Energy & Resources
Majors Return to Russian Oil Fields

Igor Effimoff began his career with Shell in the mid-1970s as the district geologist for the Middle East. In learning about petroleum geology in that region, he actually learned much about the petroleum geology of the nearby Soviet Union. When the Soviet Union began to open up in the mid-1980s, Effimoff decided to try to help develop the country’s wealth of undeveloped oil. Working with a small, independent oil company, his Russian oil ambitions were cut short after years of tough, ultimately fruitless, negotiations. Effimoff resigned himself to staying away from Russia … until about a year ago.

Now, chief operating officer for Teton Petroleum Company, an independent oil company in Houston, Effimoff has returned to Russia and is seeing results. What brought him back is a more fertile investment climate created by President Vladimir Putin over the past couple of years, he says. Effimoff’s experiences are a microcosm of a large resurgence of interest among Western oil companies in Russia.

In February, BP announced it would pay $6.75 billion to merge with Alfa Group and AccessRenova (AAR) to create Russia’s third largest oil and gas company. “That represents an investment of about the size of total Western investments in Russian oil from inception,” Effimoff says. The BP-AAR merger incorporates Russia’s fourth and seventh largest oil producers, Tyumen Oil Company (TNK) and Sidanco, which together produce about 1.2 million barrels of oil a day.

Flames burst from a gas vent at Samotlor Oil Field amid the marshes of West Siberia. Samotlor is the world’s seventh largest oil field. During the Soviet Union’s peak of oil production in 1980, Samotlor produced about 7.4 million barrels of the 12.5 million total barrels produced in the country. BP’s recent billion-dollar investment in Tyumen Oil Company in Russia will give the company access to Samotlor’s vast resources. Photo by Sergei Kivrin.

Gregory Ulmishek, Russian oil expert at the U.S. Geological Survey, says that investments in Russian oil have been halted over the years not by geological reasons but by political ones. The BP deal, he says, is a major indication that Western investment in Russian oil is on the rise.

BP entered Russia five years ago when it bought 10 percent of Sidanco. “We had a tough time initially, but after the present management and ownership structure was established early in 2001, we have gradually built an important, mutually beneficial relationship with the owners of AAR and learned a great deal about doing business in Russia,” said BP Chief Executive Lord Browne in a company statement.

BP’s investment comes after months of falling share prices. “BP has become a company of such a size that in order for it to just maintain itself, it needs to replace reserves and actually grow its reserves; it’s becoming harder and harder to do with a drill bit,” Effimoff says. “When you look around the world and see where there’s a lot of discovered undeveloped oil, your eyes focus on Russia, probably the most over-explored and underdeveloped country in the world [for oil].”
BP’s need for reserves and TNK’s need for Western-style technology and management skills create a mutually beneficial partnership, Effimoff says. According to the U.S. Energy Information Administration, Russia holds 48.6 billion barrels of proven oil reserves. Through the Russian merger, BP will see a 30 percent increase in proven oil reserves and a 12 percent boost in oil and gas production.

Much of this boost will come from TNK’s main asset in Russia, the Samotlor Field in the West Siberian basin. Samotlor, discovered in 1965, is the world’s seventh largest oil field. The basin has already produced 15.5 billion barrels of oil and as much as 9 billion barrels could remain, Effimoff says. “At its peak in 1980, it was producing 7.4 million barrels of oil a day. And 1980 roughly was when the Soviet Union was producing about 12.5 million barrels a day, so 7.4 million of that 12 million were coming from this one field.”

TNK has enlisted Halliburton to help work-over Samotlor’s 14,000 wells, using Western-style technology. Each new well is making about 2,500 barrels of oil a day, compared to an old rate of 300 to 400 barrels a day, Effimoff says.

While Samotlor is by far the largest producing field, Ulmishek says that all production has been increasing substantially during the last two to three years. “Not because they involved new fields in production but because they improved production from already producing fields,” he says.

West Siberia is the dominant petroleum basin in Russia, producing 75 percent of all Russian oil and gas, Ulmishek says. “It’s the second richest basin in the world, second only to the Middle East, with huge reserves and very substantial undiscovered resources,” he says. USGS mean estimates put the Mesozoic-aged West Siberian basin at 55 billion barrels of undiscovered resources.

The nearby Volga-Ural basin is also a large oil basin, and companies are looking there for smaller, undiscovered fields, Ulmishek says. More mature than the West Siberia basin, the Volga-Ural basin is already substantially explored and depleted. Ulmishek also points to the North Caspian basin and the offshore Arctic as areas with large resources.

Effimoff says that the past 18 months at Teton have been very successful. Teton has three producing oil fields in Russia, all in West Siberia, only 20 miles north of Samotlor, on the same geologic formation. Since 2001, production on the fields has jumped from 1,000 barrels a day to 7,000 barrels a day. “We’re not BP, but our thinking is along the same lines in many ways,” Effimoff says. “To some extent, we’re sort of a poster-child for the Russian and American governmental efforts trying to encourage U.S. independents to invest in Russia.”

Lisa M. Pinsker

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