The drilling revolution

When Russia emerged from the grip of soviet rule in the early 1990s its oil industry suffered a downturn in production. But as world oil prices have risen and the major Russian players have embraced new technologies and techniques, the industry has ridden the crest of a wave ever since. In fact, Russia has become an energy powerhouse with more gas reserves than any other nation – some 50 trillion cubic metres and an estimated 60 billion barrels of oil reserves. Foreign cash has flowed into the region, while equipment and drilling techniques have been dragged into the 21st Century too. “Companies like Sibneft and Yukos moved quickly to adopt western technologies and drilling techniques,” suggests Andrew Neff, Senior Engergy Analyst at Global Insight. “In some respects these were the companies that brought the other Russian companies kicking and screaming into the modern oil industry. Sibneft and Yukos ended up increasing their oil production much faster than the other oil majors.”

Today, Russia’s oil industry can now be found drilling horizontal wells with state-of-the-art equipment such as drill bits that can turn corners underground. Hydrofracturing, the forcing of steam into an oil well to create cracks in the surrounding rock and ease the flow of crude oil to the surface, has also become a widely used and inexpensive method. And 3D seismic surveying has become a widely used tool for identifying untapped oil.

Russia does not want to leave any stone unturned in its quest to exploit its natural resources. The country currently produces around nine million barrels of oil a day but this is still less than it was extracting during communist rule twenty years ago. Production peaked at 11.5 million barrels per day in 1987 but nose-dived in the 1990s – fuelled by Russian financial crisis and the subsequent devaluation of the rouble. In 1999 the multi-billon dollar industry began to slowly recover with the privatisation of some of the major companies. Rising oil prices, the application of Western technologies and the rejuvenation of old oil fields helped swell output.

Today, there are varying estimates of exactly how much oil Russia has access to. It’s one thing having a hefty amount of reserves, but another thing being able to extract the oil. Roughly two thirds of Russia’s oil comes from Western Siberia, which has been the drilling hub since the 1960s. Sakhalin Island and offshore fields in the Sea of Okhotsk are another focus for oil extraction. Around one quarter of Russia’s oil reserved can be found on Sakhalin.

Russia still has huge reserves of untapped oil lying under the seabed of waters to the north. Getting access to it is not easy due to the extreme environmental conditions. The Arctic region is thought to hold 40 billion barrels of oil and the world’s largest untapped gas reserves. This means investing in new technology to extract raw energy from the Arctic – including ice-resistant production platforms and 3D seismic surveying with pinpoint accuracy.

Harsh realities

While the country has a plentiful supply of raw energy the remoteness and harsh weather conditions creates a daunting recipe for the drilling teams. On Sakhalin Island the oilmen face the lingering danger of earthquakes and typhoons, as well as having to contend with a frozen sea. The freezing winter temperatures in much of the country can severely hamper production too.

The severe cold snap that hit Russia, Kazakhstan and Ukraine last year shut down a fair amount of production. Bosses at TNK BP had to cut around 200,000 barrels a day because the sub-zero temperatures made drilling impossible and put workers at risk. “The climatic conditions certainly create challenges. The further east you go in Siberia it gets colder and colder. You often see the oil workers drilling in sub zero temperatures,” says Neff.

As well as the environmental difficulties, the bureaucratic obstacles and tariffs are another added headache for the oil companies and drillers. “The oil companies would say one of the main challenges is the political issues and keeping on the right side of the Kremlin. The government has continued to raise the crude oil export tariffs, which the oil companies have said is serving as a detriment to oil production,” explains Neff. And the law surrounding who gets the rights to drill potential oil fields is not always that straight forward either. “Under the current legislation there is no guarantee that if you carry out the exploration and find reserves that you will have the right to develop these reserves. Under this system a company with an exploration licence who discovers oil is not guaranteed to get the rights to develop it. The licence has to be auctioned off in a process that is very opaque.”

On a more practical level Neff says Russia throws up many problems for the major companies. “In Eastern Siberia there is the lack of infrastructure like roads and lack of access to labour. Because of the remoteness from Russian cities and from the market for the oil, it means the costs soon add up. Drilling for oil in a remote region means that you have to deal with extracting it, piping it and build roads to get the equipment and materials and labour into the site. Often these are completely desolate areas in the wilderness. And as well as that these are seismic risk areas as well.”

On top of this there are also suggestions that the Sakhalin-2 project is not up to the required environmental standards and potentially would not be able to withstand a mudslide triggered by an earthquake. Although there is a fair amount of seismic activity in the region, many earthquakes go unreported because of the few people living there. “Increasingly, there is the environmental awareness in Russia, although I don’t think you see it to the extent that you see in the west,” asserts Neff. "However, you will see environmental concerns becoming larger as the industry becomes more developed. Greenpeace is becoming more interested on what is going on in Russia. Local environmental groups are coming to the realisation that oil and gas is good for the economy but there is a certain point where you are starting to compromise some of the natural areas in favour of more energy development.”

The good old ways

Although Western partnerships and technologies have been embraced by many of the oil’s major players in Russia, one company has stuck with its tried and trusted drilling operations. Surguteneftegas, which produces around one million barrels a day, has shunned overseas technologies and the outsourcing of its field services. The oil company, Russia’s fourth largest, is considered to be self-sufficient with much of its work kept in-house. The company also makes a point of avoiding using foreign contractors. Bosses argue that technologies and equipment can be purchased on the open market and that their use works out cheaper if domestic oilmen are used. It is also believed to drill the cheapest wells – about US$200,000 for a deviated well. Expensive 3D seismic surveying is not thought to be used either, despite it’s widespread use in the rest of the world. The firm has five production units operating licences in Western and eastern Siberia, along with four refineries.

The firm, run by the publicity-shy billionaire Vladimir Bogdanov, is seen by outsider foreign investors as an enigmatic company, as Neff points out. “It is a major producer but is very much unknown in the west. This is partly because it is a very closed company and not headquartered in Moscow like the other majors. It is very much seen as the black sheep of the Russian oil industry from an outside perspective. Inside, although being the number four company, it has never been seen as the future of the industry but rather as a hold over soviet company.” Neff adds: “They have a huge cash pile but are seen as company that is more uniquely Russian. It is also seen as the company that traditionally pays the highest wages and has a lot more support from the government. If the Kremlin says ‘jump’ Surgutneftegas says ‘how high’?” With the company’s apparent lack of modern equipment and practicesNeff questions what the future holds. “It has never been seen as a company with high growth potential because it is very much unknown.

“If they are not using seismic data you wonder how the company is going to survive in the next ten years. It is not under as much pressure for it financial or operating performance as opposed to a company that is more internationally exposed like Lukoil. It is allowed, in some ways, to fly under the radar because it is more of a steady than spectacular performer.” Neff also questions whether the firm is a sitting duck in the market and ready to be taken over. “At the moment it could just be a cash cow for the management until the time comes when President Vladimir Putin gives the word and it is time for them to sell the business to Rosneft or Gazprom. This will enable the company to be taken into the next decade.”

Dominance

Despite Surgutneftegas’ soviet-style operations the other oil companies have moved forward, especially when it comes to drilling. In fact, output has surged by 50 percent since 1998. With global demand soaring due, in part, to China’s booming economy, it is estimated that crude oil could have reached US$100 a barrel in the last few years had Russia not stepped up production. President Vladimir Putin is keen to raise the profile of his country’s oil and gas exports at a time when energy-poor countries have become even more reliant upon Moscow for their supplies. The Kremlin has also announced that Russia will spend US$100 million to strengthen the industry’s ability to get oil to market.

Meanwhile, reports have also recently surfaced to suggest that Russia has narrowly overtaken Saudi Arabia as the world’s largest oil producer. Both produce just over nine million barrels of oil a day. It seems the drilling sector in Russia is facing an intriguing period – whether the oil giants can keep delivering the goods remains to be seen. What is for sure though is Moscow’s determination to maintain its dominant position on the global energy stage. But without the most advanced drilling methods its crown could just slip.