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FeedsHome: Issue 2 2010 › Cover Story › Hidden potential
Hidden potential
25/02/2010 | Channel: Exploration & Production
As Matt High discovers, the Russian oil and gas market offers a wealth of hidden potential for the world’s energy needs
Cold. Inhospitable. Technically difficult. These are just some of the words that may come to mind when considering oil and gas exploration - both on and offshore - in the Russian and Arctic regions. In the vast global network that is the oil and gas market the Russian exploration sector is often overlooked and neglected. After all, the Gulf of Mexico, the North Sea and in some respects the coastline of West Africa are proven oil and gas exploration zones, where the weather and conditions are recognised as far more favourable that the harsh Russian environment. Furthermore, Russia’s somewhat unstable history still draws caution from potential developers who are often too keen to look at the inhospitable investment climate, poor intellectual property rights protection, burdensome tax laws and inefficient government bureaucracy associated with the region.
However, beyond this reputation the Russian region represents truly immense potential in terms of the world’s future energy requirements, a fact that many energy companies have been taking note of over the last decade. In fact, it has been established that Russia has more proven natural gas reserves than any other country in the world and sits among the top ten countries in terms of proven oil reserves. Additionally, it is presently the world’s largest exporter of natural gas, the second largest oil producer and exporter and the third largest energy consumer globally.
These figures only tell half of the story regarding Russian oil. While they equate to the equivalent of some 60 billion barrels proven oil reserves, most of which lie in the Sakhalin Island region where the Sakhalin-II project represents one of the biggest oil and gas developments in the world, the Russian oil industry itself has been in need of considerable investment for many years. While various state-owned businesses operate many of the country’s larger fields and developments, including Gazprom, which is Russia’s state-run natural gas monopoly and the world’s biggest gas exploration and production company, the scope for other global energy organisations to explore Russian oilfields remains enormous.
One of the most important questions that needs addressing is why a country that in 2009 produced roughly nine million barrels of oil per day and is the third largest energy user in the world, has been at the back of the minds of many energy producing companies for some time. The answer lies in the difficulties and challenges that are present when producing oil and gas in Russia. We have already mentioned the reputation that Russia has for having an unstable financial security market, and this is one of the key factors.
The recent figures illustrate just how much the Russian energy market has grown in recent years, and this growth itself has had a number of implications in terms of its overall outlook. Importantly, the Russian economy has become dependent on oil and natural gas exports, which has in turn made it vulnerable to fluctuations in oil prices. This has meant that the prospect of long-term production in the country for major energy companies has been less positive than those ‘safer’ areas where production has a long history, stable environment and large infrastructure.
Furthermore, the country’s ability to maintain and expand its capacity to produce and export resources has faced a number of other difficulties. Thanks to years of under-investment from its government, Russia’s oil and gas fields are not only aging, but technically at a disadvantage. Also, its state-owned crude oil pipeline system, controlled by Transneft, has insufficient export capacity, and with there being insufficient investment capital for improving and expanding the local energy industry the problem has only worsened.
Despite this, there are a number of businesses that have noted the vast potential Russia offers, and have already moved to capitalise on it with long-term promises of projects and investments. In January this year BP was one of the largest majors to announce its intent to further develop its activities in Russia and the Baltic regions. The business has been operating for a number of years in areas such as the North Slope of Alaska, the Canadian Arctic and Northern Norway. Speaking at the Moscow Academy of National Economy, BP chief executive Tony Hayward explained: “We have worked for decades in these areas, alongside the offshore Arctic regions, which represent an important new frontier for the entire industry. Building this expertise, we would certainly welcome the opportunity to deploy our technology and skills to explore and produce Arctic resources in Russia as well.”
Alongside BP, Shell has also expressed interest in a range of projects in the Russian sector, and although it is yet unclear whether they will be oil or gas related, the potential for both resources offers a considerable amount of possibilities. With respect to oil, much of the country’s reserves are located in the western region of Siberia between the Ural Mountains and the Central Siberian Plateau, with 25 per cent being on Sakhalin island.
This island represents one of the largest and most exciting developments in Russia, with the Sakhalin-II field offshore Sakhalin island being one of the biggest oil and gas developments in the world. Containing two oil and gas fields that are managed and operated by Sakhalin Energy Investment Company, the entire Sakhalin development has been hailed as the type of energy project that is needed by Russia, and as such is of vital importance to the country’s future energy politics.
The two fields at Sakhalin contain an estimated 1200 million barrels of crude oil and 500 billion cubic metres of natural gas, and it is estimated that the project, which is due to run until 2014, will cost a total of $20 billion. What is particularly notable about the Sakhalin development is the technical developments that have accompanied it, and this is what differentiates the project from others before it in Russia. As discussed, one of the main failings of the Russian oil and gas industry is that its developments are aging, which in simple terms means that the industry cannot keep up with more the more modern production techniques used in the west. At Sakhalin however a state-of-the-art LNG facility has been installed, which is the first of its kind in Russia, and is being described as a demonstration of the kind of advancement that is needed if Russia is to continue its path to being a major player in the global oil and gas industry.
Of course, when discussing technology, one must note the conditions in which Russian oil and gas exploration is carried out. While we talk about the harsh environments that are regularly encountered in regions of the Gulf of Mexico and the North Sea, the Russian environment represents a completely new challenge for oil and gas businesses. Not only must they compete with the extreme cold and long winters that hamper drilling and transportation, but much of the offshore area where drilling is set to take place is in so-called extreme deepwater, which although are common in the industry, bring added challenges in a region where technological investment is low.
It is in the field of natural gas the Russia has the largest prospects for future success, having both the largest reserves in the world and being one of the largest natural gas exporters. This export comes through a number of pipelines that have helped make Russian gas exports vital for European energy needs. The importance of these pipes has seen considerable investment in further developments, wit a number of proposed new pipelines being planned for the coming years. The largest of these is Nord Stream, a natural gas pipeline that will link Russia with the EU, and upon completion will be responsible for meeting 25 per cent of Europe’s future gas needs.
Looking ahead, the success of the Russian energy industry relies very much on the nature of development in the country and the investment given to advancing the exploration of resources. There is little doubt that in basic terms, Russia has the potential to be one of the world’s most important and viable oil and gas producing and exporting regions in the world. This potential is not purely based around the substantial amounts of oil and gas available, but in the manner in which Russian resources can be used to compliment other regions in the coming years.
For example, a considerable increase in Russia’s energy production and its ability to export that energy to the west and east could in fact ease the supply situation for more established, maturing markets such as those in the Atlantic and Pacific regions. Ultimately, while there are still a number of hurdles that need to be cleared, both for local businesses in Russia and international companies looking to exploit the resources resent in the country, the fact remains that Russia represents an abundance of hidden potential for the global oil and gas industry.
However, beyond this reputation the Russian region represents truly immense potential in terms of the world’s future energy requirements, a fact that many energy companies have been taking note of over the last decade. In fact, it has been established that Russia has more proven natural gas reserves than any other country in the world and sits among the top ten countries in terms of proven oil reserves. Additionally, it is presently the world’s largest exporter of natural gas, the second largest oil producer and exporter and the third largest energy consumer globally.
These figures only tell half of the story regarding Russian oil. While they equate to the equivalent of some 60 billion barrels proven oil reserves, most of which lie in the Sakhalin Island region where the Sakhalin-II project represents one of the biggest oil and gas developments in the world, the Russian oil industry itself has been in need of considerable investment for many years. While various state-owned businesses operate many of the country’s larger fields and developments, including Gazprom, which is Russia’s state-run natural gas monopoly and the world’s biggest gas exploration and production company, the scope for other global energy organisations to explore Russian oilfields remains enormous.
One of the most important questions that needs addressing is why a country that in 2009 produced roughly nine million barrels of oil per day and is the third largest energy user in the world, has been at the back of the minds of many energy producing companies for some time. The answer lies in the difficulties and challenges that are present when producing oil and gas in Russia. We have already mentioned the reputation that Russia has for having an unstable financial security market, and this is one of the key factors.
The recent figures illustrate just how much the Russian energy market has grown in recent years, and this growth itself has had a number of implications in terms of its overall outlook. Importantly, the Russian economy has become dependent on oil and natural gas exports, which has in turn made it vulnerable to fluctuations in oil prices. This has meant that the prospect of long-term production in the country for major energy companies has been less positive than those ‘safer’ areas where production has a long history, stable environment and large infrastructure.
Furthermore, the country’s ability to maintain and expand its capacity to produce and export resources has faced a number of other difficulties. Thanks to years of under-investment from its government, Russia’s oil and gas fields are not only aging, but technically at a disadvantage. Also, its state-owned crude oil pipeline system, controlled by Transneft, has insufficient export capacity, and with there being insufficient investment capital for improving and expanding the local energy industry the problem has only worsened.
Despite this, there are a number of businesses that have noted the vast potential Russia offers, and have already moved to capitalise on it with long-term promises of projects and investments. In January this year BP was one of the largest majors to announce its intent to further develop its activities in Russia and the Baltic regions. The business has been operating for a number of years in areas such as the North Slope of Alaska, the Canadian Arctic and Northern Norway. Speaking at the Moscow Academy of National Economy, BP chief executive Tony Hayward explained: “We have worked for decades in these areas, alongside the offshore Arctic regions, which represent an important new frontier for the entire industry. Building this expertise, we would certainly welcome the opportunity to deploy our technology and skills to explore and produce Arctic resources in Russia as well.”
Alongside BP, Shell has also expressed interest in a range of projects in the Russian sector, and although it is yet unclear whether they will be oil or gas related, the potential for both resources offers a considerable amount of possibilities. With respect to oil, much of the country’s reserves are located in the western region of Siberia between the Ural Mountains and the Central Siberian Plateau, with 25 per cent being on Sakhalin island.
This island represents one of the largest and most exciting developments in Russia, with the Sakhalin-II field offshore Sakhalin island being one of the biggest oil and gas developments in the world. Containing two oil and gas fields that are managed and operated by Sakhalin Energy Investment Company, the entire Sakhalin development has been hailed as the type of energy project that is needed by Russia, and as such is of vital importance to the country’s future energy politics.
The two fields at Sakhalin contain an estimated 1200 million barrels of crude oil and 500 billion cubic metres of natural gas, and it is estimated that the project, which is due to run until 2014, will cost a total of $20 billion. What is particularly notable about the Sakhalin development is the technical developments that have accompanied it, and this is what differentiates the project from others before it in Russia. As discussed, one of the main failings of the Russian oil and gas industry is that its developments are aging, which in simple terms means that the industry cannot keep up with more the more modern production techniques used in the west. At Sakhalin however a state-of-the-art LNG facility has been installed, which is the first of its kind in Russia, and is being described as a demonstration of the kind of advancement that is needed if Russia is to continue its path to being a major player in the global oil and gas industry.
Of course, when discussing technology, one must note the conditions in which Russian oil and gas exploration is carried out. While we talk about the harsh environments that are regularly encountered in regions of the Gulf of Mexico and the North Sea, the Russian environment represents a completely new challenge for oil and gas businesses. Not only must they compete with the extreme cold and long winters that hamper drilling and transportation, but much of the offshore area where drilling is set to take place is in so-called extreme deepwater, which although are common in the industry, bring added challenges in a region where technological investment is low.
It is in the field of natural gas the Russia has the largest prospects for future success, having both the largest reserves in the world and being one of the largest natural gas exporters. This export comes through a number of pipelines that have helped make Russian gas exports vital for European energy needs. The importance of these pipes has seen considerable investment in further developments, wit a number of proposed new pipelines being planned for the coming years. The largest of these is Nord Stream, a natural gas pipeline that will link Russia with the EU, and upon completion will be responsible for meeting 25 per cent of Europe’s future gas needs.
Looking ahead, the success of the Russian energy industry relies very much on the nature of development in the country and the investment given to advancing the exploration of resources. There is little doubt that in basic terms, Russia has the potential to be one of the world’s most important and viable oil and gas producing and exporting regions in the world. This potential is not purely based around the substantial amounts of oil and gas available, but in the manner in which Russian resources can be used to compliment other regions in the coming years.
For example, a considerable increase in Russia’s energy production and its ability to export that energy to the west and east could in fact ease the supply situation for more established, maturing markets such as those in the Atlantic and Pacific regions. Ultimately, while there are still a number of hurdles that need to be cleared, both for local businesses in Russia and international companies looking to exploit the resources resent in the country, the fact remains that Russia represents an abundance of hidden potential for the global oil and gas industry.
