Russia's oil production apparently is plunging faster than even the most pessimistic Soviet officials and western observers deemed likely only a few months ago.
Previous assessments of petroleum industry prospects in the now dissolved U.S.S.R. pointed to a steadily deepening crisis in liquid hydrocarbon flow culminating in 1994-95. A rebound at that time was considered possible, if not probable, with crude and condensate production rising to record levels early in the next century and exports surging to unprecedented heights.
But a new analysis published by the Moscow business weekly Ekonomika i Zhizn (Economics and Life) predicts catastrophe for the Russian oil industry as early as second half 1992 if immediate, drastic management changes are not made. Russia produces about 90% of the former Soviet Union's liquid hydrocarbons.
PRODUCTION SLIDE
The latest Ekonomika i Zhizn study predicts this year's average oil flow will drop to 8-8.2 million b/d, exports will halt by the end of 1992, and Russia will be forced to scrounge for money to import oil for its needs as well as those of other members of the new Commonwealth of Independent States.
While the study doesn't specifically downgrade the huge crude/condensate potential resources widely attributed to the U.S.S.R., it indicates that estimates of speculative or potential oil reserves have fallen in fields-ever smaller in average size-that have not yet been placed on stream.
Without adequate funding, exploratory and development drilling footage has plummeted during the past several years. Poor management, along with insufficient and obsolete equipment, is reducing yields from wells or stopping their production entirely (OGJ, Dec. 30, 1991, p. 24).
Authors of the imminent doomsday scenario for the Russian oil industry are Valery Neverov, a researcher for the aggressive commodity trading firm Hermes, and Aleksandr Igolkin, an economist in the State Academy for Administration.
SANGUINE FORECASTS
Neverov and Igolkin argue that Russian officials and the U.S. Central Intelligence Agency have been too sanguine in their predictions of the commonwealth's 1992 oil production. They assert that Russian specialists are overestimating crude/condensate flow at 9.2 million b/d, while the CIA expects production to sink no lower than about 8.5 million b/d.
"Even the CIA figure doesn't take into account all of the difficulties facing Russia's oil producing industry," the new analysis contends. It adds that if production does decline to 8-8.2 million bo/d, as predicted by the Hermes analytical service, Russia will have to halt all foreign crude sales and consequently be compelled to reduce imports of many products, including grain to make bread.
"Everyone will be affected. Such a turn of events will drastically weaken the nation's position and change the distribution and alignment of world forces.
"It would also give further impetus to transfer of many of our oil fields into the hands of western companies under extremely unfavorable conditions (for us)."
DEALS QUESTIONED
Quoting Izvestia, Ekonomika i Zhizn said "a whole bunch" of western oil companies such as Texaco, Elf Aquitaine, and British Petroleum have concluded agreements covering production on former Soviet Union's territory.
"But concluded with whom, on what basis, for how long a period, and in what magnitude? The general public doesn't know.
"Is it a state secret? One would like to know what Russian oil producers, including our burgeoning (nongovernment) business sector, can as yet depend upon. Here it is pertinent to note that in world practice the right to develop is granted through open bargaining.
"Our Supreme Soviet still has not started to consider a draft law on underground resources that would provide the legal basis for participation by foreign firms in oil field development. Despite the absence of appropriate laws, foreign firms have, by various means, achieved access to our oil fields, while our own entrepreneurs have been shunted aside."
Ekonomika i Zhizn said no one denies the benefit of cooperation with foreign capital and advanced technology
"But we are only referring to cooperation that is on mutually profitable basis and in no way include deals that are detrimental to our fledgling enterprises. They are faced with many difficulties, especially in our country's oil business."
The newspaper expressed alarm over trends taking shape in the commonwealth's oil industry.
"Initially, small and medium sized foreign firms came into our oil business, but recently it has been the largest petroleum giants. Long term concessions in our best oil fields are already being given out for next to nothing.
"Whereas our ideological clashes with the U.S. and other countries disappeared with our repudiation of communism, our geopolitical and economic differences remain. Without doubt our present crisis was the result of internal problems, but it would be unrealistic to expect that some foreign firms are not trying to use our difficulties to further their own interests."
HELP NEEDED
Despite their fears of exploitation by big foreign oil companies, Neverov and Igolkin tacitly conceded that Russia needs all the help it can get to cope with the petroleum industry's growing disarray. They noted that 41% of the former U.S.S.R.'s oil reserves have been produced.
Depletion of giant Russian fields in the Volga-Ural area is much greater than the national average.
In Tataria, Romashkino field, the U.S.S.R.'s largest find before the supergiant Samotlor discovery in western Siberia, 83% depletion was reported by 1990. In Baskhiria's Arlan field the figure was 72%, and in Samara 89% of Tuimazinskoye field's reserves have been produced.
Western technology and the accompanying "intrusion" of capitalist firms apparently provide the only means by which fields in the Volga-Ural area and other older producing regions can achieve substantially higher ultimate crude recovery.
Since the end of World War 11, much of the former U.S.S.R.'s oil has come from the nation's best fields, which could be developed at the least cost. Now production costs are soaring as the petroleum industry is forced to place an ever greater number of small fields on stream.
The number of oil fields on production nationwide jumped from 856 in January 1986 to 1,099 in January 1990, according to Ekonomika i Zhizn. Flow in 80% of all fields is declining.
"There seems to be no way we can compensate for the loss of production from our most prolific fields during the next few years. We are suffering the effects of Insufficiency and inefficiency in our geological exploration.
"Initial recoverable reserves in all fields that have not yet been placed on stream fell from nearly 6.9 billion tons (50.37 billion bbl) in January 1986 to less than 5.4 billion tons (39.42 billion bbl) in January 1990. No big, highly productive fields have been found in western Siberia in recent years."
Largely because of a critical shortage of money, the U.S.S.R.'s development drilling decreased by 23 million ft during 1988-91, with about 3,000 fewer wells completed each year.
Exploratory drilling dropped more than 20% in 1989-91. This resulted in 27% smaller growth in "explored" (proved plus probable) oil reserves.
Average nationwide well yields slumped from 103 b/d of oil in 1986 to 96.4 b/d in 1987, 89.8 b/d in 1988, 82.5 b/d in 1989, and 74.5 b/d in 1990.
"Not many of our big oil fields remain prolific producers," Ekonomika i Zhizn said. "That doesn't leave much for the immediate future, let alone for our descendants.
"The rate of production of oil reserves in the U.S.S.R. is three to five times higher than in Saudi Arabia, the United Arab Emirates, Venezuela, and Kuwait.
"It's significant that our explored reserves are still smaller than Saudi Arabia's proved reserves, yet we continue to pump and pump oil. Production wouldn't be hampered by strict legislation regulating the rate of oil recovery from reservoirs."
Neverov and Igolkin warned that their nation's oil industry is in a deeper crisis than the government seems to realize. They said far from alleviating the situation, officials have made a number of decisions that only made worse a disastrous long term situation.
In an attempt to achieve a quick fix their article said, government policies are strangling legitimate Russian enterprises while providing foreign firms with the opportunity to make easy profits.
"One might say the situation threatens our national interests. If present tendencies persist, catastrophe-economic, social, and political-awaits us very soon."
INDUSTRY REFORM
The main conclusion of their research, Neverov and Igolkin declared, is that immediate, fundamental oil industry reform is urgently required. They deplored the continuing belief that oil production and refining should remain government monopolies and that they must still depend on government subsidies.
A rational approach to transforming the Russian petroleum industry into stock enterprises could enable the government to obtain about 200 billion rubles in 2 months at most and would allow the industry to develop normally, the study said. However, the state would own by far the largest amount of stock and could use its dominant position to develop the industry more effectively.
The Russian petroleum industry is in dire need of investment capital, the researchers emphasized. During 1992, they said, funds available to the industry will fall 30 billion rubles short of requirements unless demonopolization, elimination of state dictation, and a shift to stock ownership are carried out.
"We don't have time to delay. During 1990, when the Ministry of the Oil and Gas Industry produced 551.1 million tons (11 million b/d) of liquid hydrocarbons - 97% of the nation's total of nearly 11. 4 million b/d -oil wells yielding 123.7 million tons (2.47 million b/d) stopped producing.
"In other words, if we don't drill any new wells and production falls at the same rate, we theoretically won't be producing a single ton of oil within 5 years.
"What's more, the percentage of lost oil production due to depletion is growing. In 1990 we lost 19.4% of our productive capacity vs. 13.1% in 1980.
"In 1990 we had to put 166 wells on stream to compensate for each 1 million tons of lost production capacity. That is 2.3 times as many wells as were required in 1980 to produce 1 million tons.
"The fact is that new wells yielded 285 b/d of oil in 1980 but only 128.5 b/d in 1990. By 1995, it's expected that the average yield of new wells will decline to 80-88 b/d.
"Then we will have to drill 240-250 wells to obtain 1 million tons of annual production. Meanwhile, the average well depth increased from 6,571 ft in 1980 to 7,677 ft in 1990."
Water cut in nationwide oil production rose from 57.4% in 1980 to 77.5% in 1990. "Thus almost four fifths of our wells don't pump crude any more but a water/oil emulsion requiring ever greater expenditures for lifting and separation," Ekonomika i Zhizn said.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
