ESTIMATING RUSSIAN OIL RESERVES

In document Realising the oil supply potential of the CIS: the impact of institutions and policies (Page 59-61)

124. Methodological differences in assessing oil reserves can have significant political and policy

implications. In Russia, the state continues to rely on a Soviet-era methodology and classification system which emphasises geological substantiation of the presence of petroleum and technical recoverability,

rather than economic considerations.151 Private Russian oil companies, by contrast, rely on western

methodologies emphasising economic considerations. To complicate matters further, the two commonly used western methodologies – from the Society of Petroleum Engineers (SPE) and the US Securities and Exchange Commission (SEC) – produce different estimates. In November 2005, Natural Resources Minister Yuri Trutnev signed an order initiating the transition to a new system for classifying oil reserves, much closer to the systems used in the West. This will in due course create a much better basis for any future differentiation of the mineral resources extraction tax (Annex 2). However, the new system will not be fully operational until 2009, owing to the need to re-estimate the reserves of all existing fields under the newly approved methodology. For the moment, the state continues to rely on the old Soviet classification system.

125. Not surprisingly, given the emphasis on physical presence and technical recoverability, rather

than commercial considerations, the state’s reserve estimates are far larger than those derived from company data. However, the trends the two sets of estimates show move in opposite directions:

• From 1998 through 2004, official estimates of total ABC1 reserves fell by an estimated 2.6%.152 In

early 2005, the Ministry of Natural Resources stated that reserves had increased by just 330mt (2.4bn barrels) in 2004, against output of 458mt. The ministry claims that between 1999 and 2003, reserve replacement ran at 85% of output. When they have occurred, moreover, new finds over the last decade

have also tended to be smaller than previously and in fields with lower flow rates.153 As IEA

(2003:148) notes, the share of Russian reserves classed as ‘difficult to recover’ is already above 50% and is growing steadily.

151. For details, see IEA (2002a:71). The Russian AB classification consists of proved, developed reserves, whether they are producing or non-producing. The C1 classification is roughly equivalent to proved- undeveloped reserves but, with few economic (as opposed to geological) checks carried out. C1 thus includes an element of the ‘probable’ category under western classification systems. IEA (2002a) suggests that about 30% of C1 reserves would fall into the western ‘proved’ category.

152. Landes et al. (2005:33–6). Since official ABC1 reserve estimates remain a state secret, the exact numbers are unknown. However, the Russian authorities have frequently claimed that reserves are falling. The last available estimate, for 1999, was 15.35bn tonnes (ca. 112.1bn bbl). Landes et al. (2005) use this estimate as a starting point, together with data for crude and condensate production and official data on crude oil reserve additions (assuming 100% replacement of condensate, for which no data at all are reported), to estimate that ABC1 reserves fell 2.6% over five years.

153. The largest new field discovered in the last decade, the Upper Filanovskoe field in the Russian sector of the Caspian, has an estimated 600m barrels of oil and 35bcm of natural gas.

• By contrast, Russian oil companies reported an average 141.8% reserve-replacement ratio over the same period, increasing total reserves by just over 31% – a truly extraordinary performance by international standards.

126. There is no contradiction here: the companies’ reported increases have come from higher

estimates of how much of the oil at their disposal is economically recoverable, whereas the decline that so worries the authorities is the product of a failure to explore and find new sources of oil. Thus, while the authorities have been increasingly frustrated by the lack of exploration, Russian oil companies are relatively well endowed with reserves by international standards and tend not to regard new exploration as a matter of such urgency. Moreover, they have little incentive to look for new resources under current legislation.

127. Despite the variations, Russian and Western assessments are generally in rough agreement

regarding the physical reserves of original oil in place. The typical Russian development plan calls for 34% recovery from the major fields in Western Siberia. Based on these plans, for every 100 barrels of original oil in place, Western hydrocarbon auditors typically ascertain only around 24 barrels of SPE category oil and as little as 18 barrels under SEC standards. The latter figure may be further reduced if the licence term is applied to the tail end of the reserves. Taking licence expiry dates into account, an average of only 11 barrels of original oil in place are currently classified as ‘SEC proven’. Significant upside thus exists at those Russian fields classified as SEC proven, which could be realised with the application of technology and proactive reserve management. The recovery of these fields could reach 45 barrels per 100 barrels of oil in place.154

128. A further problem with respect to reserves estimates concerns their classification. The authorities continue to regard reserves estimates as state secrets. This practice that reduces transparency and creates difficulties for investors – particularly foreign investors – who may be legally barred from access to information they need in order to pursue their projects.155 Publishing official estimates of Russian reserves

would increase both transparency and investor confidence, while also removing a legal impediment to the activities of foreign companies that can be used to apply pressure to them in a selective and arbitrary manner.

154. See Bush (2004) and Collison et al. (2004). Recovery factors well above 45% (and sometimes as high as 60%) have been realised in some mature basins, including Alaska and the North Sea, but these would still be characterised as outliers. That said, technology changes rapidly, and such high recovery factors were until recently regarded as impossible.

155. See Vedomosti, 24 October 2005, on the problems encountered by BP and ExxonMobil with respect to access to geological information. Maps of greater precision than 1:2500 (1cm per 25m) are also state secrets.

In document Realising the oil supply potential of the CIS: the impact of institutions and policies (Page 59-61)