Most Russian geological enterprises are small in terms of their sales, extraction volumes, and the amount of licensed reserves. Even in cases where geological enterprises are in possession of considerable hydrocarbon reserves, they are unable to commence development due to a lack of sufficient financial resources and production capacities.
Under the current Russian tax regime, and given the present state of the oil and gas industry, only those geological and geophysical companies that are licensed to explore and develop deposits and conduct oil and gas extraction will remain viable. These companies can be divided into two groups:
- Geological companies that have been incorporated into vertically integrated oil companies (VINKs), or which have direct access to a pipeline. These companies will increase their volume of oil production by using their tax exemptions. In the future, as tax assessment changes, VINK geophysical enterprises will specialize exclusively in geological and geophysical work.
- Geological companies that possess considerable licensed reserves located in regions with less developed infrastructures. As a rule, enterprises in this group find their oil and gas production declining due to growing production costs. Only large financial influxes will stimulate these companies to develop further.
Industry structure
The Russian geology sector is made up of 350 companies (1991 figures), including 118 production enterprises, 56 mapping companies, 57 pilot design and scientific research bureaus, 12 companies specializing in shelf work, and 48 production support enterprises. About 70% of the industry's production capacities are located in remote regions in Siberia and northern Russia.The federal geological service was finally organized in 1994. The service includes the Russian Federal Committee for geology and mineral resource usage, and its regional departments. The federal service manages mineral resources, including scientific research, and it also controls those state organizations that carry out federal programs such as the study of world oceans, the Arctic, the Antarctic, deep drilling, and regional geological works. The service consists of 65-70 enterprises and companies, accounting for some 20% of the geological exploration industry.
Other enterprises, and a number of scientific research institutes, were reorganized into JSCs in 1994. However, they retained their specialization. Some of them were further transformed into complex mining enterprises through the development of their production enterprises; others merged with oil and gas companies.
During 1990-96, the number employees in the industry has fallen from 350,000 to fewer than 70,000. Even though 70% of the industry focuses on servicing the fuel and energy complex, which is a priority sector for the Russian economy, it does not receive any government funding.
As early as 1990, financing for geological exploration work was reduced more than tenfold. By 1993, state financing had dropped to 9% (20% including all financing sources) of 1991 levels. In 1995 the state practically refused all financial aid to geological enterprises. In reality, this situation could eliminate an entire branch of the economy that plays a key role in raw material supplies.
Reserves, production
As a result of geological exploration in 1996, Russia's known oil and gas reserves increased by 193 million tons and 180 billion cu m, respectively. While increases should at least stay in line with production, growth accounted only for 64% of extracted oil and 30% of gas. This correlation probably will remain in 1997.The decrease in the production rate of the geological exploration sector is two to three times that of the producing sector. Geological enterprises do not have products that enjoy current demand. Their work results in geological data, which is stored in state archives and funds; and reserves, which are added to their own or the state's reserve balance sheet. Since 1991, oil companies have not received deposits but have had to purchase them by winning tenders. It is not profitable to pay for "blind" well drilling any more as it is risky, and oil companies have to use their own funds.
The system of deposit reserves receipt has also changed. Previously, explorers had to prove each ton of oil discovered to a state commission, which then approved the deposit reserves. Now, the purchaser and the seller of the license negotiate the size of newly discovered deposits.
Financing methods
Until 1990, geological and geophysical enterprises were financed by the Ministry of Geology, which drew on a special geological exploration fund financed by the oil companies.The government's tax policy in the 1990s led to the virtual destruction of geological exploration structures and was also the reason for the emergence of an independent mining sector.
Since 1992, geological exploration and geophysical research projects by state-owned companies are financed from mineral resources rehabilitation taxes, which are paid by extracting enterprises. These taxes, constituting 10% of the price of extracted oil, used to vanish into the federal budget. Since 1995, part of the mineral resources rehabilitation tax has remained locally: 5-6% to the extracting enterprises and 1-3% for the benefit of federal geological committees.
Having gained access to funds for exploration projects (note: the "Law on Natural Resources" prohibits the use of these funds for anything but this particular purpose), the mining companies can now place orders with geologists. Immediately, vertically integrated companies were faced with the question: "Why pay other enterprises for geological exploration when the company itself can handle it?"
Therefore, oil holding companies (or oil extracting enterprises) usually incorporate a geological division that handles orders for reserves exploration. As an option, the oil company itself may also handle exploration.
In order to stimulate the activities of the geological exploration companies, the state began licensing them to extract oil and gas from the deposits they had explored; a beneficial excise rate of 700 rubles/ton was introduced. The companies were also allowed to export oil that was supplied by extracting structures in payment for exploration work.
In order to improve their financial situation, a number of geological enterprises established divisions to simultaneously extract mineral resources and to provide various other services. The volume of oil produced by geological companies increased from 300,000 tons in 1991 to 6 million tons in 1997. Another development was the creation of joint ventures and the signing of contracts with foreign companies to explore and develop oil deposits. The largest of these joint ventures are Aurora Borealis, Geoilbent, and Siberian-American Oil Co.
The future
The future of oil production lies with geology. The geology crisis is closely connected with the situation in the fuel and energy complex. The steady production increase in the oil sector over the last several years was artificially achieved by the priority development of the largest and most productive deposits in Western Siberia and the Ural-Volga region.A decrease in well productivity is totally natural. In the past, close to 50 deposits were opened every year. However, statistically the average reserves of a deposit in western Siberia totaled 53 million tons in 1975, 15 million tons in 1985, and 11-12 million tons in 1991-93. In 1992-93, the preparation of new fields (such as the northern shelf and eastern Siberia) to replace exhausted ones (the Volga region, western Siberia), practically ceased.
To date, the oil reserves structure is in an economically favorable situation in terms of development, although it shows negative tendencies. Despite the rushed development of the largest deposits, these deposits still account for the major portion of current oil reserves (about 75%), especially in Tyumen oblast, Eastern Siberia, the Far East, and northwestern Russia. Most of the oil reserves (71%) are in deposits that are currently under development, and many of them are seeing a fall in productivity or are approaching this state.
Some growth has been witnessed in hard to extract reserves, including heavy and viscous oil, sub-gas oil deposits, etc.
Despite these difficulties, most of the actual oil reserves provide for a daily debit of at least 25 tons per well. The share of medium-efficiency reserves (5-25 tons/day) is about 35%, and of low-efficiency reserves (less than 5 tons/day) is 10%.
In the near future, a large increase in oil reserves will be possible, mainly through the development of new and poorly explored regions. These regions are known for having an extremely undeveloped infrastructure; consequently the cost of extraction in these regions will be quite high.
Nevertheless, the depletion of reserves in "old" regions raises the possibility of an uncontrollable decrease in oil production across Russia in a few years if new deposits are not introduced. In 3-5 years, the main reasons for decreasing oil production will be not only the lack of deposits near refining enterprises but also the lack of preparedness for development of new oil and gas regions.
A large increase in oil reserves will be possible soon, mainly through development of new and poorly explored regions. But depletion in older regions raises the specter of an uncontrollable production decline.The state practically refused all financial aid to geological enterprises in 1995. This could eliminate an entire branch of the economy that plays a key role in raw material supplies.
Only those geological and geophysical companies that are licensed to explore and develop deposits and conduct oil and gas extraction will remain viable.
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