Russia could squeeze out extra 77bn-plus barrels of oil

By bne IntelliNews November 19, 2008

Nicholas Watson in Prague -

Russia's dive to the bottom of the Arctic Ocean set off a wave of headlines about the region's untapped potential for oil exploration. But with the oil price halving from its peak, such challenging projects are becoming an evermore-distant dream, prompting a growing band of experts to argue that what the industry really needs to do is to squeeze more out of the areas already being exploited. For Russia, that could mean an extra 77bn barrels or more of oil.

EOR and IOR aren't acronyms well known beyond the fringes of the oil industry, but if a growing number of people get their way, "enhanced oil recovery" - and its precursor "improved oil recovery" - are concepts that every politician will become well versed in as the debate rages about how best to meet the world's thirst for oil.

Using methods to improve the recovery factor of oil drilling is not a new concept by any means. Since the 1970s, producers have been injecting gas or water into reservoirs to extract more oil by pushing additional oil to a production wellbore, and also dissolving the gas in the oil to lower its viscosity and increase the flow rate. "Injecting water is the first stage of treating your reservoir with loving care," says one oil exec. Since then, research and development has widened EOR to include the injection of chemicals.

There's no argument that it works. Today, the average worldwide recovery factor in oilfields is only 22% of original oil in place, but this varies enormously from place to place depending on recovery methods. In the North Sea, where companies have practised getting more oil out for years, the recovery factor can reach as high as 60% on some fields, but on average is 46%; in the US, it's around 38%; in Russia, it's just above the global average, at a miserly 23%. Using EOR methods have resulted in an average recovery rate of about 33-35% of the original oil-in-place for all fields worldwide. "As of today, merely 3% of oil production in the world comes from EOR - that shows how insignificant it has been over the years," says Dr. Rafael Sandrea of Oklahoma-based IPC Petroleum Consultants.

Why so low? Adding oil recovery methods adds to the cost of extracting the oil, of course. When oil was trading at $10 a barrel, there was little incentive to do EOR because the net benefit was either negative or too low to make it worthwhile. However, with the oil price moving above $60 per barrel, the economics has changed dramatically. "All over the world, EOR is back on the top of the agenda," David Boone, president of Calgary-based Escavar Energy, told delegates at the 19th World Petroleum Congress in Madrid in July, when oil was pushing toward $150 per barrel. "It's always been on the agenda of the really large companies, but what's interesting is that today it's on the agenda of the medium and small companies. There are some small, relatively lightly capitalized companies that are applying some pretty high-technology solutions and advertising EOR projects to their shareholders. And these are shareholders that are not used to delayed gratification. Now, with $140 per barrel of oil, everybody is on that bandwagon."

Estimates show that EOR could add reserves at a capital expenditure of just $2-4 per barrel, compared with about $4-6 for deepwater development, almost $13 for acquisitions, and more than $14 for overall global finding and development costs.

Gushing oil

Given the favourable economics and advances in technology, EOR can certainly deliver extra oil onto the world's markets relatively quickly and cheaply. But how much oil exactly?

Estimates put the total amount of conventional oil-in-place that's been discovered worldwide over the past 100 years or so at nearly 11 trillion barrels, excluding the vast heavy oil and oil sands regions of Venezuela and Canada. The overall worldwide recovery factor stands at about 22%, so that gives an ultimate recoverable reserves figure of 2.4 trillion barrels, of which a bit more than 1 trillion has already been produced. This leaves remaining reserves of 1.215 trillion barrels of proved recoverable reserves, estimates the World Energy Council in its latest Survey of Energy Resources. With the average recovery factor in oilfields at just 22%, increasing that by only 1 percentage point through EOR would add more than 100bn barrels of oil to the world's reserves - enough to replace almost four years of global oil production. "In the last 10 years, we have been discovering 10bn barrels of oil per year on average. One percentage point of additional recovery of oil is equivalent to 10 years of exploration," argues Sandrea. "We can go for the next 10 years with no discoveries and still have an extra 100bn barrels of reserves."

And Sandrea says adding that extra percentage point to the current average 22% recovery rate is easily achievable - 70% is a tenable level of recovery, he sniffs - with the industry just needing to spend $200bn-400bn to recover that incremental 100bn barrels. That compares with industry's current global exploration and development spending of $260bn per year.

The figures for Russia are equally astounding. Oil-in-place reserves are about 850bn barrels, of which 18% has been produced to date, so there are roughly 700bn barrels of oil that have been discovered but are still in the ground. At Russia's average recovery rate of 23%, that's 161bn barrels that can be expected to be produced. But raising that recovery rate to the 33-35% that has been achieved elsewhere using EOR would yield an extra 77bn-91bn barrels. To put that in perspective, reserves at Kashagan, the offshore field in the Kazakh section of Caspian Sea that is the world's largest discovery in three decades, are put at 38bn barrels. "Imagine, Russia with 700bn barrels of oil already discovered in the ground and they prefer to spend billions drilling in the Artic and elsewhere looking for new oil," sighs Rafael.

Experts say that Russia has an uphill battle to improve its recovery efficiency. Not much is known about Russian oil firms' field operations, but what little we do know says a lot. The country's biggest oilfield, Romashkino in Tatarstan, was discovered in 1948, but it wasn't until 1987 that operators there began injecting water. In the US, more that 50% of oil production comes from water injection, while in the North Sea gas and water injection began in every field from day one. However, the government does appear to be listening: licenses now being awarded to operators have a built-in clause that requires them to increase the recovery factor over a specific period.

But the main obstacle to getting companies in Russia to use more EOR techniques is the same as it is everywhere: tax.

The Russian government heavily taxes the oil sector to such a degree that it's widely seen as the major impediment to expanding exploration and production. Over the past seven years, Russia accounted for about 80% of the growth in oil production outside the Organisation of the Petroleum Exporting Countries, but output is predicted to fall 2-5% in 2009. The government levies an extraction tax with a minimum price threshold for calculating of $9 per barrel (though the government is proposing to raise that to $15) and an export duty of 65% at prices over $25 a barrel. Oil firms claim that once other corporate and payroll taxes are included, the state grabs more than 90% of profits.

In the West, the penchant is for windfall taxes. President-elect Barack Obama campaigned for the presidency on a promise to impose his own windfall tax on oil companies. Obama's plan would levy a new tax on each barrel of oil costing more than $80, with the revenue raised funding a $1,000 tax cut for working families and extra payments for people struggling with energy bills.

Supporters of EOR contend that instead of pulling extra money out of oil companies through these various taxes, politicians should create a "shadow tax," whereby if certain recovery factor gains aren't met each year, the companies in question will have to pay the corresponding tax.

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