No. 2, 2008

Russian oil and gas companies intensify their efforts on the continental shelf

Active offshore oil and gas prospecting began in our country in the 1970s, but before the end of the 20th century this work was conducted at an insufficiently high rate. The Energy Strategy of Russia for the Period of up to the Year 2020 sets the strategic objective of a full-scale development of new oil- and gas-bearing provinces of Russia’s continental shelf.

Program of action is ready

According to the RF Natural Resources Ministry, 44 offshore hydrocarbon fields discovered in Russia account for about 33% of all country’s gas reserves, 22% of our gas condensate reserves and about 12% of our oil reserves. Remarkably, 80% of the resources are found in the Arctic with just 5% of its subsoil explored. Only a few of the fields discovered are under commercial development, while the world’s offshore oil and gas production constitutes 35 and 32% of the total, respectively.

The trends to be observed in the international energy market are quite understandable and objective. On shore, the chance of discovering new hydrocarbon fields is now slim, and those which are found turn out to contain a fraction of what was the case some 20-30 years ago.

This is why the prospects for the development of the oil and gas industry are linked, above all, with a large-scale expansion into the shelf. By 2030, oil production on Russia’s continental shelf is to reach 110 million tons a year, and natural gas production, 160 billion m³. Moreover, Russian oil companies remain among the parties to numerous foreign offshore field development projects.

Gazprom’s program prioritizes four basic hydrocarbon prospect development areas: the Pechora Sea region (including Prirazlomnoye and Shtokmanovskoye fields and a number of adjacent structures) and predominantly gas-bearing regions – the north-eastern part of the Barents Sea shelf (Shtokman and satellites), the Ob-Tazovskaya Bay (Severo-Kamennomysskoye, Kamennomysskoye-more fields, etc.), the Kara Sea (the offshore part of the onshore Kharasaveyskoye and Kruzenshternskoye fields, Lenin-gradskoye and Rusanovskoye shelf fields). The choice of those regions and the sequence of their coming under development are determined by three principles: the size of explored reserves, the proximity of an operating infrastructure, and the integrated development of reserves.

The Shtokman field reserves, for example, warrant the building of a new infrastructure for gas deliveries to Gazprom’s gas pipeline system, the construction of a liquefied natural gas (LNG) plant and of a tanker fleet for LNG shipping to export markets. The deadline set for the completion of the first phase of the project (2013-2014) dovetails with the need to replenish Russia’s gas transportation system with supplementary resources and with the development of new export facilities (the Nord Stream, in particular), as well as with growing demand for LNG in the United States. As the Shtokman region reserves peter out, smaller fields will come on stream, and their gas will go to the market using the infrastructure already built.

The larger fields of the Ob-Tazovskaya Bay will start coming on stream in 2015-2017. By that time, gas production in the Yamburg region is expected to decline, and its place in the gas transportation system will be taken over by gas from the Severo-Kamennomysskoye and Kamennomysskoye-more offshore fields. When those resources become insufficient, the Chugoryakhinskoye, Obskoye and other nearby offshore fields will step in. The Kara Sea fields will be developed along the same lines: when, by 2028-2029, the Bovanenkovskoye field and the onshore half of the Kharasaveyskoye field enter the declining production stage, the shelf’s reserves will come under commercial development.

The development of the Pechora Sea’s oil-bearing area will begin earlier than that of the other sections of the continental shelf (an offshore platform on the Prirazlomnoye field will be put into operation as early as 2008) and proceed in accordance with the same all-round oilfield construction principles.

At Gazprom’s estimate, by 2030, it will produce about 180 billion m³ of gas and 11 million tons of oil a year within the framework of the above-mentioned offshore projects. Actually, shelf fields can give Gazprom much more hydrocarbons. The company’s development program is being adjusted and enlarged today. In particular, Gazprom is interested in boosting its presence on the Sea of Okhotsk shelf, especially on its Sakhalin part. Today, Gazprom holds controlling interest in the Sakhalin-2 offshore project, but before very long, it is likely to participate in the development of other fields in the region.

Overseas projects

Incidentally, Gazprom’s sphere of interests embraces not only the Russian shelf, but foreign shelves as well, some of which the Corporation is successfully exploring today.

In 1997, the Vietnamese government, impressed by Russian specialists’ record of achievement (may I remind the reader that Vietsovpetro, now part of JSC Zarubezhneft, still accounts for about 94% of the oil produced by the White Tiger field), applied to their Russian colleagues with a request to consider the possibility of Gazprom prospecting for natural gas in the northern part of Vietnam’s shelf. That provided an impetus for further talks.

In 1998, Gazprom’s specialized operator – Zarubezhneftegaz (now in charge of “onshore” overseas fields as well) – was set up for carrying out offshore oil production projects. In September 2000, Gazprom signed a contract with the PetroVietnam government company for hydrocarbon prospecting and production on Block 112 of Vietnam’s continental shelf. The document has the status of a production sharing agreement (PSA).

The VietGazprom joint operating company was set up in 2002 to comprise (besides Gazprom and PetroVietnam) Vietnam’s NKPV and Russia’s Zarubezhneftgaz. However, the new JV was not an immediate success, as oil prospecting operations on that block drew a blank. In 2005, therefore, it was suggested that Gazprom should broaden the scope of exploration by spreading it to neighboring Block 113, where drilling works had been wound up in August 2007. A newly-sunk well yielded, in a test mode, a 380,000 m³/d commercial gas flow to herald the discovery of a gas field on the Golden Panther area. The gas produced by the well was found to contain gas condensate.

Gazprom is carrying on prospecting operations on the shelf of India, in the Bay of Bengal, where its specialists also expect to discover commercial hydrocarbon reserves shortly.

At the end of 2000, Gazprom signed a classical PSA with the government of India and with the government-run Gas Authority of India Ltd. (GAIL) on Block 26.

Moreover, in October 2005, thanks to its cooperation with the government company Petroleos de Venezuela S.A., Gazprom added to the list of its overseas shelf projects by winning a tender for exploring the Rafael Urdaneta offshore area within the investment blocks of Urumaco-1 and Urumaco-2.

Neither should we leave out of account Gazprom’s plans for expanding into new shelf areas: after all, it is not improbable that in a while the corporation will join in the development of hydrocarbon reserves off the shores of Algeria, Libya, Pakistan and Egypt. Russian oil companies interested in developing offshore fields in and outside our country may well turn out to be Gazprom’s partners in these projects.

Limits of the possible

As distinct from Gazprom, Russian oil companies focused on division of property after the breakup of the USSR. That left them neither the time, nor the means for implementing offshore projects. There were exceptions, though. LUKOIL, for example, took an active enough stand right away on the matter of offshore field development. The Company joined a number of shelf-development projects in Azerbaijan’s sector of the Caspian, started producing oil from the Kravtsovskoye field on the Baltic Sea shelf (Kaliningrad Region), conducted geological prospecting operations in Russia’s and Kazakhstan’s sectors of the Caspian.

Today, LUKOIL owns a 10-percent interest in the Shah Deniz offshore gasfield development project, Azerbaijan’s largest, which came on stream in 2006. Besides, the Russian company controls 80% of the D-222 project (a block of the Yalama structure, the largest one in the north-eastern Caspian where prospecting work is in progress so far). The Kravtsovskoye field started producing in 2004, and in 2006, its output increased 53% from the previous year (and 77% over and above the plan) and amounted to 861,000 tons.

Besides, LUKOIL which, over 10 years of operations in the Caspian, has discovered 6 major hydrocarbon fields, is preparing two of them – Yury Korchagin and Vladimir Filanovsky, both in the Russian sector of the Caspian – for commercial production. The former is to come on stream as early as in 2009, and the latter, in 2012. LUKOIL expects its overall production in the region to amount to over 12 million tons a year by 2016. The Presidents of Russia and Kazakhstan have signed a protocol authorizing LUKOIL and KazMunayGaz to use the Khvalynskoye field and the Tsentralnaya structure (located in Russia’s and Kazakhstan’s sectors) without conducting tenders and auctions. In 2007, vigorous preparations were underway for the signing of a PSA on the former of those areas. The Khvalynskoye field is to go into commercial production in 2014 (rated gas output level: over 8 billion m³ a year).

LUKOIL’s offshore field development plans are not confined to the Caspian and the Baltic. The Company has acquired а 63-percent stake in the project to develop oil shelf block CI-205 near Cote d’Ivoire (West Africa) from the Nigerian company Oranto Petroleum International Ltd., and is considering the possibility of participating in other offshore field development projects.

As distinct from LUKOIL, Rosneft has taken quite long to come into its own, therefore it was only recently that it has emerged on the shelf (not counting its participation, with a 20-percent stake, in the Sakhalin-1 project which went into commercial production as late as the end of 2005). In the meantime, Rosneft is conducting exploration within the framework of the projects Sakhalin-3 (on the Veninsky block in partnership with China’s Sinopec), Sakhalin-4 (on the Zapadno-Shmidtovsky section in partnership with BP) and Sakhalin-5 (Kaigansko-Vasyukansky and Vostochno-Shmidtovsky sections).

Besides, the Rosneft is exploring, jointly with Korea National Oil Company (KNOC), a block of the Western Kamchatka shelf located in the Sea of Okhotsk, off Kamchatka Penisula’s western shore. It has obtained a license to explore the Tuapsinsky block in the Russian sector of the Black Sea off Krasnodar Territory’s shore. Jointly with LUKOIL, Rosneft plans to explore the Sea of Azov shelf (within the framework of JV Priazovneft).

Rosneft should hurry up if these plans are to become a reality. After all, the Caspian is drawing ever greater interest of not only Russian companies like Gazprom and LUKOIL, but of Western corporations as well. Rosneft faces stiff competition from Gazprom in its bid for Sakhalin.

Hopefully, things will never go as far as carving up the continental shelf, and the two companies will develop offshore fields together.