STUDY FINDS FSU OIL FLOW SLIDE EASING

The oil production slide in the former Soviet Union (FSU) is easing, and production should flatten from mid-decade through 2000, according to a study by Troika Energy Services, Dallas. Troika principal and report author John D. Grace noted that for the last 4 years the drop in FSU oil production has been a wild card of world oil supply and demand balances.

Nov. 8, 1993

6 min read

The oil production slide in the former Soviet Union (FSU) is easing, and production should flatten from mid-decade through 2000, according to a study by Troika Energy Services, Dallas.

Troika principal and report author John D. Grace noted that for the last 4 years the drop in FSU oil production has been a wild card of world oil supply and demand balances.

The study work was based on field data from the top producing and most promising new FSU fields, focusing on well performance and decline, status of producing and injection well stocks, required repairs, expected new drilling and abandonments.

All forecasts were made with probability levels surrounding the mean estimated output for each year through 2000.

SHORT TERM OUTLOOK

Troika predicts that while FSU production will be down in 1993 from the prior year, the combined loss from the largest fields will be less than in 1992, a trend that will continue into 1994.

The drop in output after 1988 was driven overwhelmingly by production losses at the largest fields in the FSU, Troika reported.

However, Troika sees evidence the crisis is beginning to lessen.

In 1992, while output from these fields dropped again, the trend of increasingly bigger declines was finally halted.

Overwhelming the dynamics of production in 1993-94 is the inertial drag of 2 years of unprecedented decline, Troika said. And the basic factors that precipitated those losses have not abated.

The report noted the lack of equipment and materials in the field is the main cause of declining production the last 2 years, while most equipment factories remain at least partially idle. Meantime, transportation inefficiencies, theft, and corruption inflate the price of what is produced.

On a more fundamental level, the report said, artificially depressed domestic wellhead prices and limited access to hard currency still severely constrain the ability of producers to compete on world markets for needed equipment and services.

Failure to bring domestic prices into parity with world levels has also induced some producers to withhold production in the hopes of receiving higher prices in the future.

MID-TERM OUTLOOK

Troika said a transition for the oil industry of the FSU--a bridge between plummeting production and a pattern of decline normal for an industry of that size and maturity--will come mid-decade.

Troika points to four assumptions that guide the outlook for 1995-96:

By yearend 1994 the idle well crisis, the main force driving production declines after 1989, will be largely resolved.
Although indications are that 1993 well failures still exceed repairs, a combination of private contracts for repair and large scale assistance from sources such as World Bank and European Bank for Reconstruction & Development have targeted idle well repair.
Domestic wellhead and world prices will reach parity during or before this period providing a powerful stimulus to the entire industry, encouraging production from young fields that are on line and have increasing production.
Higher real prices will also stem declines in older fields, affording producers funds for repairs, maintenance, exploitation of bypassed oil in older produced reservoirs, and development of untapped reserves in older fields.
By 1995-96, incremental production from joint ventures should be large enough to begin offsetting declines in the older fields.
The growth in smaller, independent oil and gas firms in the C.I.S. should fuel increased production from new, smaller fields that will also have a positive effect in 1995-96.

LONG TERM OUTLOOK

After the transitional years of 1995-96, production from the FSU will begin to perform typically for a resource base of its maturity, size and cost structure, Troika predicts, much like the U.S. after peak oil production in 1970.

At the largest fields, decline rates will no longer be governed by well failures, but by water encroachment and/or decreasing reservoir pressure. Production will be far less concentrated in the old giants, and new production from intermediate fields will play an increasing role in the production balance, Troika said.

Price decontrol will be the central economic factor in buoying output in 1997-2000.

Even if real world prices remain flat through 2000, given the current depressed levels, real wellhead prices will have at least tripled in the FSU by decade's end, Troika said. This real tripling of wellhead prices is the same factor that held the U.S. decline in the 10 years after its 1970 peak to an average of 1%/year, the company noted.

IMPLICATIONS

Production flattening mid-decade through 2000 has several important implications for the FSU, Troika said.

First, given lackluster domestic oil demand in the Russian Federation, it is unlikely Russia will become a net importer before 2000.

Second, the goals of stabilizing output at 1992 or 1993 levels are technically unrealistic in the short term.

Third, productive capacity through 2000 is not resource-constrained. If the Russian economy and petroleum industry recover very quickly, there is more than enough oil in the ground to support the high range of the forecast.

Fourth, the brightest oil production future of the former Soviet republics belongs to Kazakhstan.

Beyond the year 2000, the range of possibilities becomes much broader, Troika reported. An actual increase in production would require very aggressive activity in Kazakhstan and extraordinary improvements in production efficiency in the Russian Federation.

While the Russian Federation has massive quantities of hydrocarbons in place, Troika noted, a large part is inherently very costly to produce. At a minimum, the profitable exploitation of these resources will require sweeping organizational reform and acquisition of state of the art technology.

STUDY FIELDS

For its forecast, Troika divided about 1,400 fields in the FSU into four groups based on productive capacity.

Group I includes 14 giant fields, each of which produced at least 5 million tons (100,000 b/d) in 1992. The giant fields were responsible for as much as half of total Soviet oil output in the mid-1980s and contributed 154 million tons, one third of total FSU production, in 1992. While the more mature fields in the group are in irreversible decline, others have as much as two thirds of initial estimated ultimate recovery remaining, Troika reported.
Group II contains nine fields that were producing in 1992 and are most promising in terms of national production through the 1990s. All nine are large fields that have increasing proved reserves. The Group II fields also have the advantage of production and transportation infrastructure in place, Troika noted, Although their collective output in 1992 was only 11.5 million tons, Troika reported the figure could more than triple by the end of the decade.
Troika judged the eleven fields in Group III to represent the best opportunities for new production in the FSU despite the fact that they did not have commercial oil production in 1992. Although some will not be brought on line until the late 1990s, they have the resources to support quickly increasing output after start-up. Although the eleven are dominated by fields in West Siberia, the group also contains fields located in Timan-Pechora, Kazakhstan, Azerbaijan, and East Siberia.
Group IV is a composite of all of the remaining fields in the FSU divided into six Geographic regions. Troika said these fields are responsible for about half the production from the FSU.