TNK-BP breaks new ground in Russia

What are the current issues in Russia’s oil industry?

For an oil and gas professional, Russia is an exciting place to be. It is the largest holder of hydrocarbon reserves in the world – more than 360 Bboe. Its yet-to-find reserves, estimated by the American Association of Petroleum Geologists at 380 Bboe, represent the largest exploration prize in the world.

The hydrocarbon sector is crucial to the country’s economy. However, today the industry needs to address a number of challenges if it is to maintain its important domestic and global role going forward.

Mature fields represent the backbone of the industry. These fields still have many years of productive life ahead, but fighting natural decline will require increasingly sophisticated technology and reservoir management.

To sustain growth going forward, the industry also needs to move beyond its traditional production areas such as the West Siberia and Volga Urals. Production centers need to be established in new areas such as East Siberia, the Far East, and the Far North. This process has started, but delivering large capital-intensive projects in areas with a harsh climate and minimal infrastructure is a difficult task that will require capital, technology, and world-class project management capability.

Bill Schrader is TNK-BP’s chief operating officer. (Images courtesy of TNK-BP)

What is unique about TNK-BP as an operating company?

In many ways, TNK-BP is a unique company. With daily production roughly at 1.7 MMbbl/d, it is a rare 50-50 joint venture at this scale. It is a Russian company that combines access to a large resource base with access to world-class technology and expertise through its international shareholder.

This powerful combination is at the heart of our model, which makes TNK-BP distinctive from Russian and international industry peers. This model has proven its efficiency over time and has enabled us to deliver consistently strong operating and financial performance. Since 2004, we have grown production by 50%. Over the past three years we have delivered an average reserve replacement ratio of 139% and a highly competitive finding and development cost of US $4/bbl.

What is the company’s biggest investment to date?

Given the vast size of our portfolio, it is difficult to single out which project would constitute the largest or the most important investment. For 2010, the board of directors approved $4.4 billion in capital expenditure. Approximately 70% of this investment is planned in upstream. This investment will sustain the brownfield base in the West Siberia and Volga Urals regions and will support new greenfield projects in East Siberia and West Siberia. It also includes exploration and appraisal on new acreage. Investment in refining upgrades and retail expansion and rebranding represents the remaining 30% of our capital expenditure.

What role does collaboration play? How have you partnered with companies in Russia?

We own and operate most of our upstream assets. However, in some cases we have partnered with other companies. For instance, at Verkhnechonskoye, a major new development in East Siberia, we hold a 69% stake, with Rosneft as a minority partner. This is a productive partnership, and together we plan to invest more than $1 billion in this field during the next three years.

What are some of the challenges associated with drilling more complex reservoirs?

Let me continue to use Verkhnechonskoye as an example. This unique pre-Cambrian field is more than 500 million years old and is a very complex geological structure. The reservoir is thin-bedded, and the rock structure makes it difficult to distinguish pay or non-pay zones. The crude is light, but there are issues with salt and wax content.

However, we have been making very good progress unlocking these reserves. In 2009, during the first full year of commercial production, the field produced 25,000 b/d. This year, production is expected to exceed 50,000 b/d. The project also is unlocking a new market for Russian crude; most of this year’s production will be delivered to the new East Siberia-Pacific Ocean pipeline, connecting East Siberia with the dynamic markets of Asia Pacific.

How significant is the role of technology in your plans in Russia?

The role of technology in our business is crucial, and it feeds directly into our efficiency agenda. Technology helps unlock new resources and speeds up the development cycle; it also helps reduce our environmental footprint. Very often, the ability to apply the right technology to the right asset is the key to commercial success.

For example, our effort to develop world-class exploration and seismic capability enabled us to deliver a 74% exploration well success rate in 2009.

Another example: most of our production is on artificial lift. TNK-BP uses roughly 5% of the world’s electric submersible pumps. In 2009, we increased the mean time between failure to more than 500 days, which represents an 18% increase on the previous year.

Global technology transfer can create a lot of value for all of those involved.

The Urengoy gas field in the northern West Siberia Basin is the world's second-largest natural gas field and produces approximately 16,500 b/d of oil and 25,152 MMcf/d of gas.

What sorts of E&P investments are planned for 2010 and in the next five years?

This year and during the next few years we will focus on two E&P areas. First, we will continue investing in our mature fields to manage the natural decline and, in fact, to grow production and reserves where possible. For example, last year we delivered 6% production growth in Orenburg, a mature province in the Volga Urals which had been under development for more than 50 years. A combination of better 3-D seismic, improved waterflood patterns, and development of satellite fields enabled strong production growth on these brownfield assets. We expect to see continued growth in this region of between 4% and 7% in 2010.

The second area includes our new major projects. This includes projects like Verkhnechonskoye, which I mentioned earlier, and Uvat in South Tyumen. Commercial development of these fields began in late 2008/early 2009. Both of these fields are making a material contribution to our production. Uvat produced 40,000 b/d in 2009 and is set to reach 72,000 b/d this year.

Finally, looking further out, the next generation of projects is represented by the Yamal fields. This is a group of fields in the Yamal-Nenetsk district and the Krasnoyarsk region: Rospan, Russkoe, Suzun, Tagul, and Russko-Rechenskoe. In addition to these licenses, TNK-BP holds a 50% interest in the Messoyakha field (the other 50% is held by Gazprom Neft).

Rospan is currently producing gas and condensate, and pilots are in progress at the other fields.

Together, these fields hold more than 4.5 Bbbl of 3P (proven, probable, and possible) reserves. From 2020, this province has the potential to produce 500,000 b/d in liquids alone. Russian oil companies are working together with the Energy Ministry and state pipeline operator Trasneft to debottleneck and expand pipelines in this region to enable full-scale, efficient commercial development of this province.

What are some of the company’s biggest challenges?

Our strategic goal is to become the most efficient operator in Russia and a world-class integrated Russian oil and gas company. We will continue to improve the quality of our operations and become a cleaner and safer company every year.

We remain focused on growth. This will be driven by organic and inorganic production increases, growing refining and marketing cover, monetization of our gas resources, and targeted international expansion.

At this point, we are opportunity-rich and resource-constrained.

Given the slew of major projects in the pipeline, both in upstream and in downstream, my biggest challenge now is building up in-house project management expertise – a new generation of Russian project managers that will deliver these major projects on time, on budget, and to the highest safety and environmental standards.