL and its foreign counterparts – that have played first fiddle in the implementation of these production projects. To find proof of this, one need only to look up the details of the Far Eastern projects presented in the third volume of RPI’s report “Russian and CIS Offshore Oil and Gas Production: Outlook for the Sector’s Growth by 2020”.
The Far East has been and will remain a leader
The aforementioned RPI report pointed out that the Russian continental shelf is not the country’s richest region in terms of hydrocarbon resources. By a Russian Ministry of Natural Resources estimate, total initial oil, gas and condensate in place held by the Far Eastern seas does not exceed 13 percent of the total resources held by the entire Russian continental shelf. By this measure, the Far Eastern subsoil resources are inferior to both Russian southern seas and the Russian Arctic sector. But it is the Far East that to date has seen the greatest success in hydrocarbon production compared with the other Russian offshore areas.
More specifically, it was near Sakhalin shores where Russia’s first-ever commercial development of major offshore oil and gas fields began under the Sakhalin-1 and Sakhalin-2 projects.
Since as far back as the 1990s, these projects have been developed with predominant ownership of foreign petroleum companies. Later, foreign partners extended their operations to the Sakhalin-5 projects and the Western Kamchatka shelf.
Based on a fairly exhaustive analysis of facts, the report proceeded to conclude that intensive exploration and subsequent development of Far Eastern offshore fields would help preserve the Far East’s leadership in offshore hydrocarbon production for another five to seven years.
This conclusion, along with forecasts of exploration and production drilling, as well as offshore production from the Far Eastern seas, was based on two featured scenarios — optimistic (Scenario 1) and pessimistic (Scenario 2).
Both scenarios take into account the most significant risks that are present in the course of field development and license block exploration on the Russian Far Eastern continental shelf, i.e., in offshore areas of the Bering Sea, Sea of Okhotsk and Sea of Japan. The report considers the following risks:
» Inaccurate estimates of reserves or resources contained in a given license area
» Lack of funding for continued operations
The risk of unavailability of required process equipment for field development or license block exploration for this region is lower than for Russia’s northern (Arctic) continental shelf. Past experience shows that if certain equipment, such as drilling rigs, is lacking, it will be rented and brought, if needed, even from remote locations, such as Malaysia or Brazil.
Each of the three aforementioned risks (i.e., inaccurate estimates, lack of funds or lack of process equipment) may individually completely block the field development process. For this reason, the report did not rank them by degree of criticality.
Bering Sea
Currently the Bering Sea remains a poorly explored or, in many areas, completely unexplored region, where seismic exploration has occurred on a very limited basis. Initial total oil in place in the Bering Sea is estimated at 1.1 percent to 1.4 percent of Russia’s total offshore geological resources.
The offshore section of the sea is home to the Anadyr-1,2,3 license blocks. Up until 2002, geological resources within the Anadyr-1 license had been estimated anywhere from 320 million tons to 560 million tons of oil. Drilling in the Tsentralnaya (Central) prospect (part of the Anadyr-1 block), which had been considered a very promising hydrocarbon accumulation area, eventually failed to prove commercial inflows of crude oil.
Estimates of geological resources of the Anadyr 2 project do not exceed 450 million tons of oil equivalent. No exploration drilling has been performed in this area.
Geological resources of the Anadyr-3 project are estimated at 255 million tons of oil equivalent. This figure has not been confirmed by exploration drilling either.
Over the past few years, no offshore development work has been completed on the continental shelf of the Bering Sea.
For the Bering Sea, the RPI report produced two forecasts (based on scenarios 1 and 2 – see above), related primarily to the licensing procedure for exploration and production.
For this sea, Scenario 1 assumes that the Anadyr-1 block remains in the exploration phase, and production within the block will begin beyond the realm of 2020. The Anadyr-2, 3 blocks, hitherto unallocated, are handed over to subsoil users. This takes place from 2012 to 2015. From 2018 to 2022, the subsoil users conduct exploration drilling in the blocks, which proves successful.
Scenario 2 (pessimistic) differs from Scenario 1 in that it predicts lower well counts and lower meters drilled by 2020. Within the Bering Sea offshore, exploration drilling fails to confirm the presence of commercial hydrocarbon reserves in the Anadyr-1 block.
The Anadyr-2,3 blocks are not handed over to subsoil users, or such handover takes place after 2015 or 2016, pushing back the start-up of commercial development in these blocks to sometime beyond 2020.
Hydrocarbon production forecast
Under either Scenario 1 or Scenario 2, production of hydrocarbons in the Bering Sea will not begin until 2020, according to the RPI forecast.
Forecast of drilling and rig demand
Under Scenario 1, operators will drill four exploration wells in the offshore area of the sea, while Scenario 2 cuts the number of exploration wells to one. Because of this, under Scenario 1 demand for drilling rigs across this region will be limited to just one or two units. They will operate in the Anadyr-1 and Anadyr-2,3 blocks. Under Scenario 2, a single rig will be required, designed to drill the Anadyr-1 block.
Sea of Okhotsk
Projects
The most advanced projects in the Russian Far East are those developed on the basis of production sharing agreements (PSA) – Sakhalin-1 and Sakhalin-2. Along with the mainland Kharyaginskoye field located in the Timan-Pechora petroleum province, they remain the only assets in Russia currently produced on PSA terms.
The Sakhalin-1 project involves development of the Chayvo, Odoptu and Arkutun-Dagi fields located offshore northeast Sakhalin Island. The project is implemented by an international consortium comprising Russian, Indian, Japanese and U.S. stakeholders: Exxon Neftegas Limited (project operator; ownership share 30 percent), Rosneft (20 percent), Japanese SODECO (30 percent) and India’s national oil company ONGC (20 percent).
Sakhalin-1 is a dynamic, fast-growing project. In September 2012 its operator completed installation of a gravity-base structure for a new offshore platform to operate at the Arkutun-Dagi field, which is still being readied for development. From the start of the design work through 2011, the consortium already invested around $11 billion in this project.
The Sakhalin-2 project involves development of two oil and gas fields located offshore northeast Sakhalin Island: Piltun-Astokhskoye (predominantly oil) and Lunskoye (predominantly gas). The project operator is Sakhalin Energy Investment Company Ltd., whose shareholders are Gazprom (50 percent plus one share), Shell Sakhalin Holdings B.V. (27.5 percent minus one share), Mitsui Sakhalin Holdings B.V. (12.5 percent), and Diamond Gas Sakhalin (a subsidiary of Mitsubishi) with 10 percent). It is the foreign companies that initiated the work on the project. The total cost of the project may reach $20 billion, and raising these funds without the involvement of foreign partners would have been hardly possible.
Although Rosneft and Gazprom are prominently represented on the Sakhalin shelf, the pace of their operations is no match for the progress of the Sakhalin-1 and Sakhalin-2 projects.
Rosneft owns a 20 percent share in the Sakhalin-1 project, a 74.9 percent share in the Veninsky block development project (being a part of the Sakhalin-3 project) and a 51 percent share of the Sakhalin-5 project, and also holds development licenses for the Magadan-1, 2, 3 blocks, Lisyansky and Kashevarovsky blocks, Lebedinsky block and Astrakhanovskoye-more-Nekrasovsky block.
Late in August 2012, Rosneft and Statoil signed shareholder and operating agreements to establish joint ventures to operate in several blocks, including Lisyansky, Kashevarovsky and Magadan-1. The Russian company’s ownership share in the joint venture will be 66.67 percent, with Statoil holding the remaining 33.33 percent. Statoil will fund 100 percent of the cost throughout the exploration phase, which includes obligatory drilling of wildcat wells between 2016 and 2021.
Nearly simultaneously with the arrival of Statoil in Sakhalin, another foreign company – BP – withdrew from Sakhalin-5, its joint project with Rosneft.
Geological exploration of the Veninsky block (Sakhalin-3) has been ongoing since the late 1960s, and seismic exploration has been conducted here since the mid-1990s. Interpretation of seismic data has produced six prospective structures across the block.
Rosneft drilled its first wild cat in the Yuzhno-Ayashkaya prospect within the Veninsky block. It proceeded to test the well but abandoned it in 2006. Drilling of the Veninskaya-1 well discovered the Severo-Veninskoye gas-condensate field in 2008. In 2009 the company probed the Veninsky block with the Severo-Veninskaya-2 well, which allowed it to produce more accurate estimates of the field’s reserves. Drilling of the Veninskaya-3 well discovered the small Novoveninskoye oil-gas-condensate field. Nevertheless, Rosneft suspended its drilling and seismic exploration work on the block in 2010 and 2011.
Since 2007, Gazprom has owned 50 percent plus one share of the Sakhalin-2 project. In June 2009 Gazflot, a subsidiary of Gazprom, was granted a geological exploration license for the Western Kamchatka offshore area. Gazprom owns licenses for three Sakhalin-3 blocks: Kirinsky, Ayashsky and Vostochno-Odoptinsky, and a license for the Kirinskoye gas condensate field. (The license was granted in 2008 pursuant to the Russian Government’s resolution.)
Of all of the above fields and license blocks, the Kirinskoye field will be first to enter the commercial development phase. Meanwhile, the start-up of commercial production of this field has been postponed from the fall of 2012 until 2013, which has already caused concern of the local authorities.
The outlook for finding significant commercial hydrocarbon reserves on the Western Kamchatka shelf appears increasingly dim with each passing year.
The offshore section of the Sea of Okhotsk is also home to unallocated subsoil blocks – Sakhalin-6,7, Koryakia-1,2, Kamchatsky-1 and Khabarovsk-1,2, whose future is very difficult to predict at this point.
Hydrocarbon production forecast
The RPI report’s Scenario 1 predicts that by 2020 total production in the Sea of Okhotsk will reach 23.2 million tons per year of crude oil and 83.7 billion cubic meters per year of natural gas. Under this scenario, production of crude oil and condensate in the Sea of Okhotsk offshore by 2020 will take place at the Sakhalin-1 fields (Piltun-Astokhskoye and Lunskoye), Veninsky block, and Lisyansky and Kashevarovsky sites within the Khabarovsk territory.
Under Scenario 2, oil production in the Sea of Okhotsk will plateau at 15.7 million tons per year from 2012 through 2020. Total gas production will reach a plateau of 28 billion cubic meters to 30 billion cubic meters from 2012 through 2020. The Kirinskoye field will help boost production to 29.5 billion cubic meters per year in 2013.
According to Scenario 2, production of crude oil and condensate in the Sea of Okhotsk between 2018 and 2020 will take place offshore Sakhalin Island in the Sakhalin-1 fields – Piltun-Astokhskoye and Lunskoye. Scenario 2 for gas production in the Sea of Okhotsk offshore boils down to the entry into the commercial development of the Sakhalin-1 fields – Piltun-Astokhskoye and Lunskoye, as well as the Kirinsky block.
Forecast of drilling and rig demand
Under Scenario 1, RPI predicts that by 2020 the sector will drill a total of 105 production wells and 42 exploration wells in the Sea of Okhotsk. Scenario 2 reduced their number to 24 and 42, respectively.
Scenario 1 predicts that demand for drilling rigs in the Sea of Okhotsk will fluctuate year on year. Maximum simultaneous demand for drilling rigs by 2020 will not exceed six rigs to eight rigs.
Under Scenario 1, demand for production platforms in the Sea of Okhotsk offshore from 2012 through 2020 will be limited to 10 or 11 units. Moreover, four units out of that number are already operating (under the Sakhalin-1 and Sakhalin-2 projects). Another unit (designated for the Sakhalin-1 Arkutun-Dagi field) is in the assembly phase. The remaining demand for platforms will emerge after 2020.
Under Scenario 2, demand for exploration drilling rigs in the Sea of Okhotsk varies from year to year from 2012 through 2020, but on average it will not increase by 2020.
During the same period, maximum annual demand for drilling rigs will not exceed four units. Demand for production platforms in Scenario 2 will total five units,
four of which are already operational and another one is being built to be used for the development of the Arkutun-Dagi field.
Sea of Japan
Projects
The Sea of Japan is one of Russia’s most poorly explored offshore areas. Initial total oil in place is estimated at 0.7 percent of the nation’s total offshore resources.
Within the Sea of Japan, the most promising offshore area in terms of potential hydrocarbon accumulations is the Tatar Strait. As of 2007, operators of the Sakhalin-8,9 projects had identified 30 prospects, including five major ones holding forecast recoverable resources of 367 million tons of oil and 348 billion cubic meters of gas. Within the Sakhalin-9 site, the operator in 2006 discovered the Izylmetyevskoye gas field holding 3.7 billion cubic meters of gas in recoverable reserves.
Nevertheless, it should be noted that 10 out of the 12 exploration wells drilled within the Sakhalin-8,9 blocks failed to yield commercial inflows of hydrocarbons.
The RF Ministry of Natural Resources puts the estimates of the gas reserves in these blocks at 4.6 billion cubic meters. All of these blocks remain unallocated and their
oil reserves have not been proved.
Hydrocarbon production forecast
The RPI report projects that production in the Sea of Japan under any scenario will not begin by 2020.
Forecast of drilling and rig demand
RPI predicted that under the optimistic scenario, four exploration wells will be drilled in the Sea of Japan by 2020, while no drilling will take place in this offshore area under the pessimistic scenario.
In Scenario 1, we expect that there will be one or two drilling rigs operating in the Sea of Japan. No demand for production platforms is anticipated.
Conclusion
The above excerpts from the third volume of the RPI report “Russian and CIS Offshore Oil and Gas Production: Outlook for the Sector’s Growth by 2020” provide logical grounds for the conclusion that implementation of production projects on the Russian continental shelf is virtually impossible without a broad-base involvement of multiple petroleum companies, both Russian and foreign, on equitable terms with Rosneft and Gazprom. If anything, this is borne out by the extensive experience of recent decades, when major fields have been developed only through non-discriminatory participation of reputable Russian and foreign companies. Expanding the list of subsoil users would dramatically increase the vital inflow of investments in offshore field development and attract cutting-edge world technologies. Anything short of this rapid and fundamental change in the approach to offshore hydrocarbon development would result in a collapse of oil and gas production in Russia shortly after 2020 and a subsequent chain-reaction response of the national economy to the degradation of a major economic sector.
