Russian Oil Producers Keep Pushing Up Production

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Russian oil production has remained on a growth path despite the plunge in oil prices because producers have built their business on producing oil for less than USD 30/bbl.

When oil prices were higher, most of the revenue past a certain price was paid in taxes to the Russian government, said Matthew Sagers, managing director of research for IHS, at the annual CERAWeek conference in Houston. When prices fell, Russian tax revenues shrunk but producers saw little change in their revenues.

“Russian oil companies have always lived in a USD 25/bbl to USD 30/bbl” environment, he said. “The rest of the world has arrived at a place where the Russian companies have been all the time.”

And companies there are not backing down. “Russia is the only place in the world I know where capex increased last year,” he said. Production there “is really not going to come down.”

Even in the face of international sanctions related to Russia’s aggressive role in the conflict in the Ukraine, which have limited imports of oilfield technology and loans from international financial institutions, the country’s oil production rose to 10.4 million B/D in January, up from 10.3 million B/D in December.

That means that Russia can honor its pledge to freeze its production at January levels, and still produce at a record level this year, Sager said.

Investment is expected to continue despite the slide in oil prices this year, but that is not a certainty. The government will need to resist the powerful urge to raise taxes on the industry, which had been a major source of revenue. But the country needs to be careful because oil and gas is now such a large part of the country’s economy.

A tax increase could force producers to cut back on spending that has been financed by profits from operations, which also allowed them to raise money from a variety of sources, including Russian banks and oil traders.

Growth in the sector has come from a little-noticed sector of the Russian industry, independent producers, Sager said. Three large independents represent most of the sector. On the CERAWeek panel, the sector was represented by the head of a small company owned by international investors JKX Oil and Gas.

It is small now, with 7,000 BOE of gas in southern Russia and 4,000 BOE outside the country, but it is working on a growth plan, said Thomas Reed, chief executive officer for JKX. The lure is the country’s enormous store of conventional reserves. There are enough low-risk conventional reserves (2P) to last for another 60 years, he said.

Those huge conventional opportunities make far more economic sense in this low-price environment than large unconventional plays. The focus on conventional development there helps explain why sanctions limiting imports of oilfield technology for shale oil development in Russia have had little effect on sales.

In practice, the ban on equipment and services for shale oil development “does leave a large gray zone. Are we talking about tight oil? Strictly speaking, that is not shale oil in the language of the sanctions. In principle, there is a vast zone” outside the restrictions, said Thane Gustafson, senior director and adviser for Russian and Caspian Energy for IHS.

For Reed, the availability of advanced technologies, such as modern fracturing targeting specific zones, and horizontal drilling, could be used to increase production in the available conventional reservoirs, which come with challenges.

“Production now is mostly from vertical wells with openhole completions or perforated casing. There is room for growth,” he said.

Russian Oil Producers Keep Pushing Up Production

Stephen Rassenfoss, JPT Emerging Technology Senior Editor

20 March 2016

Volume: 68 | Issue: 4

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