No. 3, 2012


Oil of Russia magazine talks to Ilya Mandrik, LUKOIL Vice-President for Geological Exploration

In terms of hydrocarbon reserves, LUKOIL is confidently in the Top 3 companies in the world. For this achievement, the Russian major is largely obliged to efficient work in the sphere of geological exploration. The company traditionally focuses particularly on this sphere, successfully replenishing produced hydrocarbons with commercial category reserves, preparing the reserves base in good time for rapid organization of production and providing for its accelerated growth in promising regions of Russia and abroad.

Q: In which parts of Russia is LUKOIL conducting the biggest scope of geological exploration work?

A: Between 2007 and 2011 alone, in the course of geological prospecting and exploration work on the territory of Russia, LUKOIL drilled through 496 thousand meters of rock, performed 23.85 thousand line km of 2D seismics and 13.57 thousand km2 of 3D seismics. At the same time, the increase in hydrocarbon reserves amounted to only 576.4 million tons of standard fuel, including 343.3 million tons of oil, 16.2 million tons of condensate and 216.9 billion m3 of free gas.

The main scope of the Company's geological exploration works is being carried out in the Western Siberia region. For instance, since 2007, within the bounds of our Western Siberian license sectors, we have drilled through about 215 thousand meters of rock, carried out more than 2.5 thousand line km of 2D seismics and over 8.3 thousand km2 of 3D seismics. In doing so, we managed to add 213.9 million tons of standard fuel, of which over 120 million tons consist of oil.

Even so, the Company's geological exploration works are proving most successful in the Volgograd Region and in the Caspian. Over the same period, for instance, within the bounds of the license sectors of LUKOIL-Nizhnevolzhskneft, 39 thousand meters of rock were drilled, over 3.7 thousand line km of 2D seismics and 1.15 thousand km2 of 3D seismics performed, the result being an increase of over 223 million tons of standard fuel, including 92.8 million tons of oil.

Q: What is the estimate of LUKOIL's hydrocarbon reserves at home and abroad today?

A: LUKOIL Group enterprises are currently seeking, exploring and producing hydrocarbons on the territories of thirteen constituent entities of the Russian Federation and in thirteen near- and far-abroad countries. In addition, work is being carried out on the continental shelves of three seas - the Caspian, Azov and Baltic.

At the beginning of this year, the Company's recoverable hydrocarbon reserves calculated according to the Russian classification amounted to 8.4 billion tons of standard fuel, including 6.3 billion tons on the territory of Russia and 2.1 billion tons constituting the Company's share in the reserves of overseas assets.

As an issuer of securities quoted on the world stock markets, since 1996 the Company has performed an independent assessment of its hydrocarbon reserves and resources according to international standards. The external auditor is the well-known consulting company Miller&Lents, Ltd.

The assessment is performed in accordance with the standards of the Petroleum Resources Management System (PRMS). The 3P ("proven" + "probable" + "possible") hydrocarbon reserves confirmed by the auditors at the beginning of 2012 in aggregate for the LUKOIL Group amounted to 29.6 billion barrels of oil equivalent, including 27.7 billion barrels on the territory of Russia; 1.9 billion barrels is the share of overseas asset reserves.

Currently oil reserves-to-production ratio constitutes 19 years and that of gas - about 30 years. This ratio determines the basic provisions of the corporate strategy: a substantial increase in gas production in the medium term and maintenance of a stable oil production level.

In terms of hydrocarbon reserves, the LUKOIL Group is thus one of the recognized leaders, alongside ExxonMobil and BP within the group of the three biggest privately-owned companies in the world.

Q: What is the geographical scope of LUKOIL's overseas geological exploration projects today?

A:The Company's priority spheres of geological exploration works are the following oil and gas production areas of the world: the shelf of West Africa, the Middle East, Central Asia, South America, the Black and Caspian Seas.

Abroad, LUKOIL is participating in a total of 26 projects in 13 countries, including 15 geological exploration projects: 3 in Uzbekistan, 3 in Cote d'Ivoire, 2 in Romania and one project each in Egypt, Saudi Arabia, Ghana, Vietnam, Sierra Leone, Colombia and Venezuela.

In recent years, the Company has been focusing particularly on expanding its geological exploration activities in the Black Sea region. In addition to two existing projects in Romania, we are considering the possibility of the Company participating in geological exploration on the Ukrainian and Bulgarian Black Sea shelf.

Q: This year, LUKOIL has entered the active phase of development of the West Qurna-2 oil field. Why is this field in Iraq unique and so significant for the Company?

A: The West Qurna-2 is one of the biggest oil fields discovered in the world, with initial geological oil reserves of over 4.6 billion tons and about 540 billion m3 of associated gas.

In 2015, the Company plans to achieve, at this field, a daily level of commercial oil production in the amount of 21 thousand tons. It is anticipated that the maximum daily yield will be reached in the amount of 255 thousand tons, meaning in the order of 93 million tons of oil a year. This is comparable with the Company's current aggregate annual production of oil. It is these figures that explain why this oil field is so unique and commercially significant for our Company.

Q: How justified are the Company's expectations regarding its shelf projects in Africa?

A: The Company is currently taking part in the following geological exploration projects in West Africa: three blocks in Cote d'Ivoire and one block each in Ghana and Sierra Leone.

Within the bounds of these blocks, the sea depth is from 1500 to 2500 meters, this necessitating use of expensive, high-precision geological-geophysical and drilling equipment. The main hydrocarbon saturation prospects in the region are linked with the Cretaceous terrigenous deposits of the Turonian, Cenomanian and Albian Ages.

In Ghana and Cote d'Ivoire, the Company has drilled six prospecting wells. Two oil fields have been discovered: the Dzata in Ghana and the Independence in Cote d'Ivoire. The hydrocarbon potential of these fields is now being assessed. In addition, oil has flown from the Albian formations at the Buffalo facility (CI-205 block). On this block, two structural targets have been identified along Albian horizons and the question is being considered of performing further geological exploration works in this sector.

In Sierra Leone, in 2013 it is planned to begin drilling an exploratory well at the Savanna facility.

We estimate that the blocks on the West African shelf where the Company is conducting geological exploration works have a high resource potential. Suffice it to say that the recoverable hydrocarbon resources of these sectors amount, in our opinion, to in the order of 1.2 billion tons of standard fuel, which prompts us to anticipate discovery of major oil and gas fields here.

Q: What aroused the Company's interest in the shelf projects in Romania, Vietnam and Ukraine?

A: These regions are relatively new ones for the Company, although our geological service has been carefully studying for some years now the geological structure of these regions and the results of prospecting and exploration works performed there by foreign companies.

In Romania, we are participating in geological exploration works on two shelf blocks: 29 and 30. The sea here is from 200 to 1000 meters deep. The hydrocarbon saturation prospects are connected with traps in the terrigenous formations of an Oligocene-Miocene age (the palaeodelta of the Danube). Preliminary estimates put the localized recoverable gas resources of these blocks at about 200 billion m3. The promising nature of the work is evidenced by ExxonMobil's discovery, in 2011, of the Domino gas field in the Oligocene-Miocene formations of adjacent block 31.

On the Ukraine shelf, we are considering the possibility of participating in additional exploration and development of the Odessa and Bezimyannoye gas fields, as well as the Subbotinskoye oil field.

In addition, of a certain interest to the Company is participation in geological exploration works on the Skifsky deep-water tender sector, where the sea is from 200 to 2000 meters deep. Two promising local structural targets have been identified here in Oligocene-Miocene formations.

Since 2011, the Company has been working on the Vietnam shelf, on block -02, which is located on land and in the shallows of the South China Sea in the Song Hong basin. The water depth here is no more than 25 meters. Back before the Company joined the project in 1996, well 10-1 was sunk on land in the northern part of the block and revealed oil-saturated carbonaceous formations of a Carboniferous-Permian age. Tests produced a flow with a pure oil yield of 133.3 m3 per day. The Company is currently working to specify the potential of this sector and a program is being developed for further geological exploration works.

In the western part of block -02, the previous operator discovered gas field K-10, with reserves of over 20 billion m3, in the Miocene formations.

In addition, a number of promising gas elevations have been discovered in the west of the sector, this testifying to a certain hydrocarbon potential of block -02 in general.

Q: The Company recently opened an office in Norway and has undergone prequalification for work on the Norwegian shelf. What are the main criteria for possible participation by the Company in auctions for the right to perform geological exploration works in Norway?

A: The main criterion for participation by the Company in geological exploration works in Norway, as in any other overseas region, is confidence in the oil and gas potential of the selected license sector (block).

The second criterion is availability of experience of performing offshore work, including in the deep water part of the continental shelf.

The forecast geological hydrocarbon resources for the Norwegian part of the Barents Sea shelf (according to Norwegian Petroleum Directorate in 2009) is 1.87 billion tons of standard fuel. The hydrocarbon reserves in consideration of risks (according to the U.S. Geological Survey) are estimated at a level of 906 million tons of standard fuel.

Authoritative international organizations thus assess the hydrocarbon potential of the Norwegian shelf as quite high. Analysis of the geological structure of this region, according to the geological and geophysical data available to the Company, testifies that the biggest undiscovered oil and gas resources lie in the south-eastern part of Norway's Barents Sea shelf. This territory is characterized by a similar geological structure to that of the Russian sector of the Barents Sea, where a number of major fields have already been discovered, such as the Shtokmanovskoye, Prirazlomnoye, Ludlovskoye, Ledovoye and others.

The Barents Sea's main oil-and-gas-bearing complex in the Russian sector and in the south-eastern part of the Norwegian sector is a thick layer of Jurassic terrigenous formations, with which most fields discovered here are connected. Proceeding from this, we consider the south-eastern part of the Norwegian sector of the Barents Sea as the most attractive territory for participation by the Company in geological exploration works.

Q: LUKOIL is actively studying the possibility of developing the Bazhenov formation. How optimistic are the assessments made by the Company's geological service of the Bazhenov formation?

A: Russia's resource base is today characterized by a deteriorating structure of oil and gas reserves. As the reserves of the fields discovered last century are worked out, the share increases of fields classed as difficult ones, these currently accounting for in the order of 70%, whereas forecasts of the dynamics and structure of reserves show that, by 2015, the figure will have topped 80%. In my opinion, the situation may be fundamentally improved by preparing and developing non-traditional and currently unprofitable hydrocarbon sources. Such sources of hydrocarbons include the complex structures of the Bazhenov formation, the geological oil resources in which amount, according to different estimates, to in the order of 100-150 billion tons. Efficient development of the given resources will increase recoverable resources by approximately 35-50 billion tons of oil. Of significance in this is the fact that the major part of these reserves are located in regions with a developed oil infrastructure.

For the LUKOIL Group, the Bazhenov rocks constitute the main target for development on the two fields in Western Siberia: the Sredne-Nazymskoye and the Galyanovskoye, on which RITEK company has been working since 2007. At these oil fields, the given enterprise is performing a large scope of geological exploration and drilling works, as well as various geological engineering operations. On the basis of combination of the results obtained, the locations are forecast of promising oil-saturated sectors attached to zones of fracturing in the sediments of the Bazhenov formation and recommendations are justified for further development of fields, including the siting of planned wells.

It is obvious that non-traditional hydrocarbon reserves require an innovative approach to development. In order to speed up the work within the scope of resolving the global problem of profitable production of hydrocarbons from Bazhenov formations, a fundamentally new technology needs to be developed and introduced. RITEK company has determined, as the key direction in resolving this problem, development of a thermo-gas method for increasing oil recovery, which can heat the formation and form within it an effective agent for pushing out the oil, as is evidenced by the results of a large number of laboratory tests specially performed on core material from these rocks. In order to carry out a field experiment and determine the practical significance of this method, a pilot sector has been prepared and technically equipped at the Sredne-Nazymskoye oil field. We hope that use of the given method for developing oil fields will allow an increase in production of hydrocarbons from these formations by an order of magnitude.

Q: What is your opinion of the prospects for developing shale gas?

A: Over the last few years, considerable attention has been focused in the world on the problem of exploring and producing hydrocarbons from non-traditional collectors, above all oil shale. Even so, at the moment, only the United States and Canada are producing gas from clayey shales (argillite).

It should be noted that the leading positions of these countries in the development of shale gas are determined by the following factors: availability of an enormous gas potential, an efficient technology for producing the shale gas and beneficial taxation of production enterprises. In addition, development of shale gas fields should envisage the following essential conditions: proximity of a sufficiently big body of water and a low population density in the region where the works are carried out. For instance, in the order of 1600 m3 of water is required for hydro-fracturing in the well, there being 4 production wells per square km .

In Europe, prospecting work for shale gas began in 2009, most actively in Poland, Germany and the Netherlands.

In 2011, for instance, the Polish company PGNiG first launched industrial production of shale gas, though a flow of shale gas was obtained in only one out of ten wells drilled. According to the U.S. company ARI, potential shale gas resources in Poland were initially estimated at 5.3 trillion m3, but after the first few unsuccessful wells, Polish specialists reduced this figure to 570 billion m3.

The geological structure of the Polish coastline area is analogous to that of the south-western parts of the Kaliningrad Region, which indirectly confirms that the search for gas reserves in the Lower Silurian shale in this part of Russia is likely to be successful. Earlier, in the 1970s, gas showings were registered during drilling of exploratory wells into Lower Silurian formations, but little attention was paid to this at the time.

The U.S. Department of Energy predicts shale gas reserves of 530 billion m3 in the Kaliningrad part of the Baltic basin.

It should be noted that a number of LUKOIL-Kaliningradmorneft oil fields are located in the Kaliningrad Region. At one of them, the Ladushkinskoye, during drilling of operating wells, utilization is envisaged of a station for geological engineering control with a special geochemical module, core sampling for Lower Silesian formations and their analysis according to a special program for assessing the gas-generating potential. This will permit a more accurate and justified assessment of the prospects for seeking shale gas in the region.

Speaking of the shale gas productions prospects, I would like to stress that this is a very promising line of the Company's business against the background of the overall fall in reserves of traditional gas in the world. Effective fulfillment of this task requires, however, certain actions on the part of the Company and on the part of the government, specifically: in developing shale gas fields, the Company will have to introduce into practice the latest and costly technologies, which means that the relevant government authorities need to develop solutions for beneficial taxation of production enterprises for the purpose of making development of such fields economically feasible.           

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