Lack of spending on the former Soviet Union's exploration program dealt a serious blow not only to the nation's petroleum industry but to the entire economy during recent years, says F.K. Salmanov, who once served as U.S.S.R. deputy minister of geology.
Salmanov played a key role in western Siberia's exploration during that vast region's spectacular oil and gas production growth in the 1970s and much of the 1980s.
He believes the plunge in Soviet crude production during the past 3 years was not inevitable and blames errors in government policy under the Communist economic system for the petroleum industry's current plight.
Writing in the Moscow daily Izvestia, Salmanov and A. Zolotov, a doctor of geological/mineralogical sciences, called for oil and gas exploration to be stabilized at least at the 1990 level during 1992-93. They said the new Commonwealth of Independent States can and must return the nation's crude and condensate production to 12-12.6 million b/d while gas flow is hiked to 1 trillion cu m (35.3 tcf/year.
Last year's oil production in C.I.S. territory was about 10.3 million b/d, of which 9.12 million b/d came from Russia. Maximum oil production in the former U.S.S.R. was 12.48 million b/d in 1987 and 1988, with gas flow peaking at 815 billion cu m (28.77 tcf) in 1990.
FALLOUT FROM INACTION
Salmanov and Zolotov emphasized that stable growth in Soviet oil and gas production was achieved mainly by fast paced exploration. But now, current reserves are being exhausted while new reserves are not being prepared for production fast enough.
"Consequences of the lag in exploration and upgrading of reserves will be felt for the next 3-5 years," Salmanov and Zolotov said. "Entire decades will be required to restore the petroleum industry's geological exploration to its former level.
"More than 70% of today's explored (proved plus probable) oil reserves are under development. There is no sign of surplus reserves.
"Curtailment of geological exploration on the grounds that there is a lack of money will have a disastrous effect on oil production as far into the future as 1995-2000."
The Izvestia article emphasized that geological exploration is highly profitable for the national economy. It deplored the arbitrary way appropriations for exploration have been made from the general state budget.
"We must put revenues from the levy on oil and gas prices into a special account to finance geological exploration," Salmanov and Zolotov said.
"The payment to replace reserves could be 10-15% of wholesale oil and gas prices. This is not excessive. In other countries it is twice as high."
In the past, Salmanov has expressed unrestrained optimism over the Soviet Union's potential oil reserves. His confidence in this regard remains unshaken despite the 1989-91 production plunge and prospects that 1992 crude and condensate flow will drop further.
Salmanov feuded bitterly with the former Soviet oil ministry over its alleged underestimation of recoverable reserves in new fields. He has been highly critical of what he regarded as the ministry's ineptness in upgrading possible and speculative crude reserves categories to "explored" (A, B, and C1) categories and to producible status.
THE PROBLEM GROWS WORSE
The two geologists charged that Soviet oil production could have been increased faster except for lack of delivery of materials and equipment. They said the problem was known as early as the mid-1970s, but the government did practically nothing to rectify the situation.
"An important reason was that during the past 10 years oil ministry officials have devoted their efforts to justifying declines in production from various regions.
They didn't look for ways to improve recovery indices, thus weakening organization of work and on-site discipline.
"Conditions worsened further during the last 3 years, when the oil industry was placed on short rations. It was deprived of resources and food.
"Exploratory drilling fell by 25%. In western Siberia, the nation's main producing area, exploratory drilling declined by almost 1 million m (3.28 million ft)."
Salmanov and Zolotov said development drilling is in an even more deplorable state.
"Siberian personnel drilled almost 4,000 fewer wells than planned. Every fourth development well is idle.
"Whereas 30-35 western Siberian fields were placed on stream annually in 1986-88, only seven began production in 1990."
LAST PRODUCTION
The Izvestia article asserted that the recent slide in Soviet oil flow, stemming in part from reduced exploration spending, resulted in 180 million metric tons (more than 1.3 billion bbl) of lost crude and condensate production and a $25 billion reduction in petroleum revenue from exports.
"The nation obtained about $440 billion from its oil industry during the past 15 years. But this enormous wealth was essentially eaten up (under communism).
"Only crumbs from this money pie were returned to oil and gas producers and geologists whose work created it.
"We bought equipment and materials from foreign firms and even imported barite, which can be obtained from our domestic deposits."
Salmanov and Zolotov claimed the U.S.S.R. was a pioneer in developing offshore fields and introducing horizontal drilling.
Thus, they said, it is amazing that the C.I.S. now depends on foreign technology in these areas.
"One reason is that more than 60% of petroleum industry equipment has been manufactured by plants in Azerbaijan that have long since been obsolete."
The two geologists noted that while oil production was soaring in western Siberia during the 1970s and most of the 1980s, flow fell in European Russia by 2.6-2.8 million b/d, "although there was no basis for such a steep decline." They explained that new fields weren't placed on stream in the Timan-Pechora (Komi) region, the Udmurt republic, Perm and Saratov provinces, and the lower Volga River, where exploration was neglected.
"Seven fields were discovered off Sakhalin Island, some of them in the mid-1970s. None of them has been developed.
"While we wrangle, Norway and England are producing more than 4 million b/d from the North Sea."
Salmanov and Zolotov observed that despite its huge petroleum resources, the C.I.S. ranks 20th in the world per capita oil consumption, trailing countries such as Finland, Israel, Italy, and France, which have little or no oil.
They said the C.I.S. petroleum crisis is becoming more critical because the central government has lost effective control over oil and gas production.
WHAT TO DO
The geologists said it is essential that the C.I.S. and Russian petroleum industries not be fragmented by parochial interests, all striving to achieve local advantage to the detriment of the overall economy. But they also made clear that by favoring centralized policy and direction for the petroleum industry they did not advocate returning control to the "whims and machinations" of former Soviet oil ministry bureaucrats.
Instead they proposed:
- Sharply increasing official wholesale oil prices so producers can make a decent profit. They cited the still huge discrepancy between the recently quintupled government crude price of 370 rubles/ton and Russian commodity exchanges prices of about 2,500 rubles/ton, which are far more realistic in terms of dollar prices and falling value of the ruble.
- Establishing a single centralized C.I.S. administration to coordinate exploration, production, processing, and transportation of oil, gas, and condensate. A Russian oil and gas industry bank also should be set up, together with a state run foreign trade firm that would include representatives of producing, refining, and transportation enterprises and determine quotas and oversee export volumes for crude, refined products, and natural gas.
- Allocation to enterprises and local authorities 70% of revenues from foreign oil and gas sales to allow self-financing of petroleum industry development.
- Barring of "chaotic barter deals" between enterprises or between regional and local entities that damage overall state interests.
- Enactment of legislation permitting continuation of joint enterprises with foreign firms covering development of the most complex oil and gas fields, using advanced technology.
- Enabling cooperatives and private enterprises to develop small shut-in oil and gas fields, with enactment of appropriate laws on taxes, accounting, and conservation.
Significantly, the Izvestia article did not mention massive foreign investment in any sector of the C.I.S. or Russian petroleum industries.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
