By Paula Dittrick
Senior Staff Writer
HOUSTON, Oct. 17 -- BP PLC expects that its Russia investment will provide improving earnings and escalating production rates, adding that TNK-BP's production will be accretive even if the Brent crude oil price were to drop to $16/bbl.
Along with Russian partners the Alfa Group and Access-Renova (AAR), BP formed TNK-BP, a company owned and managed 50:50 by BP and AAR. TNK-BP, which has been operating for 6 weeks, is Russia's third biggest oil and natural gas company (OGJ, Feb. 17, 2003, p. 34).
In addition, BP and AAR agreed to incorporate AAR's 50% interest in OAO Slavneft into TNK-BP (OGJ, Sept. 8, 2003, p. 36). Between those two transactions, BP has invested about $8 billion in Russia.
Previously, BP completed a transaction with AAR to increase its stake in Sidanco (OGJ, Apr. 29, 2002, p. 37).
BP's Chief Executive John Browne told reporters and analysts Thursday that TNK-BP's first half 2003 oil production averaged 1.2 million b/d. He expects it will rise by 12-14% this year, decrease to 7% growth in 2004, and then hold at about 5% annual growth.
"Cash flows have been reinvested at a rate of approximately 30% over the period 2001 to the first half of 2003. Capital spend has averaged around $850 million a year. TNK-BP expects to increase this rate to around $1 billion or so over the near termputting over 70% in the exploration and production area," Browne said.
He said TNK-BP will represent some 11% of BP's proven oil and gas reserves and 3% of its capital deployed. TNK-BP is expected to account for about 15% of BP's total production, he said.
Browne said that Russian President Vladimir Putin promised to help provide the necessary tax incentives so that TNK-BP can produce more oil. "The risks are lower than perhaps in other countries," Browne said.
Climbing reserve estimates
TNK-BP has estimated proven oil reserves of 4.1 billion bbl as defined by the US Securities and Exchange Commission (SEC). This accounts only for volumes that can be produced by the time current field licenses expire.
But the estimate more than doubles to 9.4 billion bbl based on Society of Petroleum Engineers' criteria, which accounts for production that can be recovered during full field life. TNK-BP has asked the Russian parliament to extend its field licenses.
"On top of these numbers, we believe there are an additional 21.4 billion bbl of resources," Browne said.
Browne said he was confident that BP paid an "appropriate price" for its share of the assets, adding that BP spent 40,000 man-hrs examining the operational, technical, legal, and environmental aspects of TNK before making the investment.
The price paid for the estimated SEC-defined reserves was $4/bbl, significantly less than the $5.80/bbl in the YukosSibneft merger (OGJ Online, Oct. 3, 2003). On an SPE basis, the price was $1.70/bbl, Browne said.
"It is interesting to note that in the period since our transaction was announced, Russian energy stocks have increased in value by over 40%," Brown said.
Future TNK-BP operations
TNK-BP has three strategic priorities: convert resources to reserves to production; margin enhancement of its downstream assets; and develop natural gas, said Robert Dudley, TNK-BP CEO.
Currently, TNK-BP's top five fields represent 50% of the company's total oil production, Dudley said. Sources of production growth will include waterflood optimization, hydraulic fracturing, idle well reactivation, and electric submersible pumps, he said.
"Great opportunity exists through waterflood alone," Dudley said. He said TNK-BP's top five fields have 74 billion boe of OOIP. Those fields currently have a 25% recovery factor but Dudley believes the recovery factor will reach 30% through the proved developed stage with upside potential of 39-44% ultimate recovery.
In comparison, Alaska's Prudhoe Bay has a current recover factory of 44% with a 53% recovery factor through proved developed stage and upside potential of 56-61% ultimate recovery.
Dudley said Samotlor field in the West Siberian basin was similar to Prudhoe Bay in terms of waterflood opportunities, adding that Samotlor field (south and north) is the third largest oil field discovered, twice as big as Prudhoe Bay.
TNK-BP is evaluating idle well reactivation, infill drilling, and increased recovery potential in Samotlor, he said. Its 2002 production averaged 465,000 b/d.
The company said Ryabchik is a brown-field development behind pipe in Samotlor. Ryabchik has a 1 billion bbl reserve potential although it is in primary depletion with low recovery rates. A pilot is under way using BP's waterflood expertise in this shallow, largely undeveloped area.
Dudley said Western expertise might be able to reactive an unknown number of thousands of idle wells. For instance, Samotlor and Talinskoye fields have 8,000 idle wells.
In Khokhryakovskoye field, TNK-BP is reconfiguring a waterflood program to reverse a production decline, Dudley said. That field produced an average of 65,000 b/d in 2002. Khokhryakovskoye field, in the northern Vasyugan region of the West Siberian basin, was discovered in 1972.
"Russia is one of the last great hydrocarbon provinces of the world," Dudley said, adding Russia is the world's largest holder of gas reserves.
BP-TNK holds 40% of Rospan gas field in West Siberia. Dudley said BP-TNK will first focus on developing Rospan. Meanwhile, BP-TNK is examining its long-term opportunities to access international gas markets.
"We are looking for ways to cooperate with (OAO) Gazprom" in gas development, Dudley said.
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