29 Nov 2023

State Reserves Commission chief Igor Shpurov: No risk of sharp decline in oil production in Russia evident today

While oil and gas companies around the world are trying to strike a balance between introducing low-carbon technologies and solving traditional problems, Russian producers are faced with a similar quest with the added difficulty of offsetting the impact of sanctions.

The head of the State Mineral Reserves Commission, Igor Shpurov, describes in an interview with Interfax how Russian oil and gas companies are managing production in the new reality, developing methods to recover tight oil and gas and coming to grips with CO2 storage.

Exploration and production

Q.: What is the situation with replenishing Russia’s hydrocarbon resources in 2023?

A.: The reserves recovery rate is not decreasing, despite Covid-19 and the sanctions. We hope this will continue, because hydrocarbons are still on the agenda. Everyone understands that the main components of energy supply in, roughly speaking, the year 2050 will be oil and gas - they will account for 67-68% of consumption.

In this sense, if Russia is one of the leading countries for oil, then for gas it is the leading one. And all prospects for increasing gas production are connected with Russia. We have a lot of mineral potential: half of our gas resources have been counted and this does not yet include possible increases on the shelf.

Not much is being said about this, but the future of the world's energy sector is connected with Russian gas. If our short-term prospects are not very good due to the breakdown of logistics, then the medium and long-term prospects certainly are.

The only thing is that it is important for us not to lose momentum in exploration, because there are questions here too. Many deposits being developed today are becoming depleted and we need to address the mineral resource potential with the search for new deposits and how to recover tight oil and gas from ageing deposits

Q.: But has the pace of geological exploration not changed in the past two years due to sanctions?

A.: So far, not one company has reduced geological exploration, either for petroleum or for solid minerals. They remain at the same level as previous years.

As for results in 2022, they are a little worse than 2021. At the same time, there was an increase in prospecting and exploration drilling - from 356,000 meters to 367,000 meters. 2D seismic decreased slightly from 1.490 linear kilometers in 2021 to 1,200 km including regional work, and 3D from 4,100 square km to 2,300 sq. km.

When the sanctions started we accelerated the development of imported minerals because we had to supply our own industries with them. Investment in solid minerals exploration is forecast to grow 2% or by 15.8 billion rubles from 2022.

The key thing here is not just to maintain the volume of funding but also the volume of work, since companies are moving into more complex regions where exploration can be more expensive. The volume of work remains the same for now, but then time will tell.

Q.: What discoveries can we be proud of in 2023?

A.: We discovered 22 fields by August 1. They include a large oil and gas condensate field named after. R.U. Maganov on the Caspian Sea shelf, discovered by LLC Lukoil-Nizhnevolzhskneft [recoverable C1+C2 reserves: oil - 8.422 million tonnes, gas - 136.157 billion cubic meters, condensate - 24.351 million tonnes]. Then there was the discovery of Gazprom Neft’s medium-sized oil field named after. V.P. Orlov in the Orenburg region [C1+C2 - 7.541 million tonnes].

Q.: You said Russian gas is the future of world energy. There is a lot of talk that the Nadym-Pur-Tazovsky region’s underlying deposits contain huge gas reserves and need to be developed. But do we have the technologies to lift this gas at a competitive cost?

A.: The technologies exist and, crucially, the infrastructure exists in the region, which certainly enables companies to use the subsoil efficiently while keeping the project generally profitable. But we need to make an inventory of current profitable gas reserves if we are to assess the cost of gas production in the current tax environment and in the event of possible tax incentives.

We have already submitted a rationale for the inventory and made preliminary assessments. We believe this should be done along similar lines to the inventory we did for oil, but catering for the gas industry’s specifics. First of all, it must make allowance for the specific field infrastructure and the so-called “gas balance,” that is, the pivot in transport flows that is being seen now.

Also, one of the basic elements of the inventory should be to take existing infrastructure, in particular, mono-towns and transport capacity, into account.

And then, regarding the Nadym-Pur-Tazovsky region’s underlying horizons, for example, we will get an understanding of conditions needed to develop them. Perhaps this will show that it will be more economical today to develop underlying horizons than, say, certain remote fields.

Q.: Is there any certainty that this inventory will take place?

A.: No, this has to be the initiative of companies.

Q.: But the inventory you are talking about should obviously be nationwide, shouldn’t it?

A.: Of course, all companies involved in gas production and supply should be involved in this because this is connected not only with the internal finances of companies, but also with the national economy, when we talk about transport corridors, mono-towns and external infrastructure.

Q.: Let's go back to the short-term prospects for oil. Russia is reducing production, so how might this affect the well stock? Earlier you said that almost a third of the wells could be lost forever...

A.: There is no dramatic decline in production, which is governed only by agreements with OPEC, not by any other regulatory or technological restrictions. Companies are well aware of the consequences and are trying not to reduce production.

Q.: So what’s the best way to proceed if we have to reduce production significantly?

A.: Here’s what I’ve already proposed and still propose: underground oil storage facilities are an option for solving this problem. In fact, this has been discussed at the state level, and it could well be a technologically feasible solution.

We also need to optimize the existing well stock, including by limiting drawdowns in high-yield wells without stopping low- and medium-yield wells.

But no risks of a sharp decline in production are evident today because oil is needed, it is being sold, despite all the sanctions. Technologically, nothing much has changed in our production.

Q.: Speaking of underground oil storage facilities: a Rosnedra commission planned to look at a project for Russia’s first underground storage facility in April...

A.: Yes, Rosneft submitted plans for three sites on the Taimyr Peninsula, we reviewed and approved them. But the volume there is not very large; this is a project for operating, not strategic oil storage.

Q.: Have any other companies received licenses to assess underground sites for oil storage facilities? Or have they notified the State Reserves Commission about such plans?

A.: No, only Rosneft, no one else has approached us. But they will, I think.

Q.: You’ve said that underground oil storage facilities could be built in salt deposits along the Transneft system. Are you any closer to doing this yet?

A.: Not yet. But, as I said, the sanctions haven’t significantly affected production volumes, so companies don’t need this yet, or perhaps not that much. I think companies will be able to take advantage of this if the need arises.

Q.: At the beginning of 2023, the State Reserves Commission was concerned about the increasing deviation of production levels from approved projects during the development of hydrocarbon fields. Does this trend continue?

A.: A Russian government resolution [No. 353 of March 12, 2022] allowing deviations from projects has been extended until 2023. And we are already seeing requests from companies to extend the resolution into next year.

Challenges have indeed arisen for oil and gas producers due to the actions of unfriendly countries, however, the State Reserves Commission is wary of such proposals by companies to prolong the resolution and expand the list as there is a significant risk of hydrocarbon deposits being developed inefficiently, without state control.

Tight oil and gas

Q.: By the end of 2022, it was planned to create a unified system for tight oil and gas reserves classification. Are we right in assuming that this has not yet been created? Perhaps a decision was made to abandon this approach?

A.: No, no one has abandoned this; the Natural Resources Ministry is working on it. The classification project is in the pipeline.

Tight reserves is really a philosophical concept. As a rule they are hard to recover because either there are no technologies at all [for the Bazhenov formation and Domanic deposits], or they are in their infancy, or existing technologies do not make development sufficiently economic [for viscous oil].

It is with this in mind that the classification is being created. The plan is to assess the need for tax incentives to develop tight oil and gas based on the financial and economic metrics for developing them under the current tax system, taking into account incentives proposed by subsoil users in various macroeconomic scenarios.

Q.: Last year, the State Reserves Commission reviewed tight oil projects presented by Rosneft and Gazprom Neft. Have any new projects been submitted for consideration?

A.: This year we have reviewed and approved four projects, three of which were presented by the Stavropolneftegaz company, with proposals for the development of the Khadum deposits at fields in the Stavropol Territory; and one by Tatneft with the development of new technologies for viscous oil deposits.

The companies offered technologies for various purposes: determining reservoir properties, core sampling and analysis, geophysical studies, updating physical and chemical properties, developing digital modules for geological and hydrodynamic modeling, enhancing the designs of horizontal wells, their spatial distribution and location, testing various hydraulic fracturing designs and thermal methods... They have determined the optimal operating parameters and are preparing for well-testing.

Q.: Are there any problems with honoring licenses for tight oil and gas test sites?

A.: The process is already underway. Last year, I will admit, the Gazprom Neft and Rosneft projects were complex. We used them to launch and fine-tune the process: how it should be, what these projects should be, what to pay attention to.

It is very important for us that companies clearly formulate the problems they face when developing tight oil and gas. How they will solve these problems. And thirdly, they need to formulate a program for creating new technologies that will allow them to develop tight reserves.

That is, our main task is not just to evaluate the development, but to develop a program for creating new technologies. This seems to be clear from the purpose of the license, on the one hand, but on the other hand, you know, when people have been doing projects for 70 years according to the same rule [for production], and now, it turns out, they need to do it to create technology... The main thing here is how much investment and what you will be investing in. It won't just be drilling wells. It’ll be creating new technologies. This is what we will be asking of you. How many technologies have you created? What technologies have you created? Did they enable you to develop the field?

Q.: So the licensing terms imply they might never produce anything from this site?

A.: A negative result is also a result. This is the risk.

Q.: It was proposed to include some types of gas deposits among the subsoil areas that can be developed within the framework of technological test grounds for tight reserves. Has this proposal been advanced?

A.: Yes, a financial feasibility study is currently being carried out to include the gas reserves of the Berezovsky formation in the list of tight categories for which a license to create a technological test ground can be granted. Other deposits with gas reserves are not yet being considered as candidates for classification as tight hydrocarbon test sites.

Reserves classification and audit

Q.: You have said that Russia and China would draft documents on the mutual recognition of national systems for mineral reserves classification in 2023. At what stage is this initiative now?

A.: Russia and China are the only countries to have officially confirmed the harmonization of their national classification systems with the United Nations Framework Classification for Resources (UNFC). These documents confirm that our classifications not only comply with the internationally recognized standard by all countries, but also with each other. But they may have nuances and features that need to be understood before signing mutual recognition documents.

And now we are at the stage of studying characteristics of the Chinese classification for hydrocarbons and forming a case study - pilot examples between the Russian classification and the Chinese classification. It is difficult to estimate how much time this will take, for purely technical and external reasons.

Q.: There have also been reports of plans to harmonize approaches to the classification of mineral reserves in Russia and Belarus. When might this happen?

A.: Generally speaking, everything is very close between us and Belarus, and progress in terms of harmonization has been very considerable. We are working very hard, meeting approximately once every quarter.

At our last meeting in early August, the Russian side spoke about the specifics of the Russian classification for hydrocarbons. We also agreed to begin a case study, and are now agreeing on specific deposits that will serve as examples.

I believe it might take six months to a year to harmonize the classifications of Russia and Belarus.

Q.: Which other countries are we planning to harmonize reserve classification systems with?

A.: There are about 150 officially recognized classifications in the world. Fortunately, we are already aligned to some degree with some of them thanks to the harmonization of the Russian hydrocarbon classification with the UNFC.

Work is underway to harmonize classifications for the implementation of a long-term cooperation plan for the CIS countries. Work is going well with Uzbekistan, and with Tajikistan.

Q.: In February it was reported that the State Duma Committee on Ecology, Natural Resources and Environmental Protection was drafting a bill to create a system for the independent audit of mineral reserves in Russia. What stage is the bill at now?

A.: The bill has been endorsed by the country’s leading producers and experts. By the way, at the beginning of the year, Rosnedra formed a working group to discuss approaches to the legal regulation of reserve audits, which included representatives of subordinate organizations and mining companies. Now the work on preparing the relevant proposals is close to completion, we expect to present the results in September-October. This work is being carried out by the international center for best practices at Rosnedra.

In general, we at the State Reserves Commission are concerned foremost about the system of professional experts and competent persons. We ourselves are very interested in this, and so are our neighbors - Belarus, Kazakhstan, China, and everyone else. We are discussing this at all levels. We will raise this issue at the UN ESCAP session in Bangkok in October.

Q.: Regarding the status of local experts involved in auditing reserves. You have raised this issue before. What exactly is the problem?

A.: The Russian school of experts on subsoil use is one of the best in the world; local experts are regularly involved not only in the state appraisal of mineral reserves, but also in appraisals by foreign audit companies. But our country has not yet developed a system for official independent proficiency testing for experts, unlike, for example, the United States, United Kingdom and Australia.

All experts in all types of minerals were required to be members of professional bodies of experts associated with the Anglo-American countries. That is, if they are members of these professional organizations, they are allowed to audit, if not, then not. And it’s even tougher where hydrocarbons are concerned. There, only citizens of the UK and U.S. had the right of signature. So our main task is to correct this imbalance and create a system in which every expert with sufficient qualifications will have the relevant mandates, regardless of citizenship.

I hope that the decision adopted on our initiative by the UN last year will help us in this: the requirements for competent persons and professional experts were approved. We will discuss the possibility of using these requirements for all countries that need to establish independent audit systems in Bangkok.

Underground CO2 storage

Q.: Last year you said almost all Russian oil and gas companies had shown an interest in CCS projects, but were forced to put the brakes on them due to the foreign economic situation. Is any resumption of activity being seen here?

A.: Judging by the speeches given at our forum [Underground Structures 2023], companies are showing a lot of interest in such projects. You have seen for yourself: oil and gas companies, and Rosatom – they’re looking closely at everything.

Q.: The State Reserves Commission’s Expert and Technical Council has reviewed Tatneft’s application to assess a site near the Nizhnekamsk industrial zone for CO2 injection. An appraisal of the site was expected later - was it carried out?

A.: No. Appraisals of the geological substantiation for the selection of CO2 storage sites have not yet been carried out for any project. But guidelines have already been drafted and approved following detailed discussions with government agencies, universities and interested companies. In general, we expect to have such projects soon.

And Sakhalin Energy, Gazprom Neft and other companies came up with proposals at the ETC, where the methodical potential of certain solutions is considered [and not a geological rationale for the selection of CO2 storage sites].

Q.: Speaking of solutions. Gazprom Neft has identified two structures in the Orenburg region with the potential to inject 155 million tonnes of CO2 underground. Is the State Reserves Commission familiar with the outcome of this pilot work? How do you assess the potential of this initiative?

A.: We’ll have to see. But in general, I am a little skeptical about the idea of injecting CO2 into depleted oil and gas formations, because this requires huge investments in the conversion and abandonment of existing wells, as well as close monitoring. These are huge costs. And besides, you still need to understand what to do with the hydrocarbon reserves that are there: they can’t just be written off.

Q.: Why not? Is there no mechanism? Or what's the problem?

A.: We need to understand whether it’s worth continuing to develop them. We need to look at things. Someone says today it’s impossible to develop them, and someone else will come tomorrow and say: “But I can.” And we pump CO2 in there, then what? We bury these reserves. It’s a question of effective use.

Q.: During the conference, you said interest in CO2 storage was highest in China, and we can help it. Tell us more about this.

A.: We know that China is one of the largest emitters of CO2, and the problem of smog in its largest cities isn’t going away. China takes CO2 utilization and its clean climate agenda very seriously. Not because of Western initiatives, but because this is a really serious problem.

And they discuss CO2 utilization with us at the UN from time to time. They have not formally asked us how much we could recycle for their benefit, but productive cooperation in this context is possible.

Q.: What impact is the green agenda having on hydrocarbon production? Can we call it multidirectional, given that as well as oil being hounded we are seeing gas being “rebranded” and an emerging awareness that recycling must also be taken into account in the carbon footprint of renewable energy sources?

A.: There’s no impact at all, because the 21st century is the century of hydrocarbons for sure. The green agenda will evolve, but the solutions it offers will not meet growing energy needs in the next 50 years.

I think that at some point, “green” technologies, for example, thermonuclear energy, will be such that they will resolve energy supply issues. But for now, in the near future, no. Moreover, almost everyone has already recognized that gas is the most environmentally friendly fuel. And oil... As Mendeleev said back in the 19th century: “Oil isn’t fuel! You might as well use banknotes.”