FSU/Eastern Europe

Countries thrive on revitalized output

Higher oil and gas prices have allowed firms to reinvest production earnings, generating still more output and greater profits

All countries by Sergei Rudnitsky and Andrei S. Sokologorsky, Russian Petroleum Investor, Moscow

Russia. The economy remained stable throughout 2001, characterized by increased production, brisk investment activity and income growth. GDP grew 5% (compared with 2000), while industrial output increased 4.9%.

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Declining world oil prices affected financial results of virtually all Russian oil companies. For example, LUKOIL’s net profit slumped 35% in 2001, to $1.203 million. Net profit at Surgutneftegaz plummeted 64%, to $710 million (based on Russian accounting standards), and decreased 12% at YUKOS, to $343 million. However, investments in oil production that companies made in 2000 ensured record output growth in 2001. This largely offset oil price declines in the domestic and international markets. Over 30% of Russia’s hard currency revenues were generated by the oil industry.

As regards exploration, Russian oil reserve increases failed to replace production. In 2001, explored reserves increased 2.13 billion bbl, while oil production totaled 2.53 billion bbl. Moreover, the explored reserves / production replacement ratio worsened, to 84% in 2001 from 94% in 2000.

LUKOIL achieved the largest oil reserves increase, at 448.5 million bbl. By year-end 2001, the company’s recoverable reserves (under the national classification system) totaled 18.2 billion bbl. According to estimates by engineering company Miller & Lents, LUKOIL’s proven oil reserves totaled 14.5 billion bbl, 2% higher than 2000’s level. LUKOIL’s reserves increase occurred mostly in new operational areas, on the Caspian shelf and in Timan-Pechora.

Oil companies last year increased their reinvestment of capital into oil production projects. As a result, drilling increased 9%, totaling 36.898 million ft and 5,140 wells. Growth occurred in both development (up 8.7% to 32.764 million ft) and exploration drilling (up 12.5%, to 4.134 million ft). New wells commissioned by oil companies went up 18%, totaling 4,023. Surgutneftegaz remained the leader in that category last year, commissioning 843 wells. Russian companies brought onstream 48 new oil deposits. At these fields, 1.079 million ft were drilled, 141 wells were brought online, and oil production totaled 10,768 bpd.

According to Russia’s Ministry of Energy, the cumulative, year-end 2001 total of oil, oil/gas and oil / gas / condensate fields discovered was 2,200, including 1,268 under development. In line with government policy, 100 new oil and oil/gas fields are to be brought onstream by 2005 and produce 104.7 million bbl. The planned volume of development drilling by that time will reach 40.78 million ft, of which 7.97 million ft will be exploratory. In addition, 16,713 new wells are to be brought onstream between 2002 and 2005.

Russian oil production has added back roughly 1 million bpd during the last two years. (Photo courtesy of YUKOS)

Investments made by Russia’s oil industry in 2000 and 2001 ensured record oil production growth of 7.5% to 6.933 million bpd, compared to 6% growth in 2000. LUKOIL accounted for 18.1% of Russia’s entire oil output and remained the largest producer. However, the firm registered only 1.2% growth. The leaders in growth rate were Sibneft (19.7%) and YUKOS (17.3%).

Reactivation of idle, existing wells also directly impacted oil production growth. By year-end 2001, Russia’s idle well stock had decreased by 454 units, while the well stock capable of producing had increased 4,490, to a new total of 146,362. By 2005, the current number of idle wells should decrease another 25%.

Another factor that boosted oil production growth was companies’ introduction of enhanced recovery technologies at old fields. For example, YUKOS said that the use of such methods accounted for 49% (83,655 bpd) of its oil production growth. The rest of the gain was ensured by new wells (54,376 bopd) and reactivated idle wells (32,465 bopd). The Ministry of Energy forecasts that oil production growth will slow in 2002, with total output figured to be 7.011 million bpd.

Russia’s natural gas production decline slowed in 2001. Output was 56.2 Bcfd, 0.5% less than in 2000, when production declined 1.3%. On one hand, this was due to a slowing of the production decline at Russian gas monopoly Gazprom. The firm produced 2.1% less than in 2000. On the other hand, oil companies increased their gas output 4.4%, to 3.59 Bcfgd. Meanwhile, putting mammoth Zapolyarnoye field onstream (Yamal Peninsula) at the end of 2001 should boost this year’s gas production to 58.15 Bcfgd.

Kazakhstan. In April 2002, oil transportation company KazTransOil, gas transport firm KazTransGaz and oil production company Kazakhoil were merged into national concern KazMuniaGaz. Thus, one company now manages all state-owned assets in the oil and gas sector.

The government stepped up its efforts to amend existing legislation and introduce new laws. A new Law On Foreign Investments was passed in the summer of 2002. It tightened control over production projects by introducing new rules governing purchases of goods and services, and firms’ implementation of infrastructure projects.

In July 2002, Kazakhstan received long-awaited confirmation of the hydrocarbons potential in its sector of the Caspian Sea. The international consortium carrying out exploration drilling on Kazakhstan’s shelf, Agip KCO, announced that reserves at giant Kashagan field are commercial. Geological reserves are estimated at 38 billion bbl, while recoverable reserves stand at 7 billion to 9 billion bbl. Consortium officials say that these initial figures are likely to be revised upwards.

The Caspian Pipeline Consortium (CPC) commissioned its oil export pipeline last October. Since then, additional transportation capacity has encouraged operators of Kazakhstan E&P projects to step up all types of activity. Having completed exploration of the Eastern and Western Kashagan structures, Agip KCO by early 2003 will finish appraisal drilling on other offshore structures. Drilling will be performed from artificial islands. Agip KCO is already preparing to construct transport and processing infrastructure.

Since May 2001, KazMuniaGaz and JNOC have conducted exploration drilling in the Aral Sea. Last September, KazTransGaz launched exploration at the Amangeldy gas deposit, drilling four exploration wells that positively confirmed a gas presence. KazTransGaz will conduct additional studies of 17 old wells, to establish their actual productive ability, and reserve volume and parameters.

   Drilling totaled 1.62 million ft of hole. Among 399 onshore wells drilled in 2001, there were 275 oil completions, two gas / condensate wells, two dry holes and 120 service wells. In 2001, Tengizchevroil began drilling new wells at giant Tengiz field. Several wells were also drilled at Korolevskoye field, where primary oil recovery began in November 2001. The JV is implementing an early phase of its capacity extension project, which will construct a second-generation plant and re-inject associated gas into formations at Tengiz.

Produced by the Karachaganak Integrated Organization (KIO), Karachaganak gas / condensate field has entered a second development phase. As of January, 70 wells were in operation. By mid-2003, when Phase 2 completes, the number of active wells should be 113. SNPS-Aktobemunaigaz is developing Zhanazhol and Kenkiyak fields in Aktyubinsk. The firm launched a capacity expansion project and last year drilled 52 oil wells – 45 at Zhanazhol and seven at Kenkiyak. In addition, SNPS-Aktobemunaigaz is developing new tracts that are expected to yield an additional 22 million bbl of oil.

Canada’s Hurricane Hydrocarbons also plans to boost oil production. This will be done by raising recovery efficiencies at old deposits, and by bringing onstream new fields in the Kyzylkiya, Aryskum and Maybulak regions. In 2001, the company drilled 54 wells and boosted oil reserves to 510 million bbl. This year, Hurricane plans up to 127 wells.

Kazakh oil production averaged nearly 796,000 bpd (113% of 2000’s production). Natural gas extraction was 886.6 MMcfd (103.1% of 2000’s level). In 2002, production should reach 915,000 bopd and 1.16 Bcfgd.

Oil production growth was ensured when major operators increased recovery in 2001. Tengizchevroil, Kazakhstan’s prime oil producer, extracted 249,000 bpd, up 25%. Tengizchevroil’s 2002 plans call for raising production to between 253,000 and 259,000 bopd. National company Kazakhoil increased production 30%, to 129,500 bopd. SNPS-Aktobemuniagaz raised oil output to 63,735 bpd, up 111%. Hurricane’s oil production jumped 20%, to 99,590 bpd.

Azerbaijan. Oil and gas are being developed in an environment, where forecasts of major reserves in the Caspian have never come true. Dissatisfying drilling results have left Azerbaijan with the prospect of having only two major offshore projects – Azeri Chirag Guneshli (ACG) and Shakh-Deniz.

Currently, Azerbaijan is concerned with realization of Phase 1, full-scale development of ACG, operated by Azerbaijan International Operating Co. (AIOC). So, implementation of all other projects, from rehabilitation of old fields to development of promising areas, has slackened.

Some foreign firms canceled their operations in Azerbaijan after drilling in promising offshore blocks yielded negative results. Nevertheless, state oil company SOCAR is trying to proceed with exploration of structures "rejected" by investors. SOCAR has conducted exploratory drilling at the shallow Gyurgyan-Deniz offshore field. Since May 2002, SOCAR has been drilling a third exploration well at Zyrya field offshore. The two previous wells failed to discover hydrocarbons.

In July 2002, SOCAR finished drilling another well in shallow, Gryazevaysopka field offshore that produced commercial flows. Experts believe that field reserves amount to 65 million bbl. If confirmed, oil will be produced from a fixed offshore platform, N1201, installed in 90 ft of water. Joint venture Caspian Geophysical, formed by WesternGeo and SOCAR, is proceeding with a four-component seismic survey at Chirag field on behalf of AIOC. By the end of 2002, a survey will also be conducted at Azeri field.

   Drilling nationwide totaled 63 wells and 326,023 ft. SOCAR forecasts 89 wells for 2002, including 52 onshore (one for exploration) and 37 (all development) offshore.

Since June 2002, the Dede Gorgud semi-submersible rig has been drilling wells for ACG’s full-scale development. Drilling will eventually be transferred from this unit to the fixed offshore platform, Azeri 1, when the structure is ready. Nine wells will be drilled from Dede Gorgud. Thirty-nine additional wells will be spudded from the platform.

Phase 2 of full-scale, ACG development was set to begin in third-quarter 2002. The project will construct two fixed offshore platforms in the western and eastern parts of Azeri field. First oil under this project is expected in mid- 2006.

Since April 2002, SOCAR has been upgrading production infrastructure in the shallow part of Guneshli field. Twelve more wells will be drilled from the GMSP-14 platform, to produce 15,000 bopd. Similar work is underway at the GMSP-11 platform to add eight wells. Oil recovery will increase 7,000 bopd. SOCAR commissioned two high-flowrate wells at Guneshli to compensate for declining production at other wells caused by water encroachment.

During 2001, Azerbaijan’s oil production averaged 298,800 bopd, with SOCAR’s output at 181,250 bopd. Natural gas production was 532.1 MMcfd. Increased oil output was due to 16% growth (15,935 bpd) achieved by AIOC.

Recent exploration successes in Turkmenistan helped foreign operators to increase their oil production 50% last year. (Photo courtesy of Russian Petroleum Investor)

Turkmenistan. Stable advancement has been the main feature recently. Despite no major geological discoveries, the country is not showing any signs of the type of industry crisis that took hold of Uzbekistan’s energy sector.

Last year’s exploration work increased oil reserves by 30.5 million bbl, and gas reserves by 1.7 Tcf. Tracts on the right bank of the Amudarya River in eastern Turkmenistan produced commercial gas flows with condensate. The Nebitledzhe oil deposit was discovered in western Turkmenistan. In central Turkmenistan, pre-Jurassic deposits on the Shrkazy tract produced gas and condensate.

In addition to Turkmen state enterprises, exploration is operated by foreign companies. Last February, Petronas completed drilling offshore on Block 1 of its third exploration well, Ovez IV, to a depth beyond 14,435 ft. Tests produced 27.2 MMcfgd and 2,400 bcpd. The company also began drilling a fourth exploration well. After drilling is completed, Petronas plans to launch full-scale field development.

Dragon Oil completed drilling two exploration wells that revealed powerful oil and gas horizons. They flowed 1,815 and 2,545 bopd, and both were brought onstream. In 2002, the company will drill three more production wells.

Overall, drilling last year totaled 738,225 ft. Forty five gas wells and 32 oil wells were completed and put onstream. Burren Resercis Petroleum is developing Burun field, including well rehabilitation, switching wells to gas lift and performing recompletions to raise production.

Turkmenneft and Panama’s Mitro International are developing East Cheleken field. Production averaged 4,180 bopd. The firms will drill new wells and raise output to 7,970 bopd.

Liquids production rose 12%, to 159,722 bpd. Production growth was ensured by bringing onstream 30 new wells and working over 600 old wells. In addition, 213 idle oil wells were rehabilitated, and 83 wells were switched to gas lift and artificial lift. Most oil (145,400 bpd) is produced by Turkmenneft, with over one-half produced at two fields in western Turkmenistan – Barsagelmes and Koturdepe. The share produced by foreign companies rose 50%. Dragon Oil produced 6,375 bopd offshore at two fields.

Gas production last year averaged 4.96 Bcfd, up 9%. The main gas producer is state concern Turkmengaz. Most of the 400-MMcfgd incremental output came from new gas fields that went onstream – Garashsyzlygyn 10, Yyllygy and Elguyy – plus Korpedzhe field, which reached design capacity.

Uzbekistan. The oil and gas industry is poised to enter a new development stage. Before 2002 ends, the government plans to sell a minority ownership in national holding company Uzbekneftegaz (UNG) to a foreign strategic investor. UNG controls all enterprises in Uzbekistan’s oil/gas sector.

UNG conducts exploration and drilling on a modest scale. In 2001, drilling totaled less than 300,000 ft. On a minor scale, exploration drilling was performed mostly in the Ustyurt and Ferhana regions. Not satisfied with the scope and results, Tashkent produced a Program of Resource Base Restoration for the period up to 2005. To implement the program, Uzbekistan plans to expand drilling 650,000 ft/year. Accordingly, UNG signed a contract in early 2002 with Chinese oil equipment builders to purchase several drilling rigs.

UNG is trying to involve foreign firms. Together with Britain’s JEBCO Seismic LP, UNG developed geological / geophysical data packages for six promising blocks in Ustyurt. To date, exploration investment projects have been prepared for 19 prospective blocks.

Uzbekistan’s oil production is declining. Liquids output averaged 145,400 bpd, 2.4% less than in 2000. On the other hand, gas production increased 2% to 5.55 Bcfd.

Oil production at the largest field, Kokdumalak, is less than 73,000 bpd, compared to 110,000 bpd a few years ago. UNG may halt further production at the field, due to high water encroachment and decreasing pressure in the pools.

Officials are trying to address the problem of declining production by attracting foreign investors into developing mothballed deposits. Since 2001, Britain’s Uzpek Ltd. has been developing a cluster of small oil and gas deposits in Gissarsky region. Uzpek also has plans to launch geological exploration on three blocks in Ustyurt. This year, officials plan to sign a PSA involving Uzbekneftegaz with Russia’s LUKOIL and ITERA. This project will develop oil and gas deposits in Bukhara-Khiva and Gissarsky.

Ukraine. Economic growth that began in 2000 continued in 2001. Ukraine posted 9.1% GDP growth and 14% greater industrial output. Economic growth was spurred by governmental political actions and a focus on streamlining allocation of funds from the state budget.

Last year may mark a turning point for the E&P sector. According to official information, production quit declining for the first time in many years. The State Statistics Committee said that oil production averaged 73,696 bpd, a 0.3% increase. Gas output was 1.76 Bcfd, up 1.2%. The national program, "Oil and Gas of Ukraine till 2010," passed in 2001. It mandates raising oil and gas production to 80,000 bpd and 2.1 Bcfd, respectively, by 2005.

Continuing exploration drilling growth gives hope that oil production will be stabilized. Exploration drilling rose 24% in 2001. Overall, 88 new wells were drilled. Ukraine’s State Geological Service said that three new deposits were discovered, one of which is in the Sea of Azov. Reserves increased by 40 million bbl of oil and 495 Bcf of gas.

Eastern Europe (outside FSU). The Ministry of Industry and Power in Albania said during June 2002 that it was ready to begin issuing concessions to firms interested in developing oil and gas deposits along several coastal zones. As was true in 2000, just one well was drilled in 2001 for 3,450 ft. Oil output increased slightly, to 5,952 bpd. Natural gas production remained nearly negligible. Oil reserves declined 13%, to 205.9 million bbl. Gas reserves rose 34%, to 134.2 Bcf. Up to 16 wells are forecast by state firm Albpetrol for 2002.

Very little has occurred within Bulgaria over the last 12 months. Drilling remained level at two wells and 22,967 ft. Up to three wells may be drilled in 2002. Oil output continued to slowly approach exhaustion, dropping 29% to just 603 bpd.

State firm MND discovered two new, small oil deposits (Uhrice 57 and Zarosice 3, 420 bopd) in the Czech Republic. This allowed oil reserves to rise 5 million bbl, to 19.5 million bbl. Natural gas reserves have also jumped to 75.9 Bcf from 51.2 Bcf. In addition to the discoveries, state firm MND drilled 17 wells that included four oil wells and five gas completions. Oil output was up 4%, at 3,653 bpd. Up to 16 wells are planned by MND for 2002.

Drilling rebounded 36% in Hungary last year, to 34 wells. Heightened activity resulted in one confirmed discovery (Hosszupalyi Del 1, Foldes K/80 Block, 4.9 MMcfgd and 38 bcpd) and one potential find (Szentmartonkata 1, Godollo/103B contract). Nevertheless, Hungarian oil production fell 8%, to 29,444 bpd. Gas output declined 2%, to 317.1 MMcfd. Pogo Producing Co. is conducting a 3-D seismic survey this year, to identify potential drilling prospects in the Szolnok and Tompa areas. MOL and the Hungarian Geological Survey predict only 22 wells in 2002.

Romania’s government is moving ahead with privatizing 51% of state oil company Petrom. Officials hope to choose a single strategic investor by first-quarter 2004. Meanwhile, Romanian firm Romgaz has stepped closer to declaring Todiresti gas field commercial. Last December, a second appraisal, Todiresti 3, confirmed an extension of the reservoir and tested 2.3 MMcfgd. TotalFinaElf last year conducted a 2-D seismic campaign on the Neptune prospect in the Black Sea. Romanian oil production continued to fall, averaging about 126,452 bpd.

Poland’s oil production has increased during the last two years, despite a small reduction in the number of producing wells. This is partly due to POGC putting wells onstream in the relatively new Barnowko-Mostno-Buszewo and Miedzychod fields near the German border, east of Berlin. Additional improvement comes from Petrobaltic’s continued development program offshore. Polish output exceeded 17,000 bopd last year, and gas production climbed 2.6%, to 459 MMcfd. Foreign operators’ exploratory results over several years have been less than spectacular. However, Eurogas is acquiring 2-D seismic, preparatory to spudding a well in first-half 2003. RWE-DEA’s ongoing drilling efforts will last through third-quarter 2002.

Government officials in Croatia received 10 bids by a June 14, 2002, deadline for a 25% stake in state firm INA Industrija Nafta. Among the bidders are MOL, OMV, Edison Gas, Hellenic Petroleum, PKN Orlen, Sibir Energy, and Lukoil. At press time, a list of finalists was due to be released. Onshore, only one exploration well was drilled, in the Pannonian basin. The INA-Agip JV in the northern Adriatic Sea has two wildcats planned for 2002. Three gas development wells were drilled offshore last year, compared to six wells in 2000. Twelve gas wells are producing offshore.

In Yugoslavia (Serbia), state firm NIS-Naftagas drilled an appraisal well to the Melenci Duboko discovery of 1998. Drilled to a 9,515-ft TD, the Melenci Duboko 2 confirmed a new, deeper oil reservoir. The pool is about 3,300 ft below the Melenci gas field, which has produced continuously since it was discovered in 1958. Meanwhile, Yugoslav oil output has declined further, to about 17,500 bpd.