No. 3, 2009

The Timan-Pechora oil- and gas-bearing province is a strategic growth area for Russia’s oil and gas sector

As the traditional oil production regions are being gradually exhausted, Russian companies have to increase their activities to develop hard-to-access fields located in the Arctic part of Russia's northern territories and on its continental shelf. The Timan-Pechora oil- and gas-bearing province is one of the most important oil production areas of the country. It is here that experience has been accumulated of implementing unique technological projects under extreme natural and climatic conditions, which might subsequently serve as the basis for gradual advance by the oil and gas industry to the northeast of Russia.

At the new stage

The Timan-Pechora province is not a huge territory and consists of only two regions: the Nenets Autonomous Area and the Republic of Komi, which account for virtually the same proportions of oil production in this economic region. In spite of the harsh climate, oil production in Timan-Pechora began back in the 1930s. Even so, according to expert assessment, this oil- and gas-bearing province still retains a substantial resource potential. There are good reasons for its selection as a strategic priority not only by the industry's leaders (in particular LUKOIL) but also small independent companies.

The biggest share in total oil production in Timan-Pechora belongs to LUKOIL (67% in 2008). The rest of the production is carried out by Rosneft and several independent companies.

It is important to note that the Timan-Pechora oil- and gas-bearing province is characterized by a high degree of development and that a large proportion of its reserves are categorized as hard-to-recover (so-called "heavy" oil, highly viscous liquid hydrocarbons, and so on).

Even so, this does not prevent the oil companies from working quite actively in this economic region. In particular, on June 20, 2008, a ceremony was held to launch an integrated testing of the first stage of the Yuzhno-Khylchuyuskoye field (a project of Naryanmarneftegaz - a LUKOIL/ConocoPhillips joint venture) located in the Nenets Autonomous Area. It was discovered in 1981 and is today one of the biggest in the northern part of Timan-Pechora, its proven oil reserves amounting to over 500 million barrels. Naryanmarneftegaz is expected to reach its planned production level of over 150,000 barrels a day at the field already this year.

Nor are the independent oil companies lagging behind. Yenisey, for instance, has begun construction of a new refinery in the Republic of Komi - the Usinsk Refinery, with a capacity of 1 million tons a year for refining oil from the Zapadno-Synatyskoye field in the Timan-Pechora province, the estimated reserves of which add up to 9.16 million tons. It should be stressed that today, there is only one relatively large refinery immediately on the territory of Timan-Pechora - Ukhtaneftepererabotka, belonging to LUKOIL. It receives crude produced in the region and was started up back in 1934. Its design capacity is 3.7 million tons. Given the pattern of distribution of the oil produced in Timan-Pechora in 2007 among major Russian refineries, it may be stated that the above-mentioned LUKOIL refinery accounts for the biggest proportion - 88%.

LUKOIL's Arctic route

Under the tundra climate conditions of Timan-Pechora, the main problem is obviously to arrange for hydrocarbon transportation. As usually happens, however, necessity is the mother of invention. For instance, the filling factor of the Usa-Ukhta trunkline, one of the main pipelines in the region, reached 100% in 2004, which meant that urgent measures had to be taken to increase its throughput capacity. Fortunately, this was achieved over the following two years.

Since the Kharyaga-Indiga pipeline project is still on the drawing boards, the oil companies have to seek alternative ways of transporting hydrocarbons using other means of transport. In particular, LUKOIL constructed the Varandey terminal, equipped with an onshore tank firm, a submarine syphon and a reloading terminal, wherefrom oil is taken by small shuttle tankers with a 70,000 ton deadweight to the Belokamenka floating oil storage facilities (belonging to Rosneft) at Kola Bay and is then reloaded on to supertankers with a 150,000 ton deadweight for shipping to the European and North American markets.

A system for transporting large quantities of crude oil (up to 12 million tons a year) that is unique for Arctic conditions was thus created and in the eight years since it was launched it has proved its viability even during the harsh winter period. The construction of a stationary terminal in 2008 created new opportunities for intensive development of the oil potential of Timan-Pechora and the continental shelf of the Barents Sea.

The economic component of the above project is also impressive: it costs half as much to deliver 1  ton of oil from Varandey to Rotterdam ($15 less) than by pumping the same amount of oil along the Usa-Ukhta-Yaroslavl pipeline and then along the Baltic Pipeline System for loading on to tankers at Primorsk. As a result, there has been a 35-fold increase in the amount of oil transshipped through the terminal since 2000, and the startup of the Yuzhno-Khylchuyuskoye field will entail a substantial further increase already this year. In addition, other oil companies (including Rosneft, Gazpromneft and Surgutneftegaz) are considering the possibility of joining the oil export system via Varandey.

Overall, this project complies fully with government policy on oil transportation, since it makes it possible to avoid transit across foreign states and to maintain the quality of the crude, which is not always possible within the trunk pipeline system.

The second big vertically integrated oil company operating in Timan-Pechora, Rosneft, is currently using a multimodal oil export system: the crude is first pumped along Transneft pipelines to the Privodino oil-loading complex, then taken in tank cars by rail to Arkhangelsk, then by shuttle tankers to the Belokamenka floating oil storage facility and finally exported to other countries by supertankers.

Arctic Light is the oil of the future

An equally important question involved in the advance of the oil companies in the Arctic north of the Russian Federation is development of the power infrastructure. Once again, LUKOIL experience on this plane is of interest.

During development of the Yuzhno-Khylchuyuskoye field, substantial lump sums (93 billion rubles) were invested for the purpose of saving on subsequent operating costs. First of all, this helped resolve the problems of associated gas recovery and energy saving without using temporary schemes. As a result, a powerful energy center was set up, capable of generating electricity for supplying not only this field, but also other LUKOIL fields in the Nenets Autonomous Area, to the majority of which power lines have already been brought up. At the same time, it is planned for the energy center to be fuelled by associated petroleum gas (APG), 99.9% of which at the Yuzhno-Khylchuyuskoye field is already utilized. It is an interesting fact that, at the beginning of this work, until there is enough associated petroleum gas, it is proposed to use natural gas from the Yareiyuskoye field. For this purpose, gas pipelines have specially been laid (the distance between the facilities is approximately 30 km). Subsequently, however, as oil production expands, the volume of APG will increase and will suffice not only for meeting the energy center needs but also for creating a gas reserve to be stored underground. This reserve may be as much as 2 billion m3, and start being used in 8 years time (as planned). All this will help cut electricity bills more than 10-fold!

Note should also be made of other special technological solutions used in developing the Yuzhno-Khylchuyuskoye field, namely a field automatic control system including a variety of innovative ideas designed to increase the oil recovery factor. A hydrogen sulfide stripping unit has also been started up to recover hydrogen sulfide which is contained in considerable quantities by this field. On the one hand, such measures cannot but hike the cost of oil production, which is double the relative figure for Western Siberia. On the other hand, after undergoing treatment to a commercial condition, the Yuzhnoye Khylchuyu oil is of high quality and remains so until it reaches the end consumer, thanks to the transportation system described above. Finally, this has allowed LUKOIL to plan introduction of a new oil brand - Arctic Light, which will cost considerably more than the Urals oil. The substantial lump sum investments may, therefore, not only have an effect on the future operations of the Company in this region, but also enhance its export proceeds.