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Home / Issue Archive / 2009 / October #10 / Small, Independent Producers Can Get Idle Wells Flowing

№ 10 (October 2009)

Small, Independent Producers Can Get Idle Wells Flowing

Currently, the list of idling Russian wells stands at some 40 percent of total stock. This data was presented by ROSING chair Viacheslav Manyrin on opening the September meeting of engineering and technical sub-committee at Russia’s Chamber of trade and industry.

By Elena Zhuk

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   According to Manyrin, this caused by officials ignoring the legislation that covers promotion of operations with dormant wells fund. At the same time, there is no need for fundamental changes to the legislation, holds Manyrin. “Except for, perhaps, tax breaks which were in place in Soviet days and in early 1990s and which encouraged operations with difficult, drowned wells, with frontier wells”, notes the expert.

   Back in November 1999 Russia’s Prime Minister Vladimir Putin signed the document “On the measures for launching dormant, inspection and deactivated wells at the oil fields”, which established zero-rate excise tax for crude oil and gas condensate. According to Manyrin, “this was justified, correct decision, but it required an implementation mechanism and the goodwill of large vertically integrated players of the segment, first of all”. So far there is no such mechanism in place. At the same time ROSING data shows that over the recent years, oil recovery efficiency factor for Russia falls annually at the rate of 5-7 percent, standing now at between 25 percent and 35 percent, according to various estimates.

   Manyrin thinks that the way out lies in auctioning the lots, which are inefficient for large companies, to the small business. The latter will split their oil profits with the main subsoil user, as it done in U.S. or Canada, for example.
Also, small companies developing the lots unneeded by the domestic oil giants must have state ownership, holds the specialist.

   To start up such mechanism, says ROSING president, authorities must “set up a body either at Committee on energy strategy and fuel and energy sector development of Russia’s Chamber of trade and commerce or at Ministry of natural resources. Such body would include representatives of oil and gas companies, ministries Rostekhnadzor industry watchdog and other institutions, and would consistently tackle the problem.

   Launching even half of idling wells would result in extra 25 million tons of oil annually, asserts Manyrin. In addition, says the expert, this would solve crucial in the crisis issue of new jobs, creating for 3-4 years at least 250,000 jobs (together with contractor organizations).

   The data presented by Yuri Ikonnikov, head of Lukoil’s oil production department, show that for the past 3-4 years the share of inactive well stock in various projects of the company does not exceed 15.1 percent, which is still lower than general figure for hydrocarbon producers. Commenting the option of transferring the fields to small companies, Ikonnikov noted that such option is closely linked to yet-unsolved issue of production accounting on marginal wells located on different clusters and fields.

   Christof Yakubson, deputy head of the Institute of Oil and Gas Problems at Russia’s Science Academy, stresses the need to appreciate the difference between “dormant” and “idling” wells. “The notation that dormant wells fund includes inspection wells is nonsense”. This is because inspection wells are one of pre-requisites for efficient field development. The more difficult the conditions, the more important are these wells and their quantity,” says the scientist. As an example Yakubson provides one of the Californian fields, which is successfully developed for over a century and which has some 600 inspection wells (in total production pool of some 16,000 wells).

   “About the idling wells, if expensive capital repairs are required, it is hard to imagine that a small company, with no proprietary technology, could solve this challenge. Such company will have to apply to servicing companies, and the cost of repairs could go even higher because of small volume of work. The problem of wells transfer must be approached very carefully, on a case-by-case basis,” adds the expert.

   At the same time, similarly to Ikonnikov Yakubson is enthusiastic about establishing technically innovative small companies. Such businesses could contribute to solving the problems in the cases when large companies have no time to develop technologies for faster and cheaper maintenance work. Particularly considering signed by Russian President early in August legislation allowing such companies at governmental scientific centers and educational establishments.

   Mikhail Silin, Provost at Gubkin State University of Oil and Gas, notes that this legislation travelled a difficult path due to opposite viewpoints on business incentives for state-run bodies. The “contra” point of view holds that everything done within state-run university or a science center belongs to the state. At the same time, Silin does not invent a wheel when he states that a state is often an inefficient owner. Also, having over 20 years of experience, the scientist reckons that implementation of a blueprint is usually the question of its author (and benefits him, too).

   Analyzing experience of UK educational bodies, Silin gives an example of a university similar to his alma mater: “As soon as scientist created new reagent, method, etc., Centre of technology transfer at the university provides protection of intellectual property, further implementation of the discovery, creation of a small business within business incubator zone, where the scientist becomes a shareholder. Then the managers start promoting the technology and finding the investors, forming a limited company. Through 2008 this university established 52 companies. Talking of economic efficiency, two of such companies, established several years back, now provide profit to the amount of about 2 million pound sterling per year.”

   According to Silin, Gubkin State University of Oil and Gas has submitted a request for the rank of National Research University and is engaged in talks with large oil companies on setting up several small businesses – a servicing company could be one of these. “If we get this status and these funds, part of cash will be channeled into setting up our own servicing company, including as a solution for the problem of idling wells fund… we have things to say regarding geology, regarding geophysical research for this fund, traditional maintenance tasks, hydraulic fracturing work,” says Silin. The university is already a home for three companies engaged in well stimulation issues and earning over 600 million rubles while employing less than 60 personnel.

   According to Silin, adequate tax incentives are the pre-requisite of the efficient small company. “If exploitation of these wells is unprofitable for large company with significant current assets, why would it be profitable for a small business?” Availability of current assets is another pre-requisite, since cost of one operation could amount to millions of rubles.

   According to Gazprom Neft expert, low quality of well construction is one the key reasons for these problems.
At the same time, he thinks that the technologies promoted by the companies today are inefficient and thus have low appeal in the circles of upstream professionals. “The companies are conservative, they haven’t mastered technologies present at today’s market – themed conferences are required to introduce scientists to real-life conditions,” said Gazprom Neft representative. Ikonnikov also supports the point, saying about the need of “knowledge portal which would hold information on the developments classified by the segments of the industry.” He further elaborates, “this problem is present even inside the companies, when we do not know what is happening at what plant. Lukoil did establish a knowledge exchange portal but it is inefficient so far because the employees have no interest in it.” Meanwhile, notes Ikonnikov, ConocoPhillips in 2007 got $4 billion only via knowledge exchange issues. Silin initiatives include setting up Oil and Gas University similar to the Institut Francais du Petrole, which would establish key development directions of national importance.

   The opinion of Yelena Kaliakina, Principal Adviser at Ministry of natural resources, was at discord with previous points of view on the cooperation between large vertically-integrated oil companies and small business in the issue of dormant wells development. “This is the matter of relationship between the two business entities. If there are problems on legislatory level, get in touch with us, we’ll help,” she concluded. “But as for today, large companies are unprepared to cooperate on this issue with small business. Surgutneftegaz has had such experience and decided against cooperation. Large companies see the solution for the challenge in improving the technology rather than in cooperating with small business. I think this is the most viable way.”

   U.S. Department of Energy informs that in the U.S. production structure small and medium production companies take up some 60 percent of total, in Canada – 33 percent, globally – 15 percent. Just opposite is the case in Russia – the share of small companies is falling instead of growth, from 10 percent in 2000 to 4 percent in 2007. (OGE, No. 4, 2009, p. 25 «A Tale of Small Business»). Possibly, Viacheslav Manyrin is right in thinking that the issue of launching dormant wells is unsolved simply because “we act in the fashion alien to everyone else.”

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