On a global level, 2015 and 2016 marked the lowest level of new conventional
oil discoveries since 1952. In 2016, only 3.7
billion barrels of conventional oil were discovered, roughly 45 days of
global crude consumption or 0.2 percent of global proved reserves. Globally,
exploratory drilling fell by almost 20 percent in 2015 and fell even further
in 2016. Russia's exploration activities, which were hit not only by plummeting
oil prices but also by a targeted sanctions regime, suffered a double blow
during this period. In 2015, only
seven new hydrocarbon discoveries were made in Russia, three of them in
the Baltic Sea. In 2016, oil and gas companies in Russia discovered 40 prospective
fields, however, the 3P reserves of the largest among them, Rosneft's Nertsetinskoye,
amounted to 17.4 million tons. This stands in stark contrast with pre-sanction
period achievements, for instance, 2014's largest find, Pobeda, is believed
to contain 130 million tons of oil and 0.5TCm of gas.
It is only logical that against such depressive trends, that people start
to question the sustainability of Russia's current oil-producing renaissance
(Graph 1). When will Russia run out of oil? Were Sheikh Yaki Zamani's "Stone
age" simile to materialize, would Russia still be among the top producers when
oil started its descent towards obsolescence?
The Ministry of Natural Resources and Environmental Protection of Russia states
that not accounting for new discoveries, current oil reserves in Russia stand
at 29 billion tons and under current consumption rates would
be depleted by 2044 (its 2P gas reserves' depletion would come about in
more than 160 years). To this end, it would like to implement business-easing
measures, e.g.: facilitate the issuance of licenses and to increase the size
of the allotted subsoil block to a maximum of 500 km2 (which would mean a fivefold
increase compared to existing regulations). The Ministry's stimulating measures,
however, should not obfuscate the fact that Russia still has vast amounts of
untapped reserves waiting to be discovered. But where?
Frontiers
The future of Russian crude lies in oil that is more expensive, more geologically
complex and further away from traditional regions of production. Just as West
Siberia replaced the Volga-Urals Region in the 1970s as the Soviet Union's
main producing region, East-Siberia and offshore regions will overtake West-Siberia
(which saw its share in the national output diminish from 71 percent in 2004-2005
to 57 percent currently). This change of "leaders" is long overdue as West-Siberia
oil output was already expected to plummet in the 1990s, yet thanks to extended
oil recovery methods and slower-than-expected development of other oil-rich
regions it has managed to keep stable output numbers. Russia's oil sector has
been consistently hoodwinked by analysts, who, beginning from
the early 1980s predicted an imminent production slump. The production
fall did happen, reaching a low-point between 1996 and 1999 when production
foundered to 301-305 million tons per year. The cause was to be sought in Russia's
overall economic depression, not in its dearth of resources.
Today, Russian companies are similarly constrained in tackling Russia's three
new oil frontiers - shale, Arctic and deep-water. It is no coincidence that
U.S. and EU sanctions targeted the sales of technologies related to these sectors
and not conventional - whilst Russian companies are well-equipped to deal with
conventional fields, they relied heavily on Western know-how. Yet it is very
unlikely that even a tightening of sanctions could stall Russia's Arctic exploration
activities for a longer period of time. Russia's continental shelf contains
most of the Arctic's oil formations and approximately 60 percent of its undiscovered
reserves. So far, the 3P reserves of Russia's Arctic stand at 585 million tons
and 10.4 TCm, yet most of its Arctic Seas were only superficially appraised.
The Kara Sea, whose fields are almost exclusively gaseous, has been in the
spotlight since the 1983 of the Murmanskoye gas field (120 BCm), yet the northern
parts of the adjacent Barents Sea, which Russia's Federal Agency on Subsoil
Usage deems
the most likely to yield top hydrocarbon discoveries in the next few years,
are relative newcomers in prospective surveys.
Western oil & gas companies should be aware that the Russian government
treats Arctic formations as resources of "federal significance" and it is unlikely
to provide them a role other than that of a minority shareholder. There is
more maneuvering room for oil formations in the riskier part of the Arctic
- the as of yet impossible-to-assess Laptev and Chukchi Seas, where no large-scale
surveying has been done. Moreover, after the UN Commission on the Limits of
the Continental Shelf acknowledged
the Okhotsk Sea as a Russian enclave, the least-researched Russian sea
can now be prospected and appraised. Still, the Russian Arctic, along with
frontier zones like the Timano-Pechora Basin and the Yenisey-Khatanga Basin,
will play an important role in keeping Russia among world's top 3 oil producers
in the next 40-50 years. Yet there is more, Russia's oil future is not only
more Arctic, but also more shale-related.Russia has been sitting on vast shale/tight
oil reserves, which according to present data are second
only to the United States. Yet it might easily surpass all its rivals,
as the development of gigantic tight-oil formations, such as Bazhenov Suite,
the largest shale deposit in the world covering a territory of more than 1
million km2 and assumed to contain at least 20 billion tons of oil, is still
in its infant phase. The potential of the Abalak Suite underlying the Bazhenov,
the Domanik Suite, stretching asymmetrically across the Volga-Urals Region
from Perm to Orenburg, as well as many others, is still difficult to assess,
yet virtually all of them are located in traditional oil-producing regions
with a fully-established oil infrastructure. Although the first Bazhenov oil
gush dates back to 1969, several factors have hindered the development
of Russian tight oil, yet the principal among them was the availability of
other, less-costly variants of production. The preference for easier-to-access,
less costly formations is aptly reflected in Russia's curbing of deep-hole
exploration drilling (Graph 1).
As Russia's tight oil needs at least an oil price level of 55-60 USD per barrel,
bringing the first fields on-stream is still some way off as conventionals'
breakeven levels are in the 20-30 USD per barrel range. Despite a significant
lag compared to the U.S. shale revolution, this might not be that unfavorable
for Russia. It is expected that under the aegis of "import substitution", Russian
service companies might be fully up to the task to exploit Russia's shale bounty
by the 2020s, moreover, they are likely to work in an environment with significantly
lower drilling costs, time and efficiency rates than their American counterparts
in late 2000s (thus yielding more oil). By that time, perhaps, anti-Russian
sanctions will be a yesteryear affair.
Lastly, one should not underestimate the tenacity of Russia's conventional
oil reserves, which thanks to enhanced oil recovery techniques and supplementary
exploration will remain a force to be reckoned with. As demonstrated by the
discovery of the Velikoye field in the Astrakhan Oblast (reserves estimated
at 330 million tons of oil), Russia's pre-salt layers, even in regions previously
thought to be on the verge of depletion, might kickstart a new development
vector in its energy matrix. As Russia's Natural Resource Ministry cannot account
for events that are still yet to happen, its 2044 depletion assumption reflects
merely its inherent conservatism, not the country's realistic capabilities.
By all accounts, Russia will remain a major oil-producing nation throughout
the entire XXIst century, with oil production moving to places that are further
(north and east), deeper (both deepwater and pre-salt) and generally more costly.
