The ROGTEC Interview Thomas Reed, CEO of Ruspetro
Thomas Reed, CEO of Ruspetro and a founding shareholder.
Prior to joining the Group Mr Reed was a private equity and M&A advisor and investor based in Moscow. Since 1995 he has been involved in the origination, trading, and research of different classes of assets, such as equity and equity derivatives, distressed debt, and debt derivatives. Mr Reed was an advisor to VR Capital and Raven Russia and a founding shareholder of Rising Star Media. He has also advised and invested in several private companies in Russia. Mr Reed graduated from the University of Southern California with a BA in Humanities, Philosophy and Finance.
The word “unconventional” is currently a hot topic in the industry. With Russia holding some of the world’s largest unconventional resources, how strategically important are these reserves to your company?
Conventional oil reservoirs require good porosity and good permeability which result in good connectivity. In contrast, unconventional reservoirs don’t have either of these qualities and that is why we call it tight oil.
Ruspetro operates three exploration and production licenses covering a total area of approximately 1,205km2 within the central part of the Krasnoleninsk field in Khantiy-Mansiysk region of Western Siberia. The Company currently has proved and probable reserves of over 1.8 bnbbl of oil equivalent. We estimate that tight oil reserves amount to more than 70% of our total reserves. Moreover, in 2013 DeGolyer and MacNaughton for the first time reported the 300,000 acre Bazhenov shale formation as a contingent resource with original oil in place of 3.53 bnbbl.
As stated on the 6GR form of the State Register of Reserves, approximately 60% of our reserves are from the Tyumen formation with average permeability of oil assets of c.1.3mD. The porosity of Tyumen and Bazhenov reservoirs varies between 10% and 14%.
Recent changes to the MET have made it more profitable to produce from unconventional fields. When do you expect to see wide scale development of unconventional’s in Russia?
MET relief for hard-to-recover oil came into effect on the 1st September 2013 with a grace period of 10-15 years.
Due to the characteristics of our reservoirs, we estimate that 80% MET relief is applicable to production from c.50% of the Company’s Jurassic reserves and to c.97% of the Company’s current crude oil production.
The tax breaks will substantially increase well head revenue per barrel for Ruspetro’s crude oil production – at $100/bbl oil price well head revenue will increase from $22/bbl to c.$38/bbl. Incremental EBITDA proceeds of c.$16/bbl will be used for accelerated development of these reserves.
Many Russian oil & gas companies have started pilot projects developing hard-to-recover reserves. According to the latest forecast of the Ministry of Economic Development, unconventional oil extraction may reach 52 mmt (c.380 mmbbl/per annum), or 10% of Russia’s total oil production, by 2025.
Do you think that the changes within the MET are sufficient, and what further steps would you like to see to help operators produce unconventional reserves?
The Ministry expects Russian upstream to remain capital intensive – companies would have to invest up to $100bn to develop tight reserves. So the sector may need further tax and other incentives. Some incentives, such as export duty relief for oil produced from the Tyumen formation, are currently being discussed by the Government and relevant ministries, and may be approved in the near future.
What types and volumes of unconventional fields do you have currently in your portfolio? i.e. Tight, Shales Etc.
We have both tight (Tymen) and shale (Bazhenov). According to Bernstein’s research, “What If the World’s Largest Unconventional Play Wasn’t Unconventional After All? Insights from Siberia”, the Bazhenov shale is the principal source rock for 85% of oil in Western Siberia, which comprises 70% of Russia’s current oil production and 8% of global oil supply. The total area of this formation is 60-x larger than the US Bakken formation – overall the Bazhenov shale covers 2.3 mm km2.
What unconventional projects are you currently working on? And what plans do you have for unconventional development in 2014?
Ruspetro has signed a technical partnership agreement with Schlumberger, the world’s leading oilfield services company, in September 2013. This partnership is reviewing the fields subsurface and upgrading Ruspetro’s field development plan, to design and drill a number of horizontal multistage fractured wells using best-in-class tight oil technology and technical expertise, as well as to assess the Bazhenov’s potential.
Initial appraisal drilling will include detailed logging and coring of the Jurassic and Bazhenov zones to better refine and resolve the geological model.
Due to development of unconventional reserves some experts predicted that the US will become the world’s leading producer of oil by 2020. What lessons can be learned, and technology be transferred, to Russia’s own unconventional fields? Have any of these already been implemented?
Horizontal directional drilling with multistage fracturing is the keystone of shale reserve development all over the world. Horizontals have proven their efficiency in the US, though it has taken substantial time to make them economically viable.
We believe that new extraction technologies will be exported to Russia and adapted here faster than in the US. The key challenge for some Russian producers is in fact not the drilling but rather the surface infrastructure. Namely, roads in West Siberia are costly to contsruct due to the extreme climate conditions and drilling sites are further from consumers than in the US.
Please explain some of the key technical challenges you have encountered when planning or developing these fields.
First of all it is crucial to change the mindset for our subsurface technical staff. They have a lot of experience in investigating the oil migration of conventional reserves in reservoirs with good permeability. However, for unconventionals we have to deal with the source rock. So in order to develop unconventional fields faster, we need to gain a better understanding of the geo-mechanical properties of these reservoirs.
Unconventional reserves require advanced technologies to maximise the field’s potential production. What specific technologies are you currently employing?
The joint supervision of operations with Schlumberger will enable Ruspetro to benefit from Schlumberger’s knowledge and experience of the best global tight oil extraction practices, including horizontal wells and multistage fracture completions. We plan to upgrade our drilling techniques to use directional drilling as well as measurement and logging while drilling. As a result we expect this partnership to give Ruspetro the technical tools and know-how to maximize production rates, expected ultimate recovery of oil and therefore investment efficiency per well.
What experience do you have with multi stage fracking on conventional or unconventional fields? How are you expanding your knowledge base in this area?
Ruspetro has already introduced single stage fracturing on our existing vertical wells as well as waterflooding techniques which allow us to maintain high production rates. Together with Schlumberger we plan to expand this practice by performing multistage fracturing on our new horizontal wells. We believe this partnership will be highly productive and fruitful for both parties.
