Archive

No. 1, 2012

Anna Annenkova ,
IC Barrel Senior Analyst

KOMIS HEAVY OIL


The oil and gas sector of the Komi Republic: problems and prospects

Located in the far north-east of the European part of Russia, the Komi Republic possesses a combination of mineral resources that are unique in terms of reserves, diversity and quality. The fields explored on the territory of Komi hold about 50% of all Russia's reserves of titanium, 30% of bauxites, 4.5% of coal and some 3% of oil. In addition, the Republic is one of the leading industrial forestry regions of the Russian Federation, with a total forested area accounting for 3.5% of Russia's total and about 50% of the forested area in the European North of Russia. Komi's most significant wealth consists in heat and energy resources, production of which constitutes the pivot of the region's economy, occupying a third of its GRP and accounting for a substantial proportion of the budget revenues.

Oil and gas

The Komi Republic is one of the biggest oil and gas producing areas in the European part of Russia and among Russia's top ten producers. The Republic owes all this to the Timan-Pechora oil- and gas-bearing province, a significant part of which is located on its territory. Overall, about half the resources of oil and a third of those of gas in the European North of Russia are concentrated on the territory of the Komi Republic.

The Republic's oil reserves are currently recorded for 132 fields, 115 of them being oil, 9 oil and gas condensate, 5 oil and gas, and 3 gas and oil fields. Reserves of fuel gas are recorded for 133 hydrocarbon fields, including 38 fields of free gas and gas-cap gas, 95 fields of associated (dissolved) gas. Of the 156 fields of hydrocarbon crude on the state balance as of January 1, 2011, production of oil and of gas was being conducted at 87 fields, 69 of them being in commercial development and 22 - in pilot or experimental commercial development. In addition, Komi enterprises are developing 12 fields on the territory of the Nenets Autonomous Area.

The explored reserves of categories +B+1 hydrocarbons amount to 1.6 billion tons of fuel equivalent, including reserves of oil (56%) and free gas (35%). Recoverable reserves of categories +B+1 oil equal 600 million tons. More than half of the remaining recoverable reserves of oil are concentrated at three major fields - the Yaregskoye and Usinskoye oil fields and the Vozeyskoye oil and gas condensate field. The volume of reserves of +B+1 categories gas amounts to some 150 billion m3. About half the volume of gas reserves is to be found at the Vuktylskoye oil and gas condensate field.

In 2010, production of oil in Komi amounted to 13 million tons (a fall of 3% over 2009), production of gas to 3.3 billion m3 (a rise of 2%). The center of oil production in the Republic is the Usinsky Area - in 2010 it accounted for 64% (8.3 million tons) of the total volume of oil produced in Komi, followed in second place by the Pechorsky Area - 16.3% (2.1 million tons), and then by the Sosnogorsky Area - 8.7% (1.1 million tons).

The main oil-production enterprises in the Republic are LUKOIL-Komi (70.6% of total production in 2010), RN-Northern Oil (8.4%) and Yenisey (6%). Aggregate oil production since the beginning of oil fields' development in the spring of 2010 has topped the half a billion ton mark and, on January 1, 2011, amounted to 510 million tons. The main amount of free gas is produced by Gazprom Pererabotka at the Vuktylskoye oil and gas condensate field (in 2010, 2.3 billion m3 of free gas was produced, or 89.3% of total production in the Republic). The Vuktylskoye oil and gas condensate field, which accounts for over 80% of all the gas produced in Komi, is being transferred to a storage-regulator regime.

In general, production of oil in the Republic has, for over three years now, been maintained at the same level. On the one hand, this is not bad, considering that the majority of the developed fields in Komi are either in the phase of maximum production or have entered the stage of falling production.

On the other hand, however, speaking of further development of the region's oil production sector, these results are not enough. After all, even in order to avoid a fall in the production of oil and of gas in the next few years, geological exploration work must be stepped up for the purpose of identifying new formations and replenishing commercial reserves by introducing new fields into development. Yet Komi is planning an increase in production (in the order of 15 million tons by 2013), although the current state of the fields developed on the territory of the Republic will provide for production of oil only at a level of 12-14 million tons. So the oilmen of Komi also need, in addition to stepping up geological exploration work and launching development of prepared and explored fields, to apply higher oil recovery ratio technologies. In addition, new technologies are also required for developing the reserves of highly viscous oil of the Yaregskoye and Usinskoye fields.

As for geological exploration work, over the last 5 years geological study and reproduction of the mineral base in the Republic have been carried out in accordance with the Program for Development and Use of the Mineral Base of the Komi Republic for 2006-2010 and the Period up to 2015, as well as the sector-specific target Program for Reproduction of the Mineral Base of the Komi Republic (2008-2010). The total volume of geological exploration work performed in 2010 funded by all sources amounted to 4.53 billion rubles (a drop of over 11% compared to 2009), of which 4.32 billion rubles (a drop of 7% compared to 2009) went into the oil and gas industry.

At the same time, the total volume of exploratory, structural and survey drilling in 2010 amounted to 20,200 meters (5.5% less than in 2009).

A target Program is currently in place for development and use of the mineral base of the Komi Republic (for 2011-2013). In relation to hydrocarbon crude, implementation of this Program will provide for efficient management of state balance reserves of hydrocarbon crude on the territory of the Republic (in particular, creating conditions for replenishing reserves for production of hydrocarbon crude), and monitoring the performance of geological exploration work.

Key players

Now let us look in more detail at the biggest oil and gas companies operating in Komi. LUKOIL-Komi, for instance, has been producing in the Republic since 2001 and has the biggest hydrocarbon resource base in the Northwest of the Russian Federation. The company is engaged in production in the Komi Republic and the Nenets Autonomous Area (in the order of 70% and 30% of total production, respectively). LUKOIL-Komi focuses particularly on production of high viscosity oil, the recoverable reserves of which account for 63% of all recoverable reserves on the territory of Komi. The company produces highly viscous oil at the Usinskoye and Yaregskoye fields - each year, in the order of 2.3 million tons (1.6 million tons and 0.7 million tons, respectively) are produced there, this constituting about two-thirds of all Russia's heavy oils.

Overall, the remaining recoverable reserves of oil at the LUKOIL fields in the Republic Komi amount to some 500 million tons, and prospective resources to 125 million tons. At the same time, the company is actively conducting geological exploration and increasing its investments. In 2010, for instance, prospecting and exploratory drilling of 9,400 meters was carried out, construction of 2 wells was completed on the Bayandyskoye field (with well flow rates of 10 thousand tons and 50 thousand tons per annum); both wells are now in production. Overall, however, the LUKOIL-Komi investment program in 2010 was quite large (over 24 billion rubles.). The most significant projects implemented included development of the Suborskoye field, completion of drilling of 51 wells, and commissioning of a whole series of facilities (a booster compression station on the Suborskoye field, two steam generators on the Usinskoye field, a gas turbine power plant on the Tedinskoye, and a gas compressor station on the Kyrtaelskoye field).

The Rosneft subsidiary, RN-Northern Oil (which merged with the holding company in 2003), is the second biggest oil and gas player in Komi. RN-Northern Oil is the operator for development and production of oil at 17 oil fields in the Timan-Pechora oil- and gas-bearing province, 70% of the proven reserves being located at two groups of fields: the Baganskoye (Komi Republic) and a group of fields in the region of the Gamburtsev Bank (Nenets Autonomous Area). The company's proven reserves of oil amount to 65 million tons and prospective ones to 27 million tons. In July 2010, a protocol was signed between the government of the Komi Republic and Rosneft to their cooperation agreement. In accordance with this, in addition to providing certain volumes of production of oil and associated gas and investment of approximately 3 billion rubles, Rosneft also undertook to hire specialists from Usinsk and other parts of the Republic on a preferential basis. In addition, RN-Northern Oil undertook to continue its program of associated petroleum gas utilization.

Refining: LUKOIL as the leader

The refining industry in the Republic Komi holds, one might say, a strong central position among regions with their own refining - in 2010, the volume of oil refined in the Republic amounted to 4.2 million tons. This is 3.4% less than in 2009 owing to a scheduled overhaul in June of the primary refining units. At the same time, 2010 saw a rise in production of gasoline (by 10.2%), fuel oil (by almost 45%), and bitumen (3.3-fold) but a fall in that of diesel fuel (by 6.3%) and marine fuel (by almost 50%).

The key player in the Republic's oil and gas refining industry is LUKOIL-Ukhtaneftepererabotka. The enterprise specializes in production of gasoline, diesel fuel, aviation fuel, fuel oil, bitumen, vacuum gas oil and other types of output. The Ukhta refinery meets Komi's fuel requirements in full and supplies petroleum products to neighboring regions.

The Ukhta refinery is one of the oldest in the industry, having been started up back in 1934. Nevertheless, after joining the LUKOIL Group in 1999, modernization was launched at the plant, resulting in the refining depth increasing from 47% to 82.6% (in 2008), which is currently one of the best indicators in the Russian Federation.

The work on renovating and technically refitting the refinery is still going on. In particular, the vacuum installation modernization has been underway since 2009 for the purpose of increasing its capacity. The refinery is also looking for the most efficient methods of increasing the refining depth of the heavy oil from the Yaregskoye field. LUKOIL currently produces some 700 thousand tons of this oil per annum by surface methods and is planning to increase this figure to 1.7 million tons over the next 2 years. In addition, LUKOIL intends to change the system for transporting the crude from the field to the refinery: presently, the oil is warmed and transported by railway cisterns, but in the future it will arrive heated by a new pipeline.

In addition, in August 2011, the Ukhta refinery in the Komi Republic was joined by a "younger brother": Yenisey started up the first stage of an refinery in Usinsk with a capacity of 1 million tons for refining oil from the company's Zapadno-Synatyskoye field (with reserves estimated at 9 million tons), as well as a number of other northern oil fields. The refinery is capable of operating in the conditions of the Far North, at temperatures down to -50o. This is, in fact, the most northerly refinery in the world.

The cost of constructing the first stage of the refinery, given a maximum refining capacity of up to 1.3 million tons, amounted to 8.5 billion rubles. The output consists of: fuel oil, straight run gasoline and diesel fuel (including the arctic brands). At the same time, straight run gasoline will be transported outside the Republic to enterprises where it will be used as raw material for the petrochemical industry. The Usinsk refinery does not yet produce deep refining - it would not be profitable given the current capacity of the plant. In 2012-2013, however, Yenisey plans to start up a second stage of the oil-refining complex, envisaging adding to the refinery's equipment a diesel fuel hydrodewaxing and hydro-purification plant, as well as equipment for obtaining hydrogen. The total cost of the project is 9.2 billion rubles.

Raw material predominance

The main problem for the Komi Republic is probably the strong raw material orientation of the region's economy, which also predetermined the profile of its external trade turnover: predominant in exports is output of the extractive industries (oil, gas, timber), whereas in imports - machinery and equipment.

Although diversification is required for a balance of this situation, under the conditions of Komi's harsh climate, it is unlikely to be profitable to set up manufacturing units on the territory of the Republic. The predominance of the production sectors in the structure of Komi's economy is, therefore, likely to remain for the time being.

In the oil sector, the main problem is, as already mentioned, the deteriorating state of the raw material base in both quantitative (falling volumes of reserves) and qualitative terms (an increasing proportion of hard-to-recover reserves). The reason for this lies in insufficient replenishment of commercial categories of oil reserves produced as a consequence of a cut-back in geological exploration work (owing to decreased financing caused by the abolition of the mineral reserves replacement tax).

Here, too, active measures are required, above all by the administration of the Republic, to encourage both geological exploration and use of effective enhanced oil recovery methods by subsoil user companies. Even considering that none of the oil and gas severance tax currently finds it way into the regional budget, active intervention on the part of the authorities is justified, as indirect incomes from other tax items will rise. In fact, the administration of the region is already working in this direction: over the next few months, the Government of Komi plans to develop draft regional laws envisaging preferential tax treatment for sectors associated with comprehensive development of hydrocarbon fields, development of a gas supply system on the territory of the region, and energy saving.

As regards the overall potential for development of the Republic, Komi is at the moment probably the economically strongest constituent entity of the Barents Sea region, with a Gross Regional Product of 300 billion rubles. In addition, the Republic holds leading positions in the Northwestern Federal Area in terms of foreign investment (apart from St. Petersburg). In November 2010, the Fitch rating agency confirmed the long-term rating of the Komi Republic in foreign and national currency at the BB level. The agency also confirmed Komi's national long-term rating at the AA- level. The forecast for all the long-term ratings is Stable.




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Oil of Russia, No. 1, 2012
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