RESTORING IDLE RUSSIAN OIL CAPACITY

Russia can quickly restore as much a 600,000 bid of its idle oil productive capacity for less than $1,000/b/d. A simple program involving little more than minor repairs to shut-in wells could restore that much capacity for a total investment of about $500-600 million and still provide investors a hefty return. Those are the key findings of a study Dallas consultants Troika Energy Services conducted for the U.S. Department of Energy just prior to the summit meeting of Russian President Boris

May 17, 1993

6 min read

Russia can quickly restore as much a 600,000 bid of its idle oil productive capacity for less than $1,000/b/d.

A simple program involving little more than minor repairs to shut-in wells could restore that much capacity for a total investment of about $500-600 million and still provide investors a hefty return.

Those are the key findings of a study Dallas consultants Troika Energy Services conducted for the U.S. Department of Energy just prior to the summit meeting of Russian President Boris Yeltsin and U.S. President Bill Clinton last month (OGJ, Apr. 19, Newsletter).

Study authors are Elik M. Khalimov, Wayne Beninger, and John D. Grace. Grace, David Heather, and Vladimir Shpilman are Troika principals.

The study was finished at a time when the U.S. is pressing financial aid and other efforts to salvage Russia's foundering oil industry considered a key to survival of economic and democratic reforms in that nation.

STUDY PARAMETERS

Troika's study, conducted with several Moscow institutes, focused on its database of producing and idle wells by field, producing unit, and producing association.

The database, using data as recent as Jan. 1 1993 divides idle wells into 33 categories according to repair needs. It includes estimates of postrepair productivity, excluding stimulation. Troika expects to make the database available to the petroleum industry soon.

The 33 categories were grouped into four repair classes:

Major repairs covering major downhole operations, mostly requiring rigs for recompletion or stimulation.
Minor repairs, including repairs or changes of lifting equipment, less serious hydrate and paraffin blocks, and comparable low cost efforts.
Required construction, including gathering systems, surface facilities for artificial lift, and electrical connections.
Miscellaneous repairs, such as road construction, surface equipment repair, and surface pumps.

The study also grouped Russia's 33 producing associations into five regions: western Siberia, Timan-Pechora, Volga-Urals, North Caucasus, and other. It assumes a world oil price of $18/bbl.

MAIN FINDINGS

The study found, as of Jan. 1, that:

Russia had 27,592 wells idle but potentially productive following repair.
Of the total idle wells, 47% needed minor repairs, 33% needed major repairs, 11% needed miscellaneous repairs, and 8% required ancillary construction. Restoration of all idle wells would jump Russia's oil productive capacity by 1.2 million b/d.
Another 25,815 wells were classified as nonoperating, either abandoned or awaiting abandonment.
Producing wells in Russia totaled 121,600.
Fifty-five percent, or 663,000 b/d, of total capacity lost to idle wells was accounted for by wells needing only minor repairs.

Troika noted the estimates of post repair productive capacity were conservative because postulated flow rates were based on what Russian engineers expected after repair using Russian equipment and technology.

"Limited western techniques with well repair in Russia indicates that western techniques and hardware can raise well productivity by a factor of two relative to Russian procedures and equipment," Troika said.

In addition, estimates of productive capacity in Russia's idle wells were limited to major and minor repairs because of limited cost data for the other two categories. And operating and other costs were removed from the equation.

As expected, the study found the greatest number of idle wells in western Siberia, where half the shut-in wells are down for minor repairs, accounting for 537,000 b/d of the province's total capacity of 983,000 b/d.

Although the study found a wide disparity in regional costs, it determined the typical cost of a minor repair per barrel of restored capacity was one fifth that of a major repair. That was true even in arctic regions, such as in western Siberia, where the minor repair costs are an average $803/b/d vs. $4,650/b/d for a major repair.

INVESTMENT EFFICIENCY

Troika developed an equation for investment efficiency (IE) of well repairs in 30 of Russia's producing associations by subtracting well repair costs from total revenues and dividing that result by well repair costs.

Thus, an IE greater than zero would imply a payout of less than a year.

Troika found:

There is a very high return for minor repairs nearly everywhere in Russia's producing regions, from an IE low of 0.25 in the North Caucasus to 1.08 in the Volga-Urals region, 5.8 in western Siberia, and 14.2 in Timan-Pechora.
The IE of major repairs is very low compared with minor repairs. Major repairs were uneconomic in the Volga-Urals and North Caucasus regions, with IEs of -0.15 and -0.65, respectively.
The IE for repairs for the vast majority of all idle wells is positive and in many cases highly competitive with alternative upstream investment opportunities industry faces elsewhere in the world.

SUPPLY BENEFITS

Troika also studied the effect of a hypothetical $500 million aid program directed toward restoring idle Russian wells to production.

After developing several scenarios by region and repair type, Troika sees the best return would come from minor repairs in western Siberia. It found that for total repair costs of $300-600 million, incremental supply is quite elastic, generating large volumes of new production with small increases in spending.

However, that situation deteriorates when more major repairs are encountered and high costs are incurred in some small regions. With costs rising to $600 million-$2 billion, small increases in total money spent yield only small increases in productive capacity.

For minor repairs in western Siberia, further cost savings could come from targeting fields where idle wells needing minor repairs are clustered and the ratio of producers to injectors is high. Special consideration should be given to production associations with low average postrepair production costs, the study found.

UNDERLYING PROBLEMS

While noting the encouraging results of its study, Troika said, "However, repairing wells in Russia does nothing to correct the underlying problems that created the dire situation seen in fields throughout the country. These systemic problems arise from two causes:

"First, producers do not get world prices for their product and therefore lack the resources and motivation to restore and improve productive capacity.

"Second, Russia's oil fields are in legal and administrative limbo. Producing association management is not responsible to stockholders and only loosely answerable to the government. This has disconnected the people making operations decisions at the field level from the consequences, positive and negative, of their actions.

"Consequently, while our study showed a more promising outlook for short term programs aimed at restoring production from idle wells, without systemic change, these problems will simply reoccur each year and become more severe.

"As a result, any program to be truly effective in restoring productive capacity in Russia must be two pronged. One course leads to investment in well repair, the other leads to repair of the system."