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Smoothing over Russian Subsoil

The [Russian] newspaper "Kommersant" published an article [in March 2005] about the end of the administrative deadlock in the depths of the Russian Ministry of Natural Resources. The deadlock was created during the term of the previous minister, Mr. Artyukhov. This outstanding statesman made every effort to bring the process of issuing licenses for oil prospecting and extraction to a complete halt.

One might think that Mr. Artyukhov was sympathetic with the cause of saving the Russian nature and that he had been blocking the oil prospecting activity only for that reason. The former governor of the Perm Region, Mr. Trutnev, has taken over Mr. Artyukhov's office half a year ago and has been busy cleaning the Augean stables ever since.

The Kommersant lists over 50 oilfields that have been auctioned off during that period [August 2004 - February 2005]. This list clarifies why President Putin has decreed that the total size of Russia's oil reserves shall be the most portentous state secret. The oilfields being sold by the Ministry of Natural Resources are such puny weaklings that they make one want to cry.

The largest "giant" on the list is the Chulakan Oilfield in Evenkia with the probable reserves of C3 category equal to 20.4 mln. tonnes (147 mln. barrels). C3 means that the reserves will probably be found within the area prepared for drilling. Effectively this is a pie in the sky: there is no guarantee that the Chulakan oilfield has so much extractable oil. Or maybe it has even more than the 20.4 mln. tonnes, depending on how lucky those who bought it are. To achieve Russia's 2006 production target of 500 mln. tonnes a year (10 mln. bpd) one will need to empty about 25 such "Chulakans" annually, provided they contain real, not hypothetical 20.4 mln. tonnes of extractable oil.

All the other oilfields sold by the Ministry in the last five months are very tiny and contain no more than a few million tonnes of oil each. Pathetically small are the Kaliningrad region's Olympic oilfield with the possible reserves of only 20,000 tonnes and the Syr'yan Oilfield in the Kirov region with the D1 reserves of 70,000 tonnes and D2 reserves of 3.2 mln. tonnes. The last number may look like a significant one until an explanation is made that it denotes the upper limit on the oilfield's possible capacity if there is any oil in it, which is by no means certain.

Despite the strict instruction by Russia's president to keep these sorrowful curcumstances away from the public, the Ministry seems to be forced to divulge this secret to the enthusiasts who wish to bury their money in the Russain subsoil. No one wants to buy a pig in a poke, except maybe for some international swindlers borrowing money as if for exploring the oil-rich depths of a remote and mysterious land called Russia.

From March to August 2005, Russia is expected to sell about 100 more such "oilpigs in a poke." The reservoir volume data are available only for 30 of these oilfields, but for the rest, these data are either secret or have not yet been cooked by the Ministry of Natural Resources. Judging by the sizes of the two crown jewels of these auctions: the oilfield Lodochnoye in the Krasnoyarsk region with the possible oil deposits (C1+C2 categories) of 43 million tonnes (313 mln. barrels) and the oilfield Chayandinskoye in Yakutia (C1+C2=50 mln. tonnes or 365 mln. barrels), the list does not contain any giant oilfields.

Most likely, the fattest piece of the unsold Russian subsoil to be auctioned off in 2005 will be the Trebs-Titov group of oilfields that also includes the four segments of the Central Khorever Plateau in the Timano-Pechyora Province. As expected, the amount of oil in the ground is left blank here, however, the Kommersant courteously informs the prospective buyers that the starting price is $419 mln. with $1.8 per one tonne of the oil reserves.

Anyone familiar with the Arithmetics gets the idea that the deposit contains approximately 230 mln. tonnes (1.68 Gba) of oil. This kills two birds with one stone: the secret is still kept as ordered and the amount of oil in the ground can be estimated. These oilfields contain 6 months of Russia's oil supply at the current rate of extraction.

The director of the Russian Natural Resources Ministry's department of natural resource exploitation regulations, Sergei Fedorov, shares the view that the situation with the depletion of Russia's oil reserves is quite sad.

"There are very few vacant oilfields left in the state's oil fund, 92% of Russia's oilfields have already been auctioned off. Of the remaining oilfields the large ones are the one in the Nenets Autonomous Area (the Trebs-Titov group of oilfields), the Chayandinskoye in Yakutia, and the oil and gas reservoirs on the sea shelf. The rest are small oilfields."

The Kommersant concurs: "An elevated interest in the oil licenses is explained by the fact that less than 10% of the known oil deposits and less than 20% of the gas deposits belong to the state fund. The rest have already been auctioned off and the production in these gas- and oilfields is falling. The depletion rates for Russia's principal oil and gas provinces are: 70 to 80% for the North Caucasian region, 50 to 70% for the Urals-Volga region, and over 45% for the Western Siberia. As a result, companies compete for the remaining reserves and boost their auction prices. The Ministry of Natural Resources is concerned with the resource depletion. In 2004, Russian companies produced about 900 mln. tonnes of hydrocarbons [about 459 mln. tonnes of oil and 427 mln. tonnes of gas], but increased their reserves only by appx. 300 mln. tonnes. Even selling all the remaining hydrocarbon production licenses in 2005 will not compensate for the depletion because almost no new deposits have been discovered in the last 10 years. The Ministry now wants to grant licenses for both exploration and extraction of hydrocarbons, which is allowed by the new edition of Russia's Subsoil Law, and this should make the companies interested in increasing Russia's mineral resource base."

This is quite sly. One would buy a license, invest hundreds of millions of dollars, find some oilfields to produce, and then the Russian bureacrats would start "wasting" the investor "in his outhouse" [President Putin's public comment on what he would do to the terrorists and tax-evaders] and find all sorts of real and imaginary violations. Then the license would be revoked and passed over to the "right" company belonging to the same bureacrats or their relatives. Of course, the Ministry of Natural Resources did not do this before and did not take part in the recent turbulent events in Russia's oil industry, but the Ministry is not the only goverment body that can make this sort of decisions. And who knows who will be in charge of the Ministry several years down the road, maybe another Artyukhov or the Attroney General Ustinov [who arranged the back tax charges against Yukos and the sentencing of Yukos' CEO Khodorkovsky].

However, as of today, the Ministry of Natural Resources is caught in a trap set by the crooked lobbyists of the Eastern Pipeline "Taishet-Perevoznaya" expected to supply the Pacifc Rim countries with Russian oil. By having reported that there are enough resources to fill the pipeline, they assumed a significant portion of the responsibility for this affair. Now on the top of the pipeline project costing $15 bln. they have put an oil exploration project worth $40 bln. and a $100 bln. project on developing an oil extraction infrastructure if the required oilfields are found. The two latter projects will dwarf the already astronomical cost of the mighty pipeline.

The Eastern pipeline project will look even more awkward if new large deposits are found in the north of the Sakhalin island [recent exploration found appx. 2.2 bln barrels of oil off the island's northern coast]. Then the Siberian oil transported 6000 km by the railroad or 4000 km by the projected pipeline (nowhere in the world do such long pipelines operate in such harsh environment) will have to compete with the cheap Sakhalin oil. Gazprom [Russia's natural gas monopolist] must have understood this. This is why it withdrew from the Eastern Siberia projects by keeping only its formal presence there. Gazprom did it despite the fact that even though the Eastern Siberia is poor in oil, it has a few very large natural gas deposits.

Time will tell whether the Ministry of Natural Resources will be able to get out of this pipeline project trap. If not, ten years from now, Russia will have a rusty blown $15 bln pipeline named after Khristenko [Russia's minister of industry and energy] pumping soap bubbles from Mr. Trutnev's [minister of natural resources] imaginary oilfields to the fetid-smelling tankfarm of Mr. Vainshtok [CEO of Russia's pipeline monopoly Transneft]. And the historians [of Russia] will name this period "Putin's era of petroleum booze-up."

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