No. 1, 2008

Small and medium companies occupy a special place in Russia's oil-and-gas complex today

Despite certain difficulties which small and medium oil-and-gas companies have to contend with at the present stage of Russia's transition to a market economy, they have a good chance of improving their situation considerably in the long term.

Contribution of small companies

Russia's annual output of oil totals 480 million tons, 20 million tons of which are produced by small-scale companies. Perhaps, the latter amount does not look so impressive in comparison with the volumes produced by large state-owned and private companies, but still it is greater than the combined output of Germany, France and Romania.Active in Russia today are about 160 small oil- and gas-producing companies. Four of the country's regions - the Republic of Tatarstan, the Republic of Komi, the Khanty-Mansi Autonomous Area and the Orenburg Region - have 60% of the small independent oil-producing enterprises. Furthermore, three-quarters of the crude oil output in the independent companies sector (74.2%, to be exact) are shared by three oil-producing regions: the Khanty-Mansi Autonomous Area, the Republic of Tatarstan and the Republic of Komi. The producible reserves of the more than 250 oil fields, which are at present being worked by such enterprises, amount to about 1 billion tons.In the past three years the number of small oil companies has decreased. This is primarily because over 30 such enterprises were taken over by JSC RussNeft. Moreover, the share of the small companies in Russia's crude oil output has gone down since 2001 from 10 to 4%. Nevertheless, specialists do not forecast any further deterioration of the situation for the small and medium oil-producing enterprises in this country. On the contrary, today there are objective reasons to expect an improvement of conditions for small oil business in the Russian Federation.Until recently it has been more profitable for companies to export crude oil than to sell it in Russia. However, the cost of transporting oil over long distances minimized the profits made by small companies. This situation changed with the introduction of new export duties on oil that were higher than those on petroleum products. As a result, profitable sales of “black gold” on the domestic market have created favorable financial conditions for the development of small companies.

Downstream: a predicted growth

Whereas in the upstream sphere small oil companies are rather modestly represented in Russia, their positions are much stronger in the downstream sphere - the marketing of petroleum products. For instance, there are over 25,000 gas filling and service stations of which only about 7,000 belong to large, as a rule vertically integrated, companies. Incidentally, in recent years the share of small companies in the country's fuel-supply business has been steadily growing. Over 1,200 commercial oil tank farms (about 55% of the total number) belong to small independent companies.Speaking of refining, the number of small Russian companies operating in that sector is insignificant. Active in Russia today are only 40 small refineries, ten of which are within the vertically integrated structures. The other 30 refineries, which belong to small companies, account for merely 2% of the volume of refining within the country, or more than 2 million tons of petroleum products.Lately in many regions of Russia both small refineries and refining installations have been actively constructed and operated. Traditionally it is believed, in the first place, that it is economically expedient to build them in locations distantly removed from large processing enterprises; in the second place, that they should be used to refine crude oil brought over from the fields that are hard to reach, whose reserves are small and whose development would be unprofitable in the case of the crude oil being pumped into trunk pipelines; and, in the third place, that they should be used to supply enterprises situated along the pipeline routes. Regional authorities are beginning to pay more and more attention to the development of small refineries which provide additional employment in the areas of their location and which ensure the channeling of excise duties and taxes into local budgets. Besides, the operation of such enterprises helps solve the problem of additional transportation expenses.Between the years 2002 and 2006 the output of petroleum products by small refineries increased by 40%. According to the analysts of the Barrel investment company, by the year 2010 Russia will have some ten new mini refineries with a combined capacity between 200,000 and 500,000 tons of petroleum products.The more successful of the small companies are beginning to develop their own refining sector. One of them is Yangpur, a joint stock company in the Khanty-Mansi Autonomous Area. In 2006, for instance, this oil and gas company's output exceeded 350,000 tons in the oil equivalent. Today, the company employs a small refining installation with an annual output of 25,000 tons of petroleum products, including diesel fuel and gasoline fraction.

Reserves for the future

Among the problems that complicate the development of that sector is the burden of taxation. The mining tax and export duties deprive the oil companies of 75% of their profits. Small and medium-size fields, having reserves of up to 10 million tons, adverse geological conditions and a high proportion (up to 75%) of reserves that are hard to extract comprise 85% of the resource base for the activity of medium oil and gas companies. One more traditional problem for small oil-producing enterprises is their distant location from pipelines and transportation routes.Despite the difficulties of the current period, the long-term prospects for oil and gas enterprises are quite good. Drawing on the advanced experience of foreign companies in recent years, large Russian companies have got down to optimizing their assets. More and more often, the “oil majors” put up for sale unprofitable oil reserves, which are on their balance sheet and which hamper their efficient financial activity.Against the background of the falling increment of reserves and of the oil recovery index in the industry as a whole, the sector of independent small companies has retained its positive dynamics of development. According to the assessment by Dr. Yelena Korzun, the General Director of AssoNeft, it is precisely independent producers who put into operation over one-quarter of new oil fields in Russia. In a number of specific economic efficiency indices (per 1 million tons of recovered oil) small and medium companies exceed the industry's average level as follows: in the size of investments in oil and gas production - from 1.3 to 2.7 times; in putting new fields into operation - 6.5 times; in commissioning new wells into production - 2.7 times; in hole-making for development well drilling - by 33%; and in exploration drilling - by 64%.In the opinion of Gennady Shmal, President of the Oil and Gas Industry Workers' Union, utilization of associated petroleum gas may become a promising sphere of activity for small oil-producing enterprises. A total of more than 15 billion m³ of associated gas is being burned up in Russia every year. Today, this is a serious problem for large companies, especially those developing oil fields with a small gas-oil ratio. A good example of successful operation by small companies in that area is Troitskneft, a close joint stock company, which, in addition to its own oil production, supplies associated gas for the operation of the steam generators of Tatneft in developing its fields.It is in Tatarstan that small oil companies are given significant support by the state. In 1997 the Republic's Government issued to small oil-producing companies over 40 licenses for the development of fields containing sour crude oil. At present, the annual output of small companies there exceeds six million tons (about 15% of Tatarstan's total output).The administration of the Khanty-Mansi Autonomous Area also supports the idea of extensive engagement of small business in the development of oil fields. In this way it aims to promote business activity in the region and, at the same time, to solve the problem of the exhausted and nonproductive wells there. Quite often large companies refuse to develop such wells, and as a result - according to the administration of the Area - over 15,000 oil wells are standing idle. In the words of Dr. Yelena Korzun small-scale oil companies, besides playing a purely economic role, perform an important social function: in some cases they play a town-forming role. An example of that is the operation of ALOIL, a close joint stock company which produces over 200,000 tons of “black gold” a year, in the Tatar town of Bavly.With the natural depletion of large, highly profitable fields in Russia the importance of small enterprises in the country's oil industry is bound to grow. Russia's potential for developing its small-scale oil-producing business is great, but a well-adjusted state economic policy is needed to realize this potential.