No. 1, 2006

Alexander Semyanov
Deputy Head of the Main Department for Geology and Development of JSC LUKOIL


LUKOIL demonstrates the growing opportunities on the Russian shelf

More than a third of global hydrocarbon production is carried out on the maritime shelf. In Russia, which owns enormous reserves of crude oil and natural gas on dry land, currently produces less than 1% of its oil offshore. Even so, over the next decade, a rapid breakthrough in the sphere of offshore development is anticipated in the country. For LUKOIL, leader of the Russian economy, development of the country's shelf is one of the main strategic tasks.

Pearl of the Caspian

In terms of reserves of hydrocarbon raw materials, LUKOIL is one of the undoubted leaders in the world. Nevertheless, planning for the long-term future, the Company continues to expand its raw material base. Bearing in mind the objectively deteriorating structure of the reserves in the mature oil-bearing regions of Russia, LUKOIL is actively entering promising new regions for producing hydrocarbon raw materials, while focusing particularly on the offshore areas of the Baltic, Azov and Caspian Seas.

The Russian oil major has been performing prospecting and exploration works on the Baltic and Caspian shelves since the second half of the 1990s, and in the beginning of the XXI century the Company together with JSC Rosneft started operating on the Azov shelf.

In 1975, the North Caspian was declared a preservation area. In the 1990s, Kazakhstan and Russia consistently introduced amendments into the status of the biosphere reserve regime, permitting exploration, prospecting, and production of hydrocarbons in their offshore areas. In order to maintain the natural equilibrium, really strict requirements were introduced to ensure the environmental safety of this unique body of water. The first Russian oil company to be granted permission to engage in extensive geological and geophysical exploration in the North and Middle Caspian was LUKOIL. As past years have shown, the Company has managed to adhere strictly to the high environmental standards.

The Caspian basin is one of the biggest oil regions in the world, with about 5% of global reserves. A few years ago, it was believed that the main hydrocarbon raw material stocks were concentrated in the Caspian sectors belonging to Azerbaijan, Kazakhstan and Turkmenia. The results of work performed by LUKOIL in the North Caspian have revealed a truly promising new oil and gas subprovince on Russian territory, too.

Since 1995, the Company has itself and by the efforts of its subsidiary enterprise LUKOIL-Nizhnevolzhskneft been carrying out large-scale geological and geophysical exploration in the Russian offshore sectors of the North and Middle Caspian.

Five highly-productive oil and gas condensate fields the Khvalynskoye, Yury Korchagin, Rakushechnoye, 170 Kilometer and Sarmatskoye, were discovered by the Company by means of the first exploration well. The total commercial reserves of these fields taken on to the State's balance sheet amounted to 750 million tons of equivalent fuel. According to more specific estimates, the total hydrocarbon resources of JSCLUKOIL's licensed sectors on the Caspian amount to over 2 billion tons of equivalent fuel.

For the Severny licensed sector, the success rate of exploration drilling was 100%, while the exploration drilling effectiveness was over 15 thousand tons per meter (for category C1 reserves). In fact, only the exploration work in the Yamalo-Nenets Autonomous District of Western Siberia achieved a similar efficiency in the initial stages of its development.

The efficiency attained in preparation of hydrocarbon raw material reserves was $0.14 per 1 barrel of equivalent fuel, that is, a substantially lower sum than the average indicator compared with other companies. Active geological and geophysical exploration continues. Within the bounds of the Central Caspian and other licensed sectors, a number of potentially promising facilities have been discovered. Three of them have been prepared for deep drilling.

The explored reserves of the North Caspian will make it possible, beginning from 2008, to produce up to 4 million tons of crude oil and 10 billion m3 of natural gas a year. Moreover, according to objective estimates, by 2016-2018, production of hydrocarbon raw materials here will reach 50 million tons of oil equivalent a year.

In accordance with the long-term program for exploration work by the year 2010, it is planned to drill 25 wells in this region and increase the reserves of oil by 325 million tons, those of gas by 455 billion m3, and of condensate by 23 million tons.

LUKOIL has substantially consolidated its positions not only on the Russian shelf. The Company is actively developing the Azerbaijan and Kazakh sectors of the Caspian Sea. According to LUKOIL President Vagit Alekperov, one of the leaders of the Russian oil industry plans to increase considerably the number of projects in the Caspian region and, by 2020, to carry out up to 18% of its total production here. The North Caspian is one of the strategic regions in which the Company intends to concentrate funding and intellectual potential for the purpose of developing oil fields.

Along the amber coast

In 1994, after the unit Kaliningradmorneft joined LUKOIL, the Company began developing the Baltic shelf.

Kravtsovskoye (D-6), the biggest field among those discovered in the Russian sector of the Baltic Sea is located 22.5 kilometers from the coast of the Kaliningrad Region. In the region of the field, the sea is 25-35 meters deep. The geological reserves are estimated at 21.5 million tons and the commercial stocks at 9.1 million tons. The field was discovered back in 1983 by the joint venture Petrobaltic, in which the USSR, Poland the GDR participated. In the 1990s, one of the first maritime 3D surveys in Russia was carried out here.

According to the process chart for developing D-6, production is planned to be carried out by elastic water-drive drainage. A total of 17 production wells are to be drilled: one vertical, 10 inclined wells with a horizontal completion and 6 horizontal branch wells.

In July 2004, JSCLUKOIL-Kaliningradmorneft started commercial production of the Kravtsovskoye oil field (the so-called D-6 structure). The work is being carried out from an offshore ice-resistant stationary platform constructed at the JSCLUKOIL-Kaliningradmorneft's Kaliningrad plant for metal construction structures. Many international observers who have visited the D-6 platform have had several opportunities to verify that commercial production on the fields is conducted in accordance with the strictest environmental standards.

Drilling, like on the Caspian, is performed by the zero discharge method. By the end of 2005, the number of operational wells reached eight allowing LUKOIL-Kaliningradmorneft to reach an oil output level on D-6 of 600650 thousand tons of oil a year. Commercial production on the field is expected to continue for 3035 years.

Azov oil on the agenda

One major sphere in the Company's activities is development of the shelf of the Azov Sea. Russian geologists began exploring the Azov for the existence of hydrocarbon resources back in the 1970s. In 1978, in the southern part of the Temryuk Bay of the Azov Sea, the promising Gelendzhik structure was identified, the resources of which being estimated at 45 million tons of equivalent fuel. In 2001, the Rosneft scientific research institute RosNIPItermneft and the Krasnodar experimental and methodological expedition Soyuzmorgeo discovered on the Azov the major Severo-Temryuk delta structure, which is 2512 km in size and has estimated resources of 100 million tons of equivalent fuel. In the western part of the delta, a primary structure was designated for three-dimensional seismological exploration and preparation for exploration drilling. In this part, the sea is no more than 12 meters deep here.

For the purposes of efficiently developing the shelf of the Azov Sea, in 2002 the joint venture JSCPriazovneft was set up, with share participation by JSCLUKOIL-Nizhnevolzhskneft, JSCRosneft and the Administration of the Krasnodar Territory (15%).

Priazovneft carries out exploratory work on the Azov Sea within the bounds of the Temryuk-Akhtar licensed block. In this block, over 800 linear kilometers of seismological exploration and 445 linear kilometers of electrical exploration have been carried out, as have gravel exploration and geo-mechanical studies, and a thermal survey.

LUKOIL has participated in drilling the three most promising structures: the Pribrezhnaya-sea, Gelendzhukskaya-sea and the Tizdar-sea. The Company's preliminary estimates for the Azov Sea shelf are quite optimistic. The resources of the structures that have been discovered and prepared amount to 48.9 million tons of oil and 27.2 billion m3 of gas. The plan is to drill an exploration well in April 2006and, if the drilling confirms the expectation from this structure, we shall start elaborating the project for developing the field.

It should be noted that the conditions for exploring the fields here were even more favorable than those on the Caspian Sea. First of all, in the promising sectors the average depth of the sea is not great, being only 14 meters, and second there are no more favorable weather conditions.

Development of the fields on the shelf of the Azov Sea is of major significance for the South of Russia. Azov oil might compensate for the drop in production from the oil fields in the Kuban region and to a great extent supply the southern parts of the country with petroleum products.

LUKOIL's exploratory work on the Baltic, Caspian and Azov Seas testifies to the Company's growing possibilities. The recognized Russian leader in oil production on land has proved that it is also capable of accomplishing large-scale and highly-effective offshore projects. Experience of implementing these maritime projects will allow LUKOIL, in the future, to expand considerably the area covered by its work on Russia's shelf and beyond.

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Oil of Russia, No. 1, 2006
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