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   Oil companies have less than two years to rectify the situation and increase the level of APG utilization to 95 percent of its total output. Speaking off the record, oilmen admit that this target will be hard to achieve without the government’s assistance in solving a number of tasks.

   “Associated gas flaring is an outrageous fact, an example of inefficient use of energy resources. It pollutes environment, while dozens of billions of rubles simply turn to smoke. The government has recently revisited the issue and pledged to put an end to this mess. We need resolute and quick action, and we will not accept any excuses from the oil producers,” Medvedev said last November in his annual address to the Federal Assembly.

   In early 2009, the government passed the resolution titled “On the Measures Stimulating Reduction of Atmospheric Pollution by Products of Associated Gas Flaring.” The document set a target for 2012 and beyond, limiting flaring levels to only 5 percent of the entire APG output. Starting Jan. 1, 2012, producers will be liable to paying increased fees for excessive flaring. The fees will be hiked by 4.5 times.

   In case a producer fails to install at his production facilities the tools to measure and log the actual volumes of APG production, utilization and flaring, a factor of 6 would be used to calculate the excessive flaring fee.

Burning the Shtokman

   A ton of oil contains between one or two to several thousand cubic meters of associated gas. Russia does have huge natural gas reserves, but its gas production today is becoming increasingly complex while the quality of produced gas keeps deteriorating. Under the circumstances, it would seem natural to put a maximum effort into retaining the valuable APG (it can be fed into trunk gas pipelines, just as natural gas, or processed into dry stripped gas – DSG). According to some estimates, 20 billion cubic meters of associated gas are flared annually in Russia. This means that the national gas market could benefit from an extra 18 billion cubic meters of gas if flaring were stopped. That figure is comparable to 50 percent of annual gas production of Russia’s largest independent producer, NOVATEK, or a year’s amount of gas production at the giant Shtokman field during the first stage of its planned development. Also, APG is the source of liquefied petrol gas (LPG), a valuable raw material for the petrochemical industry. Today, the average level of APG utilization in Russia stands at 60 percent. According to Russia’s Natural Resources Ministry the companies’ inappropriate use of APG costs Russia’s $13 billion each year.

   The simplest method of APG utilization involves processing for LPG, natural gas liquids (NGL) and stable gasoline. A few years ago, companies flared their APG partly due to the lack of processing infrastructure while SIBUR, which owned gas-processing plants, controlled the prices. And though the prices were formally state-regulated, oilmen admit in private conversations that they were actually negotiable. Over five years the oil industry fought against state regulation of prices for APG supplied to gas processing plants, and in early 2008 the government passed the relevant resolution. SIBUR now wants oil producers to sell their APG at knock-down prices; while reaping the benefits of favorable export prices for LPG and DSG. At the same time, SIBUR refuses to work with oil companies on toll processing terms, a source in an oil company told OGE. SIBUR, in its turn, claims that oil companies simply don’t want to invest in the building of infrastructure for APG utilization, because they would have to reroute the funds spent on oil production, which provides quicker and bigger returns on investment. A SIBUR spokesman told OGE that the company was ready to discuss with oil firms the founding of joint ventures that would use SIBUR’s gas processing plants as a base, but due to the reasons described earlier “they were in no hurry to enter the talks.”

Access Denied

   The main obstacle though is the issue of providing access for DSG supply to gas trunklines. While developing the strategy for expanding gas transportation capacity, Gazprom proposed to oil companies to wait until its gas reserves at major fields depleted. After that, it said, there would be enough pipeline capacity for DSG transportation.

   In 2005, Russia ratified the Kyoto Protocol, obliging itself to keep greenhouse gas emissions in 2008–2012 at the 1990 level. Ever since, Russian authorities have been trying to introduce strict measures that targeted reduction of APG flaring. Initially the government decided to hike up the fines for flaring, eventually causing an uproar among oil companies that claimed they were not technologically armed to tackle the issue of utilization. Their key argument, however, was still the lack of access to gas trunklines.

   According to State Duma Energy Committee member Vladimir Markov, lawmakers are currently discussing the possibility of making relevant amendments to the law “On Gas Supply,” while some of them raise the issue of priority access to gas trunklines.

   “This is also strange. We’d better discuss the non-discriminatory access to the gas transportation system – it is owned by Gazprom, which is obviously going to take into account its own production plans when deciding on granting access to the grid. Possibly, such decision should be taken jointly with government authorities, which could assess the objectivity behind rejection to deny access to pipeline capacity,” Markov told OGE. But this proposal is also problematic as there is no precise definition of free capacity in the gas transportation system and the only company possessing the relevant information is Gazprom.

Oil Industry Held Hostage

   The seasonal decline of gas demand in the summer always entails reduced gas supply into the gas pipeline grid, says Anton Gladchenko, director of TNK-BP’s Dept. for Associated Gas Processing Projects. “Associated gas production – when compared to natural gas production – is technologically peculiar because of the impossibility to reduce its production (and the consequent supply of APG to the gas transportation system) without significant losses in oil production. In this regard, the discussion about priority access of APG to the gas transportation system is essential and reasonable when tackling the task of achieving the 95-percent utilization level,” Gladchenko told OGE.

   “Gazprom is not a monster – it offers oil producers to invest jointly into pipeline construction projects, but they are reluctant to do so,” comments Markov. And yet, an oil company representative admits that the producers have become hostages in this situation as neither Gazprom nor SIBUR want to invest into gas-collecting systems.

   Meanwhile, the Mezhregiongaz Online Trading Platform, which was used earlier by the oil companies to sell DSG, has been closed since early 2009. Trade floor operations had to be stopped due to the delay in adopting the government resolution on resumption of online gas trading. By the way, online traders are still waiting for this resolution.

   “Specifics and technology of associated gas production, its multi-stage separation, treatment and transportation substantially differ from production, treatment and transportation of natural gas. Considering production cost, more complex collection and treatment technology, low-pressure environment, comparatively low production volumes and the ramification of gas-collecting flowlines, the net cost of APG is four to five times higher than that of natural gas,” complains a representative of LUKOIL.

Turning Gas into Megawatts

   According to Markov, the government should adopt the “stick and carrot” policy: specify utilization targets in license agreements on one hand, and introduce economic incentives that would make utilization programs cost-effective on the other.

   Also, in order to be able to build an APG processing facility or even a transportation system that would deliver it to a plant, one needs a precise projection of APG output, but oil companies often can’t confirm these figures, making the projects’ economic feasibility more difficult to assess. Gazprom neft and SIBUR recently said they were likely to abandon the idea to build the Yuzhno- Priobsky gas processing plant, and would instead build a gas pipeline to the Yuzhno-Balyksky facility, because the oil company, among other things, was unable to confirm APG output figures.

   Besides processing, associated gas can also be used as a fuel for gas-turbine or gas-engine power plants. One of Russia’s oil majors, Surgutneftegaz, decided to utilize APG at its power-generating facilities on remote fields (7.2 percent of utilization) and has already met the 95-percent utilization target, producing cheap electricity for its own needs along the way. Processing accounts for approximately 50 percent of Surgutneftegaz’s APG utilization – in the 1990s the company managed to acquire the Surgut gas processing plant, which today has processing capacity of 7.2 billion of cubic meters per annum. In addition to this, the company uses over 11 percent of utilized APG as fuel at its production facilities.
LUKOIL has also taken this direction and will utilize its APG at both small and large (TGK-8) power generating facilities, a spokesman for the company told OGE. LUKOIL will be processing APG at its Lokosovsky gas processing plant, and then use it in gas chemistry.

   Unlike with gas trunkline system access, oil companies seem to have clinched a victory when it comes to preferences in the power generation sector. In early March President Medveded signed amendments to the law “On Power” providing priority access to the wholesale market of electricity generated by using APG or the products of its processing.

   Another oil major, Gazprom Neft, plans to build gas pipelines, processing facilities, and gas-turbine or gas-engine power plants, as well as gas reinjection under its mid-term investment program on APG utilization.
“In the third quarter of 2009 we commissioned a gas pipeline from the Yety Pur field, and in the fourth quarter we launched the first stage of operation of the 48 MW Yuzhno-Priobskaya gas-turbine power station (the capacity of the power station will double on the launch of the second stage). Design and exploration work has been completed for a number of projects, including the project on implementing a computerized APG accounting system”, a Gazprom Neft spokesperson told OGE.

(In)correct Count

   Another way of utilizing APG is its reinjection, however, according to Gladchenko, the application of this method is limited due to geological restrictions and risks for many oilfields. “Reinjection is not feasible at the wells drilled according to old standards,” a spokesman for the Natural Resources Ministry told OGE.

   TNK-BP and Rosneft employ virtually every method of utilization, depending on a field’s specifics. Each field is located at a different distance from the infrastructure and may have its own composition of oil. This is why Markov thinks that the 95-percent utilization target would be hard to achieve, one of the most difficult issues being the counting principle – should the utilization campaign results be counted as per field or overall across the company?

   According to Russia’s natural resources watchdog Rosprirodnadzor, by 2012 the number of oilfields where the 95-percent target needs to be met should grow by 2.3 times compared to 2009 – from 413 blocks to 969. LUKOIL, for instance, will have to boost its utilization rate by 1.9 times (from 120 blocks to 227), Gazprom Neft – from 1 to 46, Rosneft – 3.8 times (from 70 to 263), Russneft – 9 times (from 8 to 72), TNK-BP – 5.4 times (from 16 to 87), Bashneft – 1.6 times (from 48 to 75), Surgutneftegaz – from 30 blocks to 49.

   But even if the issues of APG access to the gas transportation system and power grid are solved, there still remains one key problem: where to market the liquefied petroleum gas?

   According to SIBUR, Russia’s LPG manufacturing capacity is approximately 9 million tons. By 2015, the oil industry’s extra potential for LPG production through associated gas utilization in Western Siberia and on new fields in Eastern Siberia is 38 million tons.

   SIBUR says it is impossible to achieve the 95-percent utilization target in 2011 or 2012 only by fiscal means, without stimulating the industry that processes liquid fractions, including those produced through additional APG utilization.
“The share of ‘wet’ gas in the production mix will grow simultaneously, partly due to development of the new fields at Yamal Peninsula and Western Siberia. In 2007, the proportion between ‘dry’ and ‘wet’ gas was 80:20, in 2010 it will be 70:30, ultimately moving to 60:40 by 2015,” SIBUR Vice President Mikhail Karisalov said last November at the Gaz Rossii forum.

The “Golden” Gasoline

   In order to expand the use of LPG – including its use as a motor fuel – authorities need to stimulate the industry, SIBUR says. Particular incentives should include passage of a law on alternative fuels, adoption of a list of carmakers’ requirements related to compressed gas (CNG) units for the purpose of agreeing installation terms, and introduction of a lower Vehicle Tax for motorists whose cars run on certified CNG equipment.

   In early February, Russia’s Energy Ministry officials held a meeting with oil industry executives, proposing to companies to use APG to produce gasoline using the gas-to-liquids (GTL) technology. By the way, back in 2007 LUKOIL planned to install a $8-10 million pilot GTL unit with an annual production capacity of 8 million cubic meters at its Perm gas processing plant, but the project ground to a halt. Unofficial sources say the project was stalled after the government decided to liberalize APG prices, prompting LUKOIL to shift the focus from GTL processing to APG sales, the latter being more lucrative from the commercial viewpoint.

   Today, LUKOIL says that it is only studying these projects. According to TNK-BP, despite being a very promising method of APG utilization, the GTL technology – due to its high capital and operation costs – is not applicable for low- and mid-range units, losing out to standard methods of APG processing. A source in Rosneft told OGE that the company is thoroughly studying GTL, but has so far concluded that the gasoline produced from LPG is worth its weight in gold.

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