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Monday, 24 June, 2002, 07:51 GMT 08:51 UK
Russia's oil renaissance
Sibneft is Russia's fifth largest and fastest growing oil producer
Sibneft is Russia's fastest growing oil producer

Opec ministers want to maintain curbs on oil exports, but Russia's oil output is growing dramatically. In the first of two articles, BBC News Online reports on Russia's newly resurgent oil industry.
It's springtime in Russia's remote and barren oil country, and the weather is still a bitter minus five.

As the frozen wastes of Northern Siberia prepare for summer temperatures of 40 degrees, a revolution is under way in the oil industry as dramatic as the change in the weather.

Production here is booming after a decade of catastrophic decline.

Yuri Schuliev
Sibneft field manager Yuri Schuliev reports a dramatic turnaround
In March, Russia overtook Saudi Arabia to regain its position as the world's number one oil producer for the first time since the 1980s.

Good times

Russia's leading oil companies have been enjoying windfall profits in recent years thanks to the strong global demand for crude.

They were also helped by the devaluation of the rouble in 1998, which saw domestic production costs fall by 75% in dollar terms.

Many have taken advantage of the good times to invest heavily into reservoir management and upstream production.

They have bought new machinery, state of the art technology and imported Western know-how.

Big and fast

Sibneft, Russia's fifth largest and fastest growing oil producer, is a good example.


We will develop production in accordance with our own plans and will not submit to restrictions imposed from outside

Alexander Korsik, Sibneft

It has invested almost $800m since 1999; last year production jumped by 20%, while this year it plans to boost volumes by almost 30%.

It's a pattern that is being repeated at other companies as well.

Yukos, Russia's second largest oil company, posted production increases of 20% in 2001, while the industry as a whole has been averaging growth of 8% since 1999.

Cooperation

Yuri Schuliev is a veteran field manager of 20 years' experience, and is head of production at Sibneft's Sugmut deposit in Noyarbrsk.

As he displays oil pumped from a newly drilled well, he says the transformation here has been dramatic.

"One-and-a-half, two years ago we couldn't imagine our production would be so high.

"We achieved these results because of our alliance with foreign contractors.

"Their specialists teach our specialists while we show them how to work in extreme conditions with temperatures below minus 50."

With a billion barrels of reserves Sugmut is at the heart of Sibneft's future production strategy.


They are investing sums into technology that we could only dream about a few years ago and are becoming dangerous for international oil companies

Valery Nesterov, Troika Dialog
As one of the largest fields under development in Russia today it's also part of the wider renaissance of the oil industry after a decade of decline.

Decade of decline

During the 1990s, production volumes in Russia fell rapidly from nine to six million barrels per day, as the gigantic orders from the Soviet planned economy dried up.

But falling state demand was not the only problem.

"The problem was in the psychology of the personnel, no-one was interested in productivity," says Yuri Nekipelov, chief engineer at Sibneft.

In communist days, exploration techniques were often wasteful as engineers simply drilled as many wells as possible to satisfy Moscow's quota demands, regardless of the productivity of each one.

Today, at Russia's leading oil companies that is changing.

Geologists now study 3D computer models of new deposits before embarking on expensive exploration tests.

Black marks

Sibneft is far from perfect.

Three years ago, it promised investors that it would report fully on its ownership structure, but has yet to do so.

At the end of 2001, major shareholders caused a storm of protest with a highly dubious and secretive stock transaction.

And Roman Abramovich, the company's main shareholder, is seen as having too much involvement in politics for comfort.

Springtime?

But some analysts nonetheless detect improvement in the air.

"The philosophy of Russia's oil barons has changed," says Valery Nesterov, an oil analyst at Troika Dialog Bank in Moscow.

Russian oil production
1991: 10.4 million barrels per day
1998: 6.1 million barrels per day
2001: 6.9 million barrels per day
Source: Troika Dialog Moscow

"They used to just accumulate funds and use them for their own private purposes or even steal them.

"Now they are investing sums into technology that we could only dream about a few years ago and are becoming dangerous competition for international oil companies."

Operational changes have been introduced as well.

Costs and production levels are precisely monitored and further savings are made by introducing competitive open tenders between the foreign contractors to explore and drill new deposits.

Capacity constraints

Despite Russia's surging production, the industry is already pumping near full capacity and any future increase in volumes requires sustained investment into new deposits.

That contrasts sharply with Saudi Arabia, which is currently producing at just two-thirds capacity and is sitting on thousands of idle wells that have already been drilled.

But despite this discrepancy, Opec members remain heavily concerned at Russia's turnaround, because it poses a threat to Opec's efforts to manage the price of oil.

As Russian oil companies improve efficiency and bring down costs, the industry is finding it easier to maintain profitability at lower prices for crude.

And while production grows, the Kremlin, which relies heavily on oil revenues to balance the budget, is also becoming less sensitive to lower prices.

Sibneft facts
Planned investment for 2002: $686m
Investment for 1999-2001: $796m
Planned increase in output for 2002: 29.2%
Output increase in 2001: 20.2%
Source: Sibneft
With such dramatic changes underway, it is clear that no matter what takes place in Vienna, Russia has little incentive to heed Opec calls to curb production.

"If we curb production we will destroy our field development plans which are optimal from an economic and technological point of view," says Alexander Korsik, chief operating officer of Sibneft.

"We will not do it. We will develop production in accordance with our own plans and will not submit to restrictions imposed from outside."

See also:

17 May 02 | Business
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