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Sanders Research Assoc. Ltd
- Issues & Answers
The Status of Oil and Gas Depletion
in Russia
By C. J. Campbell
December 9, 2004
A Very Quick History. . .
Russia is the world’s largest country covering an area
of 17 million square kilometres, being almost double the size of the United
States. It supports about 150 million inhabitants, being rather sparsely
populated. It may be divided into two broad physiographic regions: a western
area of plains and lowlands; and a more mountainous east. Much of it lies
within the Arctic Circle.
Over its long history, the country was occupied by Slavs,
Huns and others, migrating from the plains of Mongolia, which seems to have
been one of the cradles of mankind. The western part of the country came under
the control of the Varanginians, who may have been related to the Vikings,
establishing a trade route from the Baltic to the Black Sea. The country
adopted the Christianity of Byzantium from around 1000 AD.
Later came in turn Mongol and Tartar invaders, but they were
generally assimilated into the growing number of principalities and petty
kingdoms that were developing in Western Russia, including Muscovy on the site
of the present capital. Ivan the Terrible began to expand Muscovite influence in
the 16th Century. He was largely the pawn of his elite factions, and
espoused European influences, including the construction of the Kremlin with
the help Italian craftsmen. He in turn was succeeded by the Romanov dynasty
which continued in power to the 20th Century. Peter the Great
(1689-1725) consolidated power, settling disputes with Turkey to the south and
Sweden and Poland to the west, paving the way for the expansion of the nascent
Russian Empire. His greatest achievement was the establishment of a competent
administration and an improved educational sys tem. He also established St
Petersberg on the shores of the Baltic, giving Russia an outlet for world
trade. The next luminary was Catherine the Great, the German widow of an
ineffectual Czar who came to power in 1763 after a coup d’état,
organised by her lover, Count Orlov. Her reign was marked by both amorous and
territorial conquests. A general state of tension persisted after her death in
1796 with various wars against Turkey and the European powers, which resulted
in the ill-fated invasion by Napoleon who was defeated at the gates of Moscow
in 1812.
Financial-Industrial Revolution hits Russia
The Czars faced great difficulty in administering their vast
territories, which they sought to do by the establishment of a ruling nobility
and an under-class of serfs. But the 19th century also saw the
development of industry, mining and railways, with the emergence of prosperous
capitalists. What we may term the Financial-Industrial Revolution began to take
a grip of Russia. It was driven by banks that loaned money in excess of what
they had on deposit, charging interest on it which created money out of thin
air. The resulting economic growth provided the collateral to the extent that
the growth was backed by confidence in future expansion.
The Crimean War of 1853-56 found Russia in conflict with
Britain, France and Turkey, who were resisting the threat of Russian expansion
into the Middle East. Its importance then lay not in its oil as today but in
its strategic position facing the British Empire. Defeat led the reigning Czar
to move towards the liberation of the serfs, which was naturally resisted by his
nobility. Progress was slow, however, sowing the seeds of revolution, in some
cases encouraged by sympathetic intellectuals. Russia’s large Jewish
population was mistrusted by both the officials and the serfs alike, who were
no doubt reacting to the hidden pressures of usury, which in those distant days
was widely perceived to be in some way underhand and sinister. Waves of
anti-semetic progroms swept the country, forcing many Jews to emigrate.
The Lure of the East
Russia’s
eyes turned eastward during the early years of the 20th Century
where, in company with Britain, France and Germany, it sought to capture the
markets of China and Japan, exploiting also the conflicts between those
countries. The trans-Siberian railway was constructed. But a surprise attack
by Japan in 1904 led to the Russo-Japanese war, in which Russia suffered
several defeats, in turn stimulating more domestic unrest. In 1905, workers in
St Petersberg marched to deliver a petition to Czar Nicholas, but they were
brutally cut down in what was known as Bloody Sunday. The Bolshevik movement,
amongst others, gained strength, pressing for reform.
Meanwhile in Western Europe, a newly united industrial
Germany was challenging the mercantile empires of Britain and France. That led
to the erection of a complex set of alliances, including a pact of mutual
assistance between France and Russia. The catalyst for the outbreak of the
ensuing world war in 1914 was a move to secession from the Austrian Empire by
Serbia, whose Slav population was backed by Russia. With the outbreak of
hostilities, a Russian army marched into East Prussia, but was repulsed. The
privations of war exacerbated the tensions at home, which erupted in February
1917 in a spontaneous popular outburst against the government that was soon
exploited by the Bolshevik leaders, Trotsky and Lenin, who proposed a Soviet
government. A civil war followed in 1918 between the so-called Red and White
armies. Czar Nicholas and his family were arrested and later mur dered, and an
oil workers’ leader from Baku, later known as Joseph Stalin, came into
prominence, eventually taking control of the government after Lenin’s
death in 1928. The Czar and the Aristocracy were the palpable targets, but in
fact they were little more than figureheads for the underlying
Financial-Industrial System, that creamed off financial wealth in excess of the
physical wealth created by labour. The Communist system was supposed to
prevent this abuse and return justice to all through central planning. In
practice, it proved difficult to achieve, its aims, and the pressures gave rise
to purges and the wholesale relocations of communities involving massive loss
of life.
The Soviet Experiment
The inter-war years saw Russia, now known as the Union of
Soviet Socialist Republics (USSR), develop largely in isolation with all
strands of its economy under state ownership and control. Stalin proved to have
an iron hand, suppressing any hint of opposition by ruthless means. Even so,
the Soviet experiment, whatever its shortcomings, did appeal to many
intellectuals in other countries, inspiring the socialist movement as a milder
variant. The Second World War was essentially an extension of the first,
and after an initial alliance with Germany under a non-aggression pact, Russia
again joined the Allies. After initial successes, the German army was repulsed
from the gates of Moscow, and in 1945 Russian troops raised the Hammer and
Sickle over the ruins of Berlin. Russia had suffered grievously in the war, and
was not about to give up the territories it had conquer ed in East Europe,
where puppet Communist regimes were established. Its intelligence service
proved effective in securing access to details of western nuclear research,
being facilitated by socialist sympathisers. Mr Wilson, Britain’s
Prime Minister, is said to have enjoyed a particularly close relationship. The
Soviet Union also led the world into the space age.
Cold War Extends Western Economic Hegemony
The British and French empires were extinguished by the war
leaving the United States and the Soviet Union to glower at each other for the
next forty years in what became known as the Cold War. In seems in hindsight
that it was a somewhat contrived conflict to extend Western economic hegemony.
The Soviets were depicted as bent on world domination, although their only
notable convert was the island of Cuba, while Russia for its part found itself
ringed by threatening military bases containing nuclear weapons aimed at it.
Actual conflicts were confined to endeavours to partition Korea and Viet Nam,
although Soviet forces were not deployed in them
The Soviet epoch ended in 1991 when the moderate Communist
leader, Mikhail Gorbachev, was ousted by Boris Yeltsin, who in turn gave way to
the current President, Vladimir Putin in 1999.
Enter Mr Khodokovski
The Soviet Empire was dismembered: with many of its
component parts becoming independent countries with their own internal
conflicts, and a new capitalism, complete with robber barons, came to Russia.
The oil sector provided rich pickings for enterprising financiers to acquire
State assets paid for by loans from the State in the confused process of
privatisation following the fall of Communism. None was more effective
than a Mr Khordokovski, who built up the Yukos Oil Company.
President Putin enjoyed a landslide victory in the last
election, allowing him to take a stronger control of the reins of power. He had
much popular support because many Russians looked back with a degree of
nostalgia for the good old Soviet days when they knew where they stood, however
difficult their circumstances. The Duma, which had no doubt become filled with
lobbyists for vested interests masquerading under the cloak of democracy, was largely
side-tracked.
Pendulum swings towards Putin
Putin has proved himself to be a very intelligent leader
both at home and abroad. At home, he curbed the oil barons in moves that
amount to the progressive re-nationalisation of the oil business. Mr Khordokovski
finds himself in jail, and his company is in a form of liquidation. In terms of
foreign policy, Mr Putin steered a fine course succeeding in opposing the
invasion of Iraq without alienating its architect in the White House too
seriously. It was a brilliant strategy for he is now in the process of
forgiving Iraqi its huge debt which the shattered country has little chance of
re-paying in return for re-validation of promising oil rights negotiated with
the previous government. Russian oilmen will likely receive garlands of flowers
from a grateful people if and when they move in on the ignominious departure of
the occupying forces.
Russian Oil
It is difficult to summarise the geology of this huge
territory, but we may identify the main provinces:
·
The
Western basins between the Barents and Caspian Seas with their Silurian source
rocks
·
The
West Siberian basins with the Jurassic source rocks
·
The
Arctic domain
·
The
locally productive Tertiary deltaic basin of Sakhalin on the Pacific margin
Exploration commenced in the 1840s in the vicinity of Baku
on the Caspian, but lapsed during the early years of Communism, until it was
revitalised after the Second World War. In fact, the Soviet explorers proved to
be highly efficient, being able to apply scientific methods, free of commercial
constraints. Boreholes were drilled for geological information, and Russian
explorers pioneered the geochemical breakthrough that identified the source
rocks and generating belts. Accordingly, discovery at least in sub-Arctic
Russia peaked around 1960, with the corresponding peak of production following
in 1987. Exactly how much was found is hard to know, because the Soviet
classification of reserves ignored commercial constraints. Decline curve
analysis shows that the reported reserves of most Russian fields have to be
reduced by about 30% to obtain realistic estimates.
Production
crashed on the fall of the Soviets, but later rebounded to around 8.2 Mb/d in
2003 in part making good the production that would have already been secured
but for the dislocations accompanying the fall of the Soviet regime.
Accordingly, there may be a second peak around 2010 perhaps at about 10 Mb/d,
although Russian officials now speak of minimal increases. Consumption stands
at about 2.5 Mb/d yielding exports of 5.7 Mb/d. On balance it seems likely that
Russia can hold close to the present level of exports only to around 2010
before decline sets in.
It is clear that the reserve estimates of around 50 Gb as
reported previously by the Oil & Gas
Journal were too low, but it is not easy to know by how much. We
tentatively favour a figure of about 60 Gb, (excluding the Arctic) still giving
a fairly low depletion rate of 3%, which is one argument against higher
estimates. We add to this 30 Gb of Arctic oil, together with substantial
deposits of heavy oil in Eastern Siberia and NGL from gasfields, which are here
excluded from Regular Oil by
definition. The total therefore approaches the 100-120 Gb, as reported by
Yukos. The jury is still out but we think that this assessment is reasonable in
terms of order of magnitude.
Russian Gas
Russia also has large deposits of natural gas, here
estimated to total about 1800 Tcf, of which about 1100 Tcf remain to be
produced from known discoveries, discovery having peaked in the early 1970s.
Production has been about flat since 1990 at about 20 Tcf/a of which 14 Tcf/a
are consumed internally. Production is not expected to increase significantly,
both because of the natural decline of the ageing fields, some of which were
over-produced in the latter days of the Soviet regime, and the limited
incentive to build new pipelines when the country is better served by
conserving its resources. More may be found in the Arctic, including the
offshore if that extremely hostile environment should eventually be accessed.
Plans for the export of LNG from the Yamal Peninsula have been under
consideration, although calling for the construction of special ice-breaker
tankers.
Putin’s hand on Europe’s lightswitch
Europe is increasingly dependent on Russian gas as North Sea
production, especially in Britain, declines steeply, and tends to assume that
it will be readily made available under the blandishments of liberalised
markets. But Mr Putin is no fool, having even, it is said, received some
geological training, and is likely to recognise that the resource is finite and
that his country has prime claim on what remains. Furthermore, as he becomes
more aware that he has his hand on Europe’s light switch, given that so
much electricity is now generated from natural gas, he may come to recognise
that starving his country’s industrial competitors of energy will give
its domestic manufacturing base a decided advantage. Russia may come to see
advantage in embracing the euro as a natural currency for trade, opening the
final chapter in the postscript to the Cold War.
