CAPITAL: Moscow
MONETARY UNIT: Ruble
REFINING CAPACITY: 6,745,213 b/cd
OIL PRODUCTION: 5.89 million b/d
OIL RESERVES: 48.573 billion bbl
GAS RESERVES: 1,700 tcf
Falling crude oil prices during 1998 forced Russia`s oil companies to cut costs and reorganize.
The year was seen as a possible turning point in Russian oil companies` organizational and business practices.
Relying on Russian oil ministry data, a study by the French Industry Ministry`s Hydrocarbons Department said that high production and transport costs, as well as inflated work forces and subsidiary social obligations, made Russian companies particularly vulnerable to low crude prices.
The study said oil export revenues had plunged from $15 billion in 1997. Despite a 10% increase in export volumes in the first 7 months of 1998, oil exports had earned only $5.9 billion, nearly 27% less than in the same 1997 period. (Dollar estimates were based on the exchange rate before the August 1998 devaluation of the ruble.)
Depreciation of the ruble provided only slight relief for oil companies, and it could be eroded by inflation. Adding to their woes were government plans to increase fiscal pressures on the industry and collapse of the banking system.
The French study noted that Russian oil firms had been forced to cut costs dramatically. They fired employees, scrapped noneconomic activities, capped marginal wells, reduced investments, spun off service and supply operations, and sought western technology.
The study said that reducing staff and abandoning nonoil activities were particularly difficult in Russia, where companies employed 30-70% more personnel than did their western counterparts.
Also, about 10% of their budgets was earmarked for large-scale social services projects, such as the operation of hospitals, housing, and farms.
The cuts were painful in regions where oil companies were the major employers. But the study said layoffs still were the most common method for reducing costs.
Yukos Oil Co., in the framework of its alliance with Schlumberger Ltd., established oil service companies and was considering spinoff of all of its service operations. It wanted to diversify overseas and had a goal of producing 25% of its oil from outside Russia.
Yukos reduced its production costs from $9.80-10.60/bbl to $7.20/bbl in July 1998 and hoped to go further. Its leaders announced a reorganization they said would cut production costs 25%.
The regional subdivisions inherited from the Soviet era were to be replaced by Yukos EP for exploration and production, Yukos RM for refining and marketing, and Yukos Moscow for management and finance.
The plan, if implemented, could reduce the upstream work force to 25,000 from 76,000. Other Russian oil firms were studying similar measures.
The French study said some Russian oil executives thought the industry was headed toward even more concentration.
Alliance
One of Russia`s largest and most financially stable oil companies, Tyumen Oil Co., late in 1998 signed an alliance with Halliburton Energy Services (HES) aimed at optimizing and enhancing production from four west Siberian fields in which Tyumen Oil had an interest. Initial work focused on Samotlerskoye field.
Tyumen Oil was producing 420,000 b/d with 370,000 b/d coming from Samotlerskoye. The company had proved reserves of 4.3 billion bbl, according to a study by Miller & Lents, an engineering company. Some 70% of the company`s reserves were in Samotlerskoye field.
Another aim of the alliance was keeping Samotlerskoye`s production at the 370,000 b/d level for 20 years, according to Simon Kukes, president and chief executive officer of the Moscow-based company.
Tyumen Oil was created by the Russian government in 1995, but the first 2 years were spent in a fight for ownership. In 1998 it was Russia`s fifth largest oil producer and third largest reserve holder. The company had not failed to make any debt payments despite Russia`s moratorium on loan repayments.
A draft production sharing agreement for Samotlerskoye field was to be presented for government signature as 1999 approached then sent to the Russian Duma for approval.
Tyumen Oil planned to begin work under the agreement, which was to run from 1999 to 2018. It called for production of 112.3 million bbl in 1999 rising to a peak of 136.1 million bbl in 2010 and declining to 122.6 million bbl in 2018. This would require rehabilitation of 2,300 wells during 3 years to improve production. It would also include drilling of 4,583 production and injection wells, 2,317 of them horizontal, the drilling of 3,245 additional well bores, hydraulic fracturing of 1,500 wells, and other operations to enhance oil production.
HES was to direct the work from Niznevartovsk, in the Tyuymen Oblast in west-central Siberia.
Kukes said the company increased the number of its service stations from 250 to 400. It doubled its retail market share in 6 months, cut real costs by 30%, and increased refining margins by nearly 50%. The company cut the workforce by 20% to 40,000.
Kukes said the economic crisis in Russia and devaluation in some ways helped oil companies. Devaluation cut total tax, labor, and social costs by 250%. Tyumen`s tax debt fell from $400 million to $150 million. Also, transport tariffs were cut, making rail transport economic as a potential export system.
Russia`s Far East
Drilling and development plans for two major offshore Sakhalin Island development projects advanced in 1998.
Exxon Neftegaz Ltd., operator of the Sakhalin I project, in 1998 revealed results from its 1997 operations, as well as its development plans. The Sakhalin I partners expected to spend as much as $200 million during 1998.
The project group planned to continue an extensive program of appraisal drilling and seismic operations in 1998 to evaluate the field and development options. Total expenses for the field evaluation program, started in 1996, were to exceed $400 million.
The Sakhalin II consortium, Sakhalin Energy Investment Co. Ltd., selected Arctic Pacific Contractors, a 50-50 joint venture of Fluor Daniel Inc. and Brown & Root Energy Services, to provide major project management services.
Both projects were off eastern Sakhalin Island in the Sea of Okhotsk.
The Sakhalin I project group included Rosneft-Sakhalin and Sakhalinmorneftegas-Shelf, both of Russia; Sakhalin Oil & Gas Development Co. Ltd. (Sodeco), a combine of Japanese companies; and Exxon Corp. affiliate Exxon Neftegas Ltd.
Exxon Neftegas and Sodeco held 30% shares each, Sakhalinmorneftegas-Shelf held 23%, and Rosneft-Sakhalin held 17%.
In 1997, the group drilled three appraisal wells in Arkutun-Daginskoye field with two drilling rigs belonging to Rosneft-Sakhalinmorneftegas (RN-SMNG).
The first well, Dagi-6, was drilled in the central portion of the field to a depth of 2,500 m, encountering formations with a high water cut.
Dagi-7 was drilled to 2,616 m total depth and discovered oil in four main zones, three of which had been previously identified as gas-bearing. In two other zones, gas was discovered.
Dagi-8 was drilled to 2,500 m TD, and all zones encountered appeared to contain oil. Long-term production tests were scheduled.
The partners also completed a 600 sq km 3D seismic survey on the Arkutun-Daginskoye and Chaivo structures. Preliminary interpretation of the Arkutun-Daginskoye data revealed a field with an extremely complicated structure and numerous faults.
Additional analysis of 3D seismic data, appraisal drilling, and supplemental research were required to prove reserves sufficient to make Arkutun-Daginskoye field development profitable.
The consortium planned to drill two additional appraisal wells in Arkutun-Daginskoye in 1998 and, if possible, implement productivity testing in two wells drilled in 1997.
The new wells were to be drilled with two jack up rigs, Okha and Ekhabi, belonging to RN-SMNG. The offshore operations were expected to be carried out during the ice-free navigation season (mid-June through mid-October).
Plans during 1998 for the Chaivo structure, where five wells had been drilled, aimed at completing the analysis of 3D seismic data. Additional information was needed to determine the feasibility of development.
The Sakhalin II project centered on Piltun-Astokskoye and Lunskoye fields, 13-16 km off the central east coast of Sakhalin Island in water depths of 30-60 m.
Its development expected to involve multiple offshore oil and gas production platforms, subsea pipelines, and onshore facilities including oil and gas pipelines, processing facilities, terminals, and other infrastructure.
The $40 million contract for this work, let to Arctic Pacific Contractors, included project engineering, procurement, construction planning, and other associated support services for the basic design concept and definition phases of the project.
Piltun-Astokskoye holds 750 million bbl of oil and 1.9 tcf of gas, while Lunskoye holds 11.1 tcf and 326 million bbl of condensate. Production from the two fields were to be exported to shore by pipeline and transported 625 km to an export point at Progordnoyy for shipment. An LNG terminal had been proposed at this export point, with completion slated for 2004.
Piltun-Astokskoye was scheduled to come on stream during 1999 at an initial production rate of 90,000 b/d of oil. Sakhalin Energy Investment Co. Ltd. was owned by Marathon Sakhalin Ltd., Shell Sakhalin Holdings BV, Mitsui Sakhalin Development Co. Ltd., and a subsidiary of Mitsubishi Oil Co.
Transportation
Russian gas company Gazprom arranged financing in 1998 for its proposed Blue Stream natural gas export pipeline from Russia across the Black Sea to Turkey.
A group of Italian banks was expected to lend the $2 billion needed for the project, secured by gas export contracts to Italy. Gazprom also apparently sought financing support from Italian petroleum company ENI (with which it had a strategic alliance in Russia`s Astrakhan region) for the Russian portion of the line.
Saipem SpA, an Italian company and a subsidiary of ENI, was to construct the pipeline, portions of which would traverse deep water.
The project was to transport 360 billion cu m of Russian gas to Turkey during 2000-25.
The 1,213-km line would extend from Izobilnoye, Russia, to Ankara. A 396-km section would traverse the Black Sea at a depth of 2,150 m. Start-up was planned for April 2000.
