No.4, 2005

Vladimir Igorev


For ten years LUKOIL-Western Siberia has been a leading oil producer

Over 60% of Russia's oil reserves and about 90% of its reserves of natural gas are located in a unique oil- and gas-bearing province lying within the Tyumen, Tomsk, Novosibirsk and Omsk regions and the Khanty-Mansi and Yamal-Nenets Autonomous Areas. This is the birthplace of JSC LUKOIL, and there the Russian oil major's main resource base is situated. LUKOIL believes that Western Siberia has a great future, and so the Company continues to build up its potential in this region so rich in mineral resources.

Siberian Iliad

Over half a century ago, the first gas blowout, which struck near the village of Beryozovo, ushered in a new epoch in Russian history: Western Siberia was to become the country's main oil- and gas-producing region. The oil and gas fields of Uray, Samotlor, Megion, Yamburg and Urengoy were declared to be the world's "discoveries of the century." In the 1970s and 1980s, the natural riches of Western Siberia enabled the USSR to make a real breakthrough in the oil and gas industry. The country became a leading exporter of energy.

Few people believed then that it was possible to build, within a short time, the world's largest industrial facilities and modern well-appointed towns and cities in that vast, austere, boggy, frozen-through, sparsely-populated land. It was hard to believe that this could be accomplished within several years and not over long decades. Enlisted in accomplishing that were the country's best drillers, geologists and construction workers. It was in Western Siberia that, for the first time in Russia's industrial practice, large scale multiple drilling of inclined holes was employed - the main "engineering key" to Siberia's oil. It was also for the first time that high-pressure bits, light-weight drill pipes and other "simple" novelties were used for work in the hard climatic, geological and mining conditions.

The high world oil prices and the low production costs of Western Siberia's "black gold" offered the Soviet Union excellent opportunities of economic growth. However, the irrational plan-based economic system prevented it from taking full advantage of those opportunities. In fact, by the time the USSR fell apart, its oil industry was in a bad crisis.

By the late 1980s, the accelerated oil recovery rates caused a production decline in many Siberian oil fields. The situation was aggravated further by a drop in the world oil prices. Considerable investment into oil production was required, but the government, which had always seen the oil industry as the economy's donor, proved unable to reverse the situation. It became evident as never before that fundamentally new approaches were required toward managing the gigantic oil and gas industry.

At a new stage

Western Siberia became the "cradle" of LUKOIL, the leader of Russia's oil industry. Today, the name "LUKOIL" (it owes its first three letters to Langepas, Uray and Kogalym, the towns that form the Company's backbone) is well known all over the world. The Company was established at a meeting of the heads of three production associations - Kogalymneftegaz, Langepasneftegaz and Urayneftegaz - which took place on December 3, 1990 in the town of Kogalym. Signed in the course of the meeting was a protocol of intentions which provided for the creation of a state concern called LangepasUrayKogalymneftegaz. On November 25, 1991, the Government of the Russian Federation issued a decree establishing such a concern. However, market-oriented reforms in the country led to the following result: on April 5, 1993, the Russian Government adopted Resolution No. 299 on the establishment of the joint-stock company LUKOIL.

The Company began by stopping the decline in and then steadily building up production of its oil fields. Thanks to its efficient operation, the Company not only invested in the development of production in Western Siberia but also reached out into regions that were entirely new to it: the Republic of Komi, the Volga area, the Caspian, the Middle East, North Africa and South America. But Western Siberia remained LUKOIL's main area of operation - its resource base and its manpower source. Since 1995, the Company has been developing Western Siberia's mineral wealth with the help of its special organizational structure - JSC LUKOIL-Western Siberia. A year later it managed to slow down the decline in oil production at Langepasneftegaz and Urayneftegaz. Subsequently, in 1996, it managed to fix the annual oil production figure at 41 million tons. From then on, an upward climb began. LUKOIL-Western Siberia for about two-thirds of LUKOIL Group's total oil production.

The magnificent five

LUKOIL-Western Siberia carries out the exploration and production of hydrocarbons by its five territorial production units (TPU): Langepas-neftegaz, Urayneftegaz, Kogalym-neftegaz, Pokachevneftegaz, and Yamalneftegaz. Urayneftegaz, which conducts its operations in the Kondinsk and Sovietsk districts, is the oldest TPU of the Company.

It was there, near the town of Shaim, that Western Siberia's first oil was produced back in 1960. To this day, Shaim remains a real legend to Russia's oil industry workers. The trail blazers of Uray had to endure unbelievable hardships: the absence of roads, impassable bogs, penetrating cold, logistical difficulties an so on. Yet, in those arduous conditions they managed to produce oil the year round.

More than four decades have passed since then. However, the "growth potential" in that mature oil producing region is far from exhausted. Thus the oilmen of Uray have begun devoting particular attention to the technology of associated gas recovery - apart from state-of-the-art EOR techniques. The year 2004 was a special one for Urayneftegaz. Its oil production reached 4,889,000 tons - the highest figure for the past decade. Furthermore, two new license areas were put on stream and a new oil field, Novomostovskoye, was discovered, whose reserves are estimated at about 3 million tons. Overall, the reserve increment constituted 5 million tons, and toward the end of 2005, production is expected to go up by some 50,000 tons.

Completed in 2004 was the construction of a gas-compressor station with a productivity of 50 million m3 a year at the Mortemya-Teterevskoye oil field and of a gas-piston power plant at the Tolumskoye oil field. Their commissioning made it possible to increase considerably the associated gas recovery ratio at these fields - from 63.4% in 2003 to 72.4% in 2004. By the way, in accordance with the holding company's approved program, by 2008 the average ratio of associated gas recovery by the companies of LUKOIL-Western Siberia will be brought to 95%.

TPU Kogalymneftegaz has traditionally been the leader among the units of LUKOIL-Western Siberia in terms of technical and economic indicators. Development of the Kogalym fields began over 20 years ago; however, they were not affected by the large-scale accelerated production schemes of the Soviet period. Tens of thousands of today's oil and gas industry professionals have "graduated" from the Kogalym "oil production school".

Kogalymneftegaz features the most sustainable production growth: whereas in 2001 it produced just over 27 million tons of oil, last year its output was 33,715,000 tons. Maintaining a stable increment in oil reserves due to geological prospecting and the introduction of new technologies is one of the tasks which is being successfully addressed by the personnel of the TPU. Last year, five new oil pools were discovered, and the increment in oil reserves totaled 4.9 million tons.

From the start, the situation of the LUKOIL-Western Siberia's third territorial-production unit Langepas-neftegaz has not been as advantageous as that of Kogalym or Uray. Geographically, Langepas is surrounded by the license areas of the other companies operating in Surgut, Nizhnevartovsk and Megion. And so, an "extensive" growth of the volume of oil production is impossible for Langepasneftegaz. Meanwhile, this company has managed to maintain a high level of oil production: whereas in 2003 it produced 5.6 million tons, its output reached 5.65 million in 2004. It is the most active user of EOR methods in the LUKOIL-Western Siberia's subsidiaries. This is due to the high watercut level of its product, for Langepas is one of the Samotlor group of fields where, back during the Soviet years, the method of flooding was clearly abused in order to reach the highest results in the shortest time possible. Last year, about 1.2 million tons of oil were produced in Langepas with the use of modern EOR methods.

The depletion of an oil field is known to increase the "gas factor". The oilmen of Langepas skillfully use this circumstance to raise the production of crude hydrocarbons. The associated gas recovery ratio at the Langepas oil fields is the largest in Western Siberia - over 95%. In 2004, associated gas production there reached 257,000 m3 a year. The need for improving its organizational structure further prompted the Company's top managers to grant, in 1998, independent status, within the framework of LUKOIL-Western Siberia, to one more territorial production division - Pokachevneftegaz which used to be part of Langepasneftegaz. This was linked with the early development of the Severno-Pokachevskoye field, one of the most promising in Western Siberia. Today, the territorial production unit is working seven large oil fields. In 1999, it produced 7.1 million tons of oil, and in 2004, nearly 7.8 million. In the foreseeable future, its oil production is expected to grow steadily. The company's gas production likewise continues to grow. Great expectations are associated with the commercial development of the Yamal peninsula resources. Development of Yamal opens up great possibilities, for the peninsula is believed to contain one-quarter of the world's proven reserves of gas. As far as LUKOIL is concerned, more than half of its reserves of gas are precisely in that region. The year 2004 saw the establishment of the holding company's fifth territorial production division - Yamalneftegaz, which was to operate on the territory of the Yamal peninsula.

In 2000, LUKOIL-Western Siberia got down to developing field in the Bolshaya Kheta depression. Located there are the Nakhodkinskoye, Perekatnoye, Pyakyakhinskoye, Yuzhno-Messoyakhskoye, and Khalmerpayutinskoye gas and gas condensate fields. The total area of the five license blocks in the Bolshaya Kheta depression is 19,882 km2. The reserves of the Nakhodkinskoye gas field alone are estimated at 275.3 billion m3. A total of 62 wells are planned to be drilled at the Nakhodkinskoye field, which will make it possible to raise annual gas production there to 10 billion m3 by 2007. The field facility construction costs are to run into 500 million, and the field is expected to be put on stream in October 2005. Under a gas delivery agreement, the gas produced there will be sold to Gazprom. In the last quarter of 2005, LUKOIL is to sell to Gazprom up to 0.75 billion m3, and in 2006 - nearly 8 billion m3 of gas.

In the future, it is planned to develop and put on stream (one by one) the remaining fields of the Bolshaya Kheta depression, whose aggregate proved reserves of hydrocarbons, add up, as of today, to 2.5 billion barrels of oil equivalent. According to the Company's strategic plans, gas production on the Yamal peninsula will total at least 25 billion m3, and oil production, 2 million tons.

Steadily on the rise

In 2004, the oil production of the Company was 52.2 million tons - 21% up on 1995. The increase in associated gas production over the past few years was nearly 40%. In 2005, the Company set itself the goal of attaining in oil production an increment of 1.6 million tons as against the level achieved in 2004. It is still too early to sum up results, but, judging by some preliminary statistics, the target figure will be exceeded - if only by a narrow margin. In all probability, LUKOIL-Western Siberia production of hydrocarbons will continue to grow in the future, with the gas component becoming increasingly important.

Today, the hydrocarbon reserves of LUKOIL-Western Siberia exceed one billion tons of oil and 900 billion m3 of gas. The Company accounts for about 67% of the increment in LUKOIL Group's overall production. Siberia's "light" oil is becoming more and more difficult to produce. From the Soviet period, the company inherited a lot of oil fields whose highly watered active reserves had been considerably depleted. Such a state of affairs is typical of many oil companies operating in Western Siberia. And so, some Russian and Western experts have hastened to predict an inevitable early decline in hydrocarbon production in the region. Already produced over the past decades in Western Siberia have been more than 7 billion tons of oil and 8,000 billion m3 of gas. However, according to LUKOIL's specialists, the probability of new fields being discovered is still rather high, especially in the region's northern territories. It is believed that the undiscovered reserves of oil and gas there comprise 56% and 45%, respectively, of the initial ultimate reserves.

It should be borne in mind that Western Siberia is a kind of "proving ground" for new technologies of oil production in Russia. Owing to the introduction of the latest processes and equipment, a constant upward reappraisal of the hydrocarbon reserves there is taking place. Whereas on average Russian oil companies recover 30% of underground reserves, the Western Siberia holding company has already reached the level of 40%, and it does not intend to stop there.

In the LUKOIL Group, oilmen believe that Western Siberia has a great future, and so the Company continues to build up its production potential in that unique region. The ten years since the establishment of LUKOIL-Western Siberia have shown that Russia's largest oil- and gas-bearing province is not just the main resource base for the Company's business: it is also "a school for professionals" and a future "jump-off place" for the Company's expansion into the new oil producing regions of the globe.

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Oil of Russia, No.4, 2005
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