FSU/EASTERN EUROPE

A roaring comeback continues

High oil prices and strong revenues are generating cash for regional operators to re-invest in E&P projects. Russia is in the best year of its post-Soviet transition, with oil production increasing and drilling set to hit a four-year high

Russia, Turkmenistan, Uzbekistan, Ukraine, Belarus and Lithuania by Alec Mikhalyants, Igor Polovets and Alex Chorine, RPI, Inc., a U.S.-Russian consulting firm, Moscow and Los Angeles

Russia

Politically, as well as economically, 2000 was the best year for Russia during its post-Soviet transition. Politically, 2000 brought stabilization. The new administration of President Vladimir Putin managed to successfully consolidate power. Putin embarked on a path of liberal reforms, securing a pro-reform majority in the parliament for the first time in post-Soviet history. The Putin administration also implemented radical reform of relations between the federal government in Moscow and the regions. The reform redistributed power in favor of the central government, forcing the regions to comply with federal legislation, and curbing the ability of regional administrations to run their territories as personal fiefdoms.

Former Soviet Union Click for enlarged view

After a decade of declines and stagnation, the macroeconomic situation showed drastic improvement, as Russia overcame the effects of the 1998 financial crisis. GDP growth reached an impressive 7.6%, industrial production grew by 10%, and foreign reserves grew an average $400 million / week, to reach $28 billion by year-end.

For the Russian oil industry, 2000 became a record year. Boosted by high oil prices, companies increased investment in exploration and production. Investment in the sector reached $4.7 billion, twice the amount invested in 1999. Moreover, estimates indicate that the actual figure may be higher than indicated by official statistics, by as much as 30%.

Boosted by high crude prices and a strong recovery, Russian oil companies posted their strongest financial results ever. Leading producer LUKoil posted an after-tax profit of $3.1 billion. Number-two YUKOS also posted an after-tax gain in excess of $3 billion. On the lower end of the totem pole, even smaller, vertically-integrated companies, such as 12-MMt/yr (239,000-bopd) Slavneft (owned by the Russian and Belarus governments) posted a $756 million profit.

Flush with cash, Russian oil companies also began seeking to diversify and increase their international presence, competing with each other for refining and downstream assets in Central and Eastern Europe. In Russia, Tyumen Oil Co. (TNK) completed the largest acquisition in Russia’s oil industry to date, purchasing ONACO, a vertically integrated, 8-MMt/yr (159,000-bopd) producer, for $1.08 billion from the government.

Exploration. Reserve increases did not cover production. During 2000, Russia added about 203 million t (1.475 billion bbl) of new oil reserves, and 223 Bcm (7.875 Tcf) of natural gas reserves.

An injection of cash in the oil sector fueled a frenzied competition for assets, particularly new reserves and E&P licenses. With West Siberia (Russia’s core production area) already divided into spheres of influence, companies began turning their attention to East Siberia. The vast area to the east of traditional production areas is largely under-explored, but it is thought to contain enormous hydrocarbon reserves. YUKOS has formally announced that East Siberia is an area of its strategic interest, while Surgutneftegaz also began acquiring exploration licenses in the region.

Drilling / development. There was a resurgence of drilling activity last year. Wells drilled rose 43%, to 3,405. Total footage drilled increased an impressive 70%, to 30.51 million. Within the totals, development drilling reached 27.18 million ft (up 67.5%), and exploration drilling tallied 3.33 million ft of hole (up 96.3%).

Russian companies began operating 43 new oil fields. Among these new fields, operators drilled 147 new wells for a total depth of 252,000 m (826,812 ft) and produced 546,000 t of oil (10,845 bopd). At Yarainerskoe field, Sibneft drilled nine new wells for 25,600 m (83,994 ft) and produced 106,000 t (2,105 bopd). Sibneft also drilled five new wells at Romanovskoye field, having completed 24,000 m (78,744 ft) of development drilling at the site. Output at Romanovksoye was 41,000 t (815 bopd). Surgutneftegaz drilled 47 new production wells for 149,100 m (489,197 ft) in East Tromeganskoye field. The field produced 64,000 t (1,270 bopd) last year.

Production. Russia’s average daily production increased 7%, reaching 6.45 million bopd. Included in that figure were 6.223 million bpd of crude and about 228,000 bpd of condensate. Among oil companies, YUKOS and Sibneft registered the largest daily production increases, at 17.4% and 16.8%, respectively. Bashneft and Tatneft, operating older fields in European Russia, registered declining output – 9,450 bopd less for Bashneft and 10,180 bopd less for Tatneft.

High investment levels stimulated production increases. Among the leaders for increases were YUKOS (up 4.83 million t/95,940 bopd, or 11.3%), Surgutneftegaz (up 3.05 million t/60,580 bopd, or 8.1%), state-owned Rosneft (up 1.2 million t/23,835 bopd, or 7.3%) and Tyumen Oil (1.28 million t/25,425 bopd, or 6.4%). These figures are included in the Russian production table. On the whole, major operators’ production grew 10%, while output from small producers declined 6%.

Last year, 3,178 new wells were brought onstream, or 48.5% more than in 1999. The total number of active oil wells increased 9.3%, while the number of idle wells declined 4.5%. As of January 1, 2001, the total number of wells stood at 141,879, or 8,201 more than a year earlier. Operating in West Siberia, Surgutneftegaz was the leader in new producing wells, bringing 761 wells onstream. Russia’s largest oil producer LUKoil, was a distant second, with 399 new wells.

High oil prices, as well as increased application of enhanced recovery methods, were behind production increases. YUKOS and Surgutneftegaz, in particular, achieved significant increases from implementation of enhanced recovery.

Natural gas. Gas industry results were less impressive. According to the Energy Ministry, natural gas production reached 584.2 Bcm (56.37 Bcfd), a 1.6% decline from 1999’s level. Gazprom, the country’s national gas monopoly, produced 523.1 Bcmg (50.47 Bcfgd), or 4.3% less than a year earlier. However, Gazprom’s production declines were partially offset by increased gas output from oil companies and independent producers.