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Viktor Katona

Viktor Katona

Viktor Katona is an Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, currently based in Budapest. Disclaimer: views set…

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Who Will Win The Race In Russia’s Emerging Oil Frontier?

Russia’s gradual pivot to the Asia-Pacific region put a new spin on the nation’s exploration & development priorities. The Irkutsk region is emerging as one of the leading new hubs of oil & gas production, underpinned by ample reserves and substantial export options. The 38 bn m3/year Power of Siberia, due to be onstream by 2020, pipeline will feed China’s gas needs under a 30-year contract, whilst the Transneft-operated Eastern Pipeline-Pacific Ocean pipeline’s (ESPO-1) throughput capacity is bound to be increased to 80 bn tons/year. Both are secured by overt political backing and will materialize as expected, yet the real issue is to extract the plentiful oil.

After the ESPO has been put onstream, yet before the imposition of reciprocal sanctions, the Irkutsk Region has witnessed a spectacular buildup of oil & gas reserves, as almost every year a new 100+ million barrel field was discovered. The Zapadno-Ayanskoye (discovered in 2008, 24 million tons), Baykalovskoye (2009, 53.6 million tons), Savostyanovskoye (2010, 160 million tons), Severo-Danilovskoye (2011, 75 million tons), Ignyalinskoye (2011, 66 million tons) and im. V.B.Mazura (2012, 40 million tons) fields contributed massively to raise the region’s oil reserves. As for its gas reserves, the Kovyktinskoye field alone contains almost as much gas as the whole territory of Norway, further buttressed by recent discoveries as the Chikanskoye (2007, 98.3 bn m3) and Angaro-Ilimskoye (2009, 33 bn m3) fields. After a two-year nosedive, induced by falling crude oil prices, the Irkutsk Region’s Verkhneicherskoye field (2016, 61 million tons) once again topped Russia’s annual oil discovery list.

The fact that Irkutsk boasts 3.8 trillion m3 gas and 664 million tons of oil 2P reserves, with possible and inferred reserves equaling 7.2 trillion m3 of gas and 1.875 billion tons of oil should come as no surprise, since the Nepa-Botuoba Basin has long been in the sights of energy specialists, however, something popped up in the way of the region’s getting into preeminence. The first exploration works were conducted parallel to the construction of the Trans-Siberian Railway, however, the Russian Civil War and the havoc it had wreaked cut short the tentative. The post-WWII epoch brought about in 1962 the first oil discovery in Eastern Siberia, the still functional Markovskoye field, and things seemed to pick up steam, yet the Collapse of the Soviet Union resulted in the adjournment of numerous projects. Related: The Shift Towards Renewables Is Picking Up Pace

Among them, the Kovyktinskoye field stands aside. Discovered in 1987, the Gazprom-controlled giant field is the largest in Eastern Siberia and after reaching its peak production of 25 bn m3/year in mid-2020s, it will amount to two-thirds of the Power of Siberia throughput capacity. On top of this, however, Russian authorities are unlikely to promote the development of gas projects and are more likely to concentrate on oil. The prioritization of oil exploration by the state-owned Rosgeologia is understandable as Russia experiences a hefty gas production capacity surplus (cca 150 bn m3/year), yet needs to create an effective basis for future oil production at this juncture.

Moreover, the expansion of the $23bn ESPO pipeline is expected to increase overall throughput capacity by 34.5 million tons per year, which will not be fully offset by the tying in of the Zapolyarye-Purpe and Kuyumba-Tayshet pipelines (additional 28-29 million tons/year by 2020). From this, 8 million tons/year will be pumped to the Rosneft-owned Komsomolskiy refinery and another 5 million tons/year to the Khabarovsk refinery of NNK, a structure belonging to Rosneft’s previous CEO, E. Khudaynatov. Therefore, considering the accelerated development of Eastern Siberia, potential investors might be tempted by the idea of exporting ESPO from Kozmino. Yet time is running short as Russian companies are also vying for their place in the sun, tempted by the favorable differential, currently 4$/barrel, between Urals Med and ESPO (in case of Urals Rot the gap is even bigger at 4.5$/barrel). Related: Why Is Smart Money So Long In Oil?

Epitomizing the appeal of the Irkutsk Region is the Irkutsk Oil Company, which managed to increase its oil output almost 13 times during the past seven years, totaling 7.8 million tons in 2016 and becoming, virtually out of nowhere, Russia’s No.11 oil producer. Yet even the boldest investors should be aware of the challenges this faraway East-Siberian region entails. Although the ESPO pipeline cuts through the Irkutsk region, facilitating the construction of loopings, oil infrastructure is underdeveloped and its construction inflates project costs significantly. The region’s local oil & gas demand is limited and despite a long-held aim to create a gas chemical complex cannot absorb any of the new projects’ output. Last but not least, most of the Irkutsk Region oil is tight, necessitating an implementation of sophisticated extraction technologies. Thus, one finds oneself with the following choice: concentrate on W-Siberian fields with less spare oil but low production costs or reach new frontiers where oil is aplenty, yet infrastructure is lacking?

When confronted with such a dilemma, the choice of partners might sway the decision. INK seems a good pick, as it is a privately owned company, partly owned by the European Bank of Reconstruction and Development and Goldman Sachs. Rosneft, the leading actor in Eastern Siberia, is unlikely to let investors into its most promising projects. It sold 26 percent of the Vankor field to the Indian ONGC Videsh and 20 percent of the Verkhnechonsk project to Beijing Gas, however, both have reached peak production in 2014 and 2016, respectively. Vankor’s development is particularly attended with difficulties, since the field began to see a decline in production, three years after attaining peak production, despite initial plans that projected a plateau to mid-2020s. The most audacious might go at it all by themselves.

By Victor Katona for Oilprice.com

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