WHEEL OF FORTUNE

fallenleafblackbeansOil and Offshore

Nov 8, 2013 (3 years and 11 months ago)

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WHEEL OF FORTUNE



The Battle for Oil and


Power in Russia



CERES Conference
on Energy and


Security in Eurasia



Georgetown University


April 8 2013

CERES April 8 2013

Four Key Challenges Facing the
Russian Oil Industry


Near Term: The Threat of a Drop in Production, as the Soviet
-
Era Legacy Runs Down



In the Background: The Likelihood of a Lasting Decline in
Revenues to the Russian Government, with Destabilizing
Consequences



More fundamentally: The Need for a Restructuring of the
Russian Oil Industry and its Relationships with the State and
the global Oil Industry



Deus ex
Machina
? Will the “tight
-
oil revolution” put the first
three issues above to sleep?



CERES April 8 2013

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First Challenge: A Decline in
Production After 2015?

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3

Overall Oil Production is a Race Between Old
Oil Decline and New Oil Development


Output from New Projects
Probably Sufficient to Offset
Projected Decline in Older
Fields over 2012

15


Aside from currently
-
producing “new” fields,
Prirazlomnoye,

Filanovskoye, and a few
others likely to add
significant volumes in next
few years



But Key Question Is What
Happens Next?


Next generation of new
fields must be sanctioned
soon in order to avoid
sharp decline in Russian oil
output post
-
2015

Source: IHS CERA, Ministry of Energy, company reports.

CERES April 8 2013

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4

Second Challenge: Stagnant or
Declining Rent Flow to the
Budget?

CERES April 8 2013

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The Next Generation:

Moving Out of the “Comfort Zone”

6

CERES April 8 2013



Colder, deeper, farther, more sour, higher pressure, lower porosity
=

higher cost and lower profit (depending of course on world prices)



Russia is not running out of oil, but it is running out of cheap oil.

The Russian state is becoming steadily more
dependent on oil and gas rents: their share is
growing, even as the budget itself grows

0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
percent
Oil
Gas
Source: Central Bank of Russia; Ministry of Finance; IHS CERA.

Preliminary data suggest that

in 2012 the combined total will

be over 50%

7

CERES April 8 2013

Third Challenge: Reforming the
Structure of the Industry and its
Relationship with the State

CERES April 8 2013

8

Four Main Changes Are
Needed

1.
Tax reform: beyond 60
-
66

2.
Encouragement of diversity

3.
Greater flexibility in regulation

4.
More openness to foreign participation


All are in progress

but too slowly.

CERES April 8 2013

9

Lastly, What Implications for Foreign Players?
So Far, their Direct Role Has Been Limited

10


Possible Text Area


Possible Text Area

Source: TEK Rossii, Ministry of

Energy/Ministry of Fuels

Note: Includes all oil
-
producing

enterprises wth large foreign

ownership.


CERES April 8 2013

The Tight
-
Oil Revolution?

Deus Ex
Machina
?

CERES April 8 2013

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12

The Tight
-
Oil Phenomenon Started with Shale, But Has
Since Widened to Include Dozens of Conventional Plays


= Multi
-
stage

= Emerging

= Gas Liquids

Barnett

Granite

Wash

Eagle

Ford

Bakken

Niobrara

Heath

Shale

“Bone Spring”

Tuscaloosa

Mowry

NBRA

Utica

shale

Monterey

Cane

Creek

Cherokee

Atoka

Collingwood

Wasatch

“Wolf
-
berry”

Mississippian

Woodbine


Cleveland

Brown

Dense

CERES April 8 2013

5
mbd

of Oil and Condensate Will Likely be Added to North
American Production by 2022

With Possibly More to Come

13

CERES April 8 2013

-
1,000
2,000
3,000
4,000
5,000
6,000
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
mmbbls

/day

Total Oil and Condensate Production Forecast

Emerging Canada Plays
Duvernay
Viking
Cardium
Bakken Willston
Montney Gas
Montney Oil
Emerging US Oil Plays
Barnett
Woodford
Niobrara
Uinta-Piceance-Mesa Verde
Utica Gas
Utica Oil
Marcellus Wet Gas
Cleveland-Tonkawa-Marmaton
Granite Wash-Colony Wash
Mississippian
Wolfberry-Wolfcamp
Bone Spring
Eagle Ford Volatile /Wet Gas
Eagle Ford Oil
Bakken
Key Points from the North American
Experience to Date


It’s not just about “shale oil”:


Tight
-
oil techniques have spread from shale to a wide range of lower
-
quality
conventional plays


It’s more than about geology and technology:


“Cracking the code” requires approaches carefully tailored to each field, an artful
combination of technologies, much trial and error, and strict cost control


The key questions are above the ground:


Availability of small or medium
-
sized independents with innovative cultures and
focus on controlling costs


Availability of numerous service companies competing with one another and
sharing lore


Availability of developed infrastructure, especially roads and water


Supportive regulatory structure and private mineral rights


Speed of permitting and flexibility of production plans


Despite tightening environmental regulations, especially in the U.S.
Northeast


CERES April 8 2013

14

It’s Not Just About The
Technology…

CERES April 8 2013

15

FIRST GENERATION: 2000

05

Russian service contractors

NEXT GENERATION: 2010

?

Foreign or Russian?

Simple

hydrofracturing

Horizontal

drilling

3
-
D seismic

mapping

Multistage

hydrofracturing

Long
-
reach

Horizontals

Micro
-
seismic

field support

Little more than 10
mt

of
Bazhenov

oil produced so
far; estimates of
Bazhenov

reserves range widely
(reflecting major geological uncertainties)

Official reserve estimate range: From about 520
mt

(Russian government) to 3 billion tons
(
Khanty
-
Mansiysk

government); ultimate
recoverable reserves estimated at up to 50
billion tons (RITEK)

Exploration and evaluation of formation ongoing
since first
Bazhenov

discovery in 1968

Original source rock for about 80% of West
Siberia’s conventional oil reserves

Discovered
Bazhenov

oil and gas deposits
spread over 70 or so fields in territory of over
one million square kilometers

Typically located at depth of 1,000 to 3,500
meters

Still “black box” in terms of average composition,
recovery and flow rates, costs

Bazhenov

formation recoverable reserves:

Bonanza or mirage?

16

Area of the
Bazhenov

Formation

CERES April 8 2013

Four Russian majors pioneering
Bazhenov

development, notwithstanding challenging economics

17


Rosneft‘s

Salymskoye

field

is largest
identified source of
Bazhenov

reserves to
date, and
Bazhenov

a focus of joint
venture with ExxonMobil (along with
Achimov

Formation)


Surgutneftegaz

one of largest producers
of
Bazhenov

oil so far, about 5
mt
, and
reports highly differential results and poor
economics overall


LUKOIL’s RITEK

subsidiary predicts 40%
Bazhenov

recovery rate will be possible
with its “
thermogas
” method


Gazprom

Neft

(GPN)

board of directors
approves launch of project to develop
Bazhenov
,
Abalak
, and
Frolovskaya

tight
oil formations within framework of
Salym

venture with Shell



Source: IHS CERA.


0
1000
2000
Revenue
Costs
Million US dollars


Financial Results of
Surgutneftegaz’s

Bazhenov

Program Illustrate Need for
Tax Breaks*

Capital expenses
Operating expenses
Transportation
expenses
Source:

IHS CERA,

Neftegazovaya

v
ertikal
.

*Results through
2010.

CERES April 8 2013


Early results suggest tight oil technology well suited for rejuvenation of mature
Russian fields (poor
-
quality reservoirs within conventional plays)



Key consideration favoring currently
-
producing Russian fields: Infrastructure
already largely in place


Existing vertical wells can be used as platform to drill horizontal wells


Manpower typically readily available, along with field infrastructure such as power
lines, roads, and pipelines



Russian majors achieve promising results in older West Siberian
-
producing
regions through more systematic application of horizontal drilling in combination
with fracturing methods


First pioneered by
Sibneft

(now GPN) at
Noyabrsk

decade ago



Mature fields may contain one third or more of recoverable Russian tight oil
reserves if US experience is representative of global pattern

Unconventional plays within established conventional fields:

Russia’s most lucrative tight oil prize, near to medium term?

18

CERES April 8 2013


Key signposts include LUKOIL’s West Siberian field stabilization
program, TNK
-
BP’s
Samotlor

redevelopment, and
Priobskoye

projects of
Rosneft

and GPN

19


Six
-
year production decline of
LUKOIL’s West Siberian subsidiary
apparently halted in 2012 with help
from tight oil technology


Share of horizontal drilling increases
from 14% in 2008 to 37% in 2012
(versus Russian average of 11%)


TNK
-
BP cushions
Samotlor

decline
with help from horizontal drilling and
fracturing at tight
Ryabchik

formation


2012
Samotlor

program includes
six
-
stage hydraulic fracturing of
horizontal wells


Priobskoye
:
Rosneft

and GPN
development plans include
multistage fracturing in combination
with horizontal drilling in their
respective license areas




0
100
200
300
400
500
600
700
Barrels per day

Flow rates at selected LUKOIL West
Siberian fields

Vertical
Well
Horizontal
Well, with
Multi-Zone
Hydraulic
Fracturing
Source:

IHS CERA,

LUKOIL.

CERES April 8 2013


Rosneft

finalizes three strategic alliances with IOCs (ExxonMobil,
Eni
, Statoil) in
2012, focusing on offshore exploration


And
Rosneft
-
BP shelf partnership back on agenda following TNK
-
BP deal?
Sechin

hints
at new joint projects


Government hopes incentives announced in spring 2012 will stimulate major new
shelf investment

and increase oil production five
-
fold

by 2030


April 2012: President
-
elect Putin announces new fiscal incentives, including cancelation
of export tax for new shelf projects, and predicts $500 billion in new shelf oil and gas
investment by 2030


Government forecasts jump in Russian shelf oil production from 13
mt

in 2011 to 66
mt

per year by 2030


But key players still debating details of shelf regime, including role of state
companies, and latest draft legislation envisages fiscal incentives for projects
starting up only after 2015


Medvedev government considers proposals for liberalizing shelf access; in November
energy ministry announces support for shelf licenses for private sector “in long term”


Rosneft

and
Gazprom

defend privileges, announce plans to jointly create and operate
offshore infrastructure, and promise to invest up to ~$16 billion in shelf by 2015

Will Russian shelf oil production come to rescue?

Impact of ambitious new projects only likely post
-
2020


20

CERES April 8 2013

Varying degrees of short
-

and long
-
term activity in
Rosneft

joint ventures: What will lead to success?

21

2011

2012

2013

2014

20+

Kara Sea

Barents
Sea

Sea of
Okhotsk

Black Sea

Stavropol

Komsomolskoye

West Siberia

Russia

= Statoil

= ExxonMobil

= Eni

XOM
-
Rosneft
JV
signed

Rosneft

acquires
30% of
XOM West Texas,
Cardium,
and, deepwater
GOM assets

Eni
-
Rosneft JV
signed

Statoil
-
Rosneft
JV
signed

XOM
-
Rosneft Plan for
2D and 3D Seismic in
Kara Sea

XOM
-
Rosneft start
joint development of
tight oil in West Siberia

Statoil
-
Rosneft
acquire 2D and
3D Seismic in the
Barents in 2016
and 2018

Statoil
-
Rosneft drill 1
E well in Barents by
2020, with 2 additional
exploration wells

Statoil
-
Rosneft acquire
2D Seismic on Okhotsk
licenses from 2014

18,
Drill 3 E wells

Eni
-
Rosneft
acquire 2D and
3D Seismic in the
Barents in 2016,
2017, and 2018

Eni
-
Rosneft
drill 2 E wells
in Black Sea
by
2015‒16

Eni
-
Rosneft drill
1 E well in
Barents by 2020,
2
-
3 E wells
post
-

2020

XOM
-
Rosneft
drill 1
st

E well
in Kara Sea

CERES April 8 2013

Lessons of initial Russian offshore development:

Sakhalin and North Caspian

22


Sakhalin PSAs in sub
-
Arctic zone are closest
Russian analog to date, demonstrate critical
importance of foreign investment


But 1990s formula for attracting large
-
scale FDI
to Sakhalin and developing first offshore
Russian oil and gas province
(PSAs, leading
IOC role) currently off table in Russian Arctic


S
ome similar technological challenges,
especially in case of second
-
generation
Sakhalin

projects now on agenda



LUKOIL’s start
-
up of North Caspian oil
produ
ction

in 2010 (and deepwater West
Africa initiatives)
show potential contribution of
Russian private sector to Russian Arctic


In

October LUKOIL asks for government
permission to invest $2.7 billion in 2D and 3D
seismic at 4 east Arctic blocks covering nearly
135,000 square km, followed by 5 exploration
wells


0
2
4
6
8
10
12
14
16
Million metric tons

Current sources of Russian
offshore oil production

North
Caspian
(Korchagin
field)
Sakhalin-2
Sakhalin-1
Source: IHS CERA,

Ministry of Energy.

*Preliminary estimate.

CERES April 8 2013


August 2011 installation of
Prirazlomnoye

platform in Pechora Sea followed by
repeated delays in production schedule


Rostekhnadzor

refuses permission for start
-
up after summer 2012 inspection


Suboptimal fiscal regime also a factor?
Gazprom lobbying for early implementation of
new shelf tax incentives currently planned
after 2015


In event field comes
onstream

as now
expected in 2013, annual output likely to
reach about 6
mt

by 2020?


Geological similarities to S.
Khylchuyu


Future Russian Arctic projects may give
preference to alternative offshore technology


Delays in construction of Russia’s first Arctic
offshore platform reflects inexperience of
Sevmash

submarine yard in executing civilian
contracts


G
lobal offshore industry has moved on to
more flexible subsea drilling techniques


For Kara Sea exploration drilling,
Rosneft
-
ExxonMobil reportedly consider combination
of gravity
-
based platform that can be refloated
in shallow water (up to 60 meters) and semi
-
submersible rigs for deeper water


Prirazlomnoye
: All systems go for 2013 launch?

Source: IHS CERA.


21103
-
1

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CERES April 8 2013

Concluding Questions


The Russians like to say, “The Iron Curtain didn’t go down; it went
up.” But in the oil industry, it’s only risen halfway


The Russian oil industry today is overtaxed, overregulated,
underchallenged
, and
undermotivated

to meet the challenges ahead


What will happen now? In the near and middle term, the answer
depends above all on global oil prices


But in the longer term, only reform will avert a crisis and enable
Russia to continue its modernization


Reform in the oil industry, because Russia’s future depends on oil


Reform in the state, because oil rents cannot support a ballooning
budget indefinitely


CERES April 8 2013

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Link to follow
-
up Gustafson story in
International Herald Tribune
, Dec. 4

http://
www.nytimes.com
/2012/12/05/business/global/
russian
-
oil
-
industry
-
at
-
a
-
crossroads
-
as
-
infrastructure
-
ages.html?pagewanted
=all


CERES April 8 2013

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Спасибо за


Внимание
!