Russia holds the world’s largest natural gas reserves, the second-largest coal reserves, and the ninth-largest crude oil reserves. Russia is the largest producer of crude oil with an average about 9.8 million bbl/d in 2011 and 10.4 bbl/d in 2012. OAO Rosneft became the world’s largest oil producer after it acquired TNK-BP in March 2013 in a $55 billion sale, and output. Oil and gas revenues account for almost 50 percent of Russia’s state budget and are very much the bloodline to the country’s $2 trillion economy. Petroleum is sourced from 259 different companies, 132 which are independent, and 14 which are under the Gazprom conglomerate.
Recent deals with international oil and gas majors, involving joint offshore development in the Kara Sea and the Black Sea highlight the importance of exploring for new oil and gas resources to support the long-term development of Russia’s oil and gas sector. Owing to the significant potential of existing fields, there has not, until recently, been a pressing need for Russian oil and gas companies to conduct extensive exploration programs. The existing producing fields have mostly hard-to-recover reserves, with the water cut of produced fluids exceeding 80 percent. This dictates the need to expand exploration into frontier regions, including the Arctic shelf, the shelf of the Black Sea, the Sea of Okhotsk and others. There are still no potential resources available to offset declining production levels in mature producing areas: West Siberia for oil and the Nadym-Pur-Tazovsky region for gas. Some problems may be resolved by the accelerated development of East Siberia and the Caspian shelf and by applying advanced technologies to increase the output of existing oil and gas assets. However, to maintain the current production levels after 2025, the oil sector alone would need to produce an additional 20 million tons in 2025 and 90 million tons in 2030 from new exploration.
According to Russia’s Energy Strategy, by 2030, domestic oil and condensate should reach the target production level of 530 million tons. From 2025 – assuming that Russia intends to maintain its leading position among the oil-producing nations – the potential of existing and allocated onshore fields will not be sufficient to reach the target production level of 500 million tons that was announced by the Russian Government.
When it comes to Russian companies, exploration activities still account for a small share of their spending. This is indicative of a low level of interest in such investments among domestic players. The success rates of exploration drilling in Russia normally range from 50 percent to 90 percent, and this should encourage increased investment in exploration projects by Russian companies. Owing to the extensive exploration experience of local players and their knowledge of the exploration potential of mature areas, the success rates of exploration projects in Russia are above the world average (40%-70%). However, with the expansion of exploration activities into less-well known regions, Russian companies are likely to face a sharp decline in success rates (down to 20%-30%), even if significant investments are made in preliminary studies (seismic surveys, electrical prospecting, etc.). The fairly modest results of exploration activities in East Siberia and on the Caspian shelf clearly indicate the level of risk that domestic companies may face in the future. In Russia, prospecting costs account for a much larger share of total exploration expenses (which include drilling as well as prospecting costs) than in the rest of the world. This is largely because Russian companies focus most of their exploration efforts onshore. With a maximum well cost of USD 15 million per well (except 6km-7km wells drilled in reservoirs with a high H2S content), total drilling costs are comparable to seismic costs. By contrast, the cost to drill an offshore well may be as high as USD 60 million to USD 120 million, thus affecting the cost ratio for offshore exploration: seismic acquisition costs will account for a significantly smaller proportion of the sum of these costs and drilling costs. Consequently, this parameter is expected to decline to the world average against a background of overall growth in the exploration budget.