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15:49 GMT +3 hours21 December 2014
Analysis & Opinion

Russia needs investment, geographical expansion to maintain oil production

Analysis & Opinion
Russia, the world's top crude producer, needs to pump billions of dollars into its oil industry and expand beyond the traditional oil area of West Siberia to maintain international leadership and reverse declining output, industry analysts say.

Russia, the world's top crude producer, needs to pump billions of dollars into its oil industry and expand beyond the traditional oil area of West Siberia to maintain international leadership and reverse declining output, industry analysts say.

The global financial and economic crisis that spread to Russia in 2008 forced domestic oil companies to cut investment in the development of oil fields, which has resulted in oil output decline by 2-3% annually.

In October, Prime Minister Vladimir Putin said that Russia, where oil accounts for more than half of budget revenue, would pump about 10 million barrels a day for at least a decade. In Soviet times, output peaked at 11.48 million barrels a day in 1987.

"What we are pumping now is more or less our maximum," said Ildar Davletshin, an oil and gas analyst at Renaissance Capital. "Growth potential is not that easy and it will take about five years before new large deposits start producing."

The deposits of West Siberia, the largest petroleum basin in the world, have been intensively developed since the Soviet period, and are now largely depleted. New fields discovered in East Siberia can only partially compensate for the slump in oil production and require heavy investment in infrastructure.

"The problem is that traditional oil producing regions and fields, primarily in West Siberia, have reached a mature stage of development and we see a natural depletion of their resource base," said Vladimir Semakov, a spokesman for Russia's largest privately owned oil company LUKoil, which last month reported a 1% fall in its proven reserves.

"But East Siberian fields are incomparable in size with West Siberian deposits and will only allow the government to prevent the fall in oil production for a short period of time."

Davletshin said that the overall reserves of East Siberian fields stand at 15 billion barrels. According to the U.S. Geological Survey, West Siberia contains 144 billion barrels of discovered reserves and 55.2 billion barrels of undiscovered resources.

The right to develop East Siberia's largest deposit, Vankor, which holds 2.5 billion barrels of oil, belongs to state-run Rosneft. In January, Rosneft boosted output by 3.4% year-on-year thanks to the development of Vankor, Russia's largest new oil project.

Russia also has a potentially promising Arctic shelf, but its harsh conditions mean that data on its reserves are scarce, geological uncertainty high and environmental conditions difficult.

"No one has worked in such severe conditions where the ice depth at sea exceeds 1.5 meters. Companies will need to invest huge funds and apply technologies that have never been used before," Semakov said.

In January, BP stroke a $16 billion deal with Rosneft for the right to develop the Kara Sea shelf in the Arctic, which was previously open only to local firms. The two firms plan to spend $1 billion to $2 billion on exploration over 10 years.

Davletshin said reserves in the Kara Sea, an extension of the West Siberian basin, stood at about 10 billion barrels. He estimated reserves of the whole Arctic shelf, which also includes the Barents, Laptev, East-Siberian and Chukchi Seas, at 40 billion barrels.

Privately-owned LUKoil and TNK-BP are also eager to muscle in on the Arctic projects. TNK-BP, half-owned by four Russian billionaires, went as far as gaining a court injunction in February to freeze the deal to develop the East Prinovozemelsk-1, 2 and 3 deposits, where Rosneft and BP plan to work.

Bordering the Kara Sea in the east is the oil and gas rich Yamal peninsula, where oil exploration started in the 1980s but was suspended due to the collapse of the Soviet Union.

Now oil companies are turning to the peninsula anew. Gazprom Neft, the oil arm of Gazprom, and TNK-BP have recently teamed up to develop the Messoyakha oil and gas fields there. They plan to invest $15 billion to $18 billion in the project.

The West Messoyakha and East Messoyakha fields hold about 560 million metric tons of oil and condensate and 230 billion cubic meters of gas in recoverable reserves.

"Deposits in the north of Yamal, where a new oil mining hub of the company is being created, will become Gazprom Neft's growing point," it said in a statement.

Apart from Messoyakha, Gazprom Neft also develops Yamal's Novoportovskoye deposit and Yamal deposits belonging to SeverEnergia company, in which Gazprom Neft owns 25.5%.

TNK-BP is also developing the Russkoye field on Yamal with current recoverable reserves of about 150 million tons of oil.

The government is aware of the investment issues facing the oil companies, who have lobbied vociferously for tax breaks.

Oil producers are waiting for the government to ease the tax burden for producers aiming in remote regions, said Svetlana Grizan, an analyst with VTB Capital.

"The government has already started thinking about the future development of Arctic greenfields and ways of stimulating oil producers to develop these complex and hard-to-reach deposits. This is why it is currently discussing special tax regimes for Arctic and Yamal fields," she said.

MOSCOW, March 11 (RIA Novosti)