The RPI Report: Investment Restrictions May Give the Sidetracking Market a Chance
Effective of May 2022, as part of the OPEC+ agreement, it has been planned to raise the level of production base, serving as the basis for oil production quotas, for five countries, including the Russian Federation. In absolute terms, this means that Russia will be able to produce 21 MМT of oil more in 2022 than in did in 2021. However, the developments taking place in Russia and in the Ukraine since February 24, 2022, may make some alterations to these plans.
It is already now clear that oil and gas companies are going to bump into the problem of providing their exploration and production with sufficient financing.
In this context, one has to increase or maintain the production level using very harsh financial austerity measures. This can be achieved using various methods of enhanced oil recovery (EOR), sidetracking, hydraulic fracturing etc. Sidetracking operations, mentioned in this list, make it possible to approach the compromise between the cost of an operation and the incremental oil rate obtained due to it from an existing oil well. This situation gives the market of sidetracking a chance to grow, especially in the conventional oil producing regions and at the time when the implementation of major oil production projects like “The Vostok Oil” has not yet begun.
During the retrospective period of 2008-2021, the annual number of sidetracking operations in Russia predominantly demonstrated a positive dynamics from year to year. However, the market development rates had their “drawdowns”. For instance, in 2009, the number of sidetracking operations declined by 1.7% due to the economic crisis. In 2018, for the first time since 2009, a new reduction of sidetracking operations took place by 2.1%, compared with the previous year. This was caused by oil producing companies refocusing their attention from sidetracking to drilling operations as a basic method to maintain their oil production level. In 2020, given the COVID-19 pandemic and the industry-wide stagnation, the sidetracking market declined by 1.9%.
The main factors determining the development of the sidetracking market in 2008-2021 were:
• Increased oil production well stock, including horizontal wells;
• Aging production well stock (first of all, Western Siberia and the Volga-Urals region);
• Reduced share of inactive wells;
• Old well stock declining production;
• Increased number of operations aimed to improve oil recovery factor (ORF), including sidetracking;
• Declined efficiency of formation pressure maintenance activities, including sidetracking operations;
• Increased number of horizontal sidetracks as part of sidetracking operations, and reduced number of deviated sidetracks.
In 2007-2020, Russia’s oil producing well stock grew up to the number of 154.9 thousand wells, having increased by 26.9 thousand wells for that period, which is equivalent to 21% of the level of 2007. The maximum share of the total number of wells and the maximum increment in the well number was provided by Western Siberia and the Volga-Urals region. By the end of 2020, Western Siberia had 87.3 thousand producing oil wells (56.4% of the Russia-wide well stock), while the Volga-Urals region had 58.5 thousand wells (37.9% of the Russia-wide well stock).
The increase in well stock during the period of 2007-2020 took place mainly due to commissioning of directional wells. Two interdependent processes had place in the structure of annual commissioning of wells during 2007-2020: the increasing share of commissioned horizontal wells and the reduced share of commissioned directional wells. As a result of this, the share of commissioned horizontal wells, which amounted to 10.1% in 2007, increased up to 42.7% by 2020. In the period of 2007-2020, the share of inactive wells in the operating well stock reduced from 12.7% to 7.9%. During 2017-2018 this share locally grew up due to restrictions imposed on the oil production volumes.
In the whole of the retrospective period, the increase in the well stock had place in the context of declining production rate of oil producing wells. For instance, the average daily production rate of a single oil well was 10.3 tons in 2006, whereas this indicator declined to 9.0 tons by 2020.
That said, the production rate of the new wells decreased from 40.7 to 27 tons, which was the decline by 49.1%, while the production rate decreased from 9.8 tons to 8.2 tons at the old wells, which made up 16.3% of the decline.
In 2020, incremental production due to formation pressure maintenance methods (new drilling + sidetracking + hydraulic fracturing) in an average amounted to 15.7% in Vertically Integrated Oil Companies.
The shares of sidetracking and hydraulic fracturing in the structure of incremental production increased while the new drilling went down: new drilling had 72.2%, sidetracking – 14.5%, hydraulic fracturing – 13.3%.
The sidetracking market development is also influenced by incremental production obtained from a single sidetracking operation, since sidetracks have already been carried out at the most perspective sidetracking candidate wells. This indicator has declined by 16.7% for the latest eight years.
The factors mentioned above have just been determining the sidetracking market development for the past 14 years. As a result of this, the number of sidetracking operations increased by 112.7% for the period of 2008-2021, from 1679 to 3571 jobs (assessment as of 2021). The annual rates of the sidetracking operations increment were extremely high from 2010 to 2014, except for the year of 2012, when a short-term decline in production rates had place down to 1.8% (see Diagram 1). The active growth associated with these years was possible due to the initial penetration of the sidetracking technology into the market. An additional impetus came in the form of the RF GosGorTechNadzor regulation dated 06.06.2003 #71 “About the Approval of the «Mineral Resources Conservation Regulations» “ which limited the number of idle wells – their share was not allowed to exceed 10% of operating well stock. In order to meet the requirements of these rules, Vertically Integrated Oil Companies began to actively employ sidetracking converting wells from the idle stock into the operating one.
New trend became obvious in 2019 – oil companies began to supersede drilling with sidetracking operations. During the same year, the companies decreased the volume of development drilling, while the volume of sidetracking operations in the whole of the country-wide market increased by 4.5%. This enabled the companies to effectively curb the trend of production decline, and first of all, in the conventional oil producing regions like Western Siberia and the Volga-Urals region.
In terms of regional make-up (oil and gas producing provinces, oil and gas companies), the increase of sidetracking operations continued in all of the provinces up to 2017, however the two of them determined the main dynamics of this growth: namely, Western Siberia and the Volga-Urals region. During 2007-2017, of all the incremental 1984 sidetracking operations, Western Siberia provided for 1200 jobs, while the Volga-Urals had 667 ones.
The number of the operations decreased in these regions during 2018: by 3.3% or 64 jobs, and 0.3% or 4 jobs, correspondingly.
However, the trend of the increasing number of sidetracking operations continued in Eastern Siberia (growth of 2018 made up 3.5%). The market in the whole grew up by 2.1% in 2021, compared with the previous year, and the major engines of this growth were Western Siberia and the Volga-Urals region.
Western Siberia and the Volga-Urals, in the total structure of the sidetracking market, summarily made up 93% of the market, with the shares of 56% and 37%, correspondingly (see Diagram 2). The shares of the given oil and gas provinces in the total volume of sidetracking operations have been largely due to their considerable shares in the total oil well stock.
The trend of transition from construction of deviated sidetracks to the construction of horizontal sidetracks continued in 2021.
The Russia-wise share of sidetracking construction amounted to 60% in the total volume of sidetracking operations for the last year.
Combined with the increased average length of a horizontal sidetrack, it provided for an exponential growth of horizontal sidetracking drilling during 2008-2020, compared with the dynamics of drilling in deviated sidetracking. As a result of this, horizontal sidetracking amounted to 76% of the total sidetracking in 2021 (see Diagram 3).
Similar to the previous year, the market of sidetracking demonstrated the decline of 0.2%, in monetary terms, in 2021, down to 117.9 bln.rubles. This was due to both the total reduced number of sidetracking operations, and the reduced average cost of a single sidetracking job by 0.4%, down to the level of 33.8 mln.rubles (see Diagram 4).
According to estimations made by some of the industry experts, further insignificant reduction in the cost of an average sidetracking operation is possible in the mid-term perspective, due to the introduction of new methods of enhanced oil recovery (EOR), such as, for instance, acid-jet tunneling, which makes it possible to considerably increase oil recovery from low-permeable formations. The given technology is not only 2.3 times cheaper than wan average sidetracking operation, but it is 30% faster than a sidetracking job.
The Market Breakdown
As this article was being written, no data were yet available regarding the number of sidetracking operations with the customer and contractor companies for the year of 2021, therefore, we have used the information related to the previous year.
In 2020, the sidetracking technology was mostly demanded by the following companies:
• “Rosneft” – 38.1% of the total number of sidetracking operations in RF;
• “Surgutneftegas» –22.5%;
• “Gazprom Neft” – 8.9%;
• «LUKOIL» – 7.1%.
In total, the given companies held 76.6% of the Russia-wise market of sidetracking operations.
Reduction in the number of sidetracking operations was noticed across all of the Vertically Integrated Oil Companies in 2020, with the exception of “Rosneft” which managed to increase the number of carried out sidetracking jobs by 3%, compared with the year of 2019.
Estimated per 1 thousand oil producing wells, the maximum number of sidetracking operations among the Vertically Integrated Oil Companies was carried out by:
• “Gazprom Neft” – 48.1 jobs;
• “Rosneft” – 41.63 jobs;
• “LUKOIL” – 38.2 jobs.
Among contractor companies, it is possible to name certain independent companies and the structural subdivisions of the Vertically Integrated Oil Companies. The largest shares of the sidetracking market in 2020 were held by:
• “Surgutneftegas” – 21.4%;
• “RN-Burenie” – 17.1%;
• “UPNP i KRS” – 10.7%;
• Eurasia Drilling Company (EDC) – 6,6%.
In total, the given companies held 55.8% of the market.
The shares of contractors in the sidetracking market are going to be diversified towards drilling companies due to the contractors specifying on workover operations, since carrying out sidetracking jobs have become technologically more sophisticated (due to the increased number of more complicated wells and the grown share of horizontal drilling), and the modernization of the fleet is required in order to meet the new market challenges.
Unfortunately, it is very hard to make a qualitative forecast for development of the sidetracking market matching the realities of March 2022. To all appearances, some clarity will be available for us by early May this year only.
Author
Vadim Kravets,
Lead Analyst for RPI Research & Consulting
