Editorial: Making a virtue of necessity [NGW Magazine]
There was a time when Opec oil ministers’ meetings in Vienna generated much commentary – before, during and after. But now they losing their potency: if they are unable to adhere to their cuts as it is, their talks this month about further cuts to maintain prices are not credible. Historic growth rates in non-Opec output are expected next year, chiefly from US, Norway and Brazil, accentuating the trend that has made Opec+ decisions of secondary importance for a few years.
Higher drilling successes and well recovery rates along with digitalisation and better contracting have all improved the economics upstream in different ways over the last five years. The international oil companies’ breakeven price is in some cases half the Brent price ($60/barrel). And while oil supply is certain, demand is shaky.
Gas is in a similar boat to oil. Even when the gas price is indexed to crude it is relatively cheap these days. It is the only credible low-carbon replacement for oil in the marine and heavy transport sector and for coal in the clean, despatchable power-generation and undisputed champion of space heating, its future too is secure for some time yet. Rising annual averages for renewables’ share of the UK generation mix, for example, disguise the huge daily swings in their actual output on peak winter days.
So producers are having to get their hands dirty, developing market outlets for their not-so-precious commodity: Novatek’s LNG filling-station in Germany perfectly demonstrates first that there are no more free lunches and second, gas is becoming ever closer to oil.
While painful for producers, cheap gas is a boon to consumers, and Russia, an Opec+ country supposedly applying brakes on its production, is both: most of its oil and gas is used at home. The availability of cheap oil and gas gives it a good chance of modernising and cleaning up the economy rather than relying on exports and failing to diversify.
Its oil and gas companies are also becoming generalists, helping to cut costs and waste further. Since acquiring Sibneft and creating Gazprom Neft in 2006, Gazprom is now looking to integrate oil and gas recovery in Russia even further, by targeting gas at some of its major oilfields and oil at its gas deposits. Its first tentative moves have been with Novatek.
Their Arcticgas joint venture is seeking gas and condensate in the deep Achimov layers of the Urengoi gas field in Western Siberia. The first production wells started in the summer. And a block off the Chukotka Peninsula in the Far East has caught their attention. It is likely to hold oil and gas.
Gazprom’s wholly-owned subsidiary Gazprom Neft this month began active development of oil rims, thin layers of oil covered by a typically much larger gas cap, at the Chayandinskoye gas field – the primary supplier for Gazprom's Power of Siberia gas pipeline to China, which came online at the start of this month. The oil could also reach China through the East Siberia-Pacific Ocean route.
At Western Siberia's Yamburgskoye field, Gazprom Neft is again targeting deep Achimov oil layers beneath gas-bearing reservoirs.
Gazprom Neft has said that targeting oil at gas fields will play an integral role in its growth plans. But the company is also working on plans for gas production at its projects in Russia's Far North. There, the Novoportovskoye field so far only produces oil but Gazprom Neft wants to monetise its 320bn m3 of gas as well. The company aims to route a 115-km pipeline from the field across the Gulf of Ob to Yamburgskoye and thence into Russia's national gas system, contributing to flows bound for Europe via the Nord Stream and other export pipelines.
The pipeline is expected to pump up to 20.5bn m3/yr of gas, although Gazprom Neft has not said when it will be ready to operate. Gazprom Neft wants to underpin the project further by accumulating more resources in the area.
There are limitations to how much gas Gazprom Neft can feed into Russia's gas grid, however. Russia's main market for gas abroad is Europe, which has limited growth potential. Gazprom already has enough spare gas capacity to meet future increases in European demand, without Gazprom Neft's assistance. Five or so years ago, LNG would have been the obvious choice: it still keen to build a big plant in the west. Maybe now it is gas for transport: no slouch in this sector, the country has been an early adopter of gas for heavy and light duty vehicles.
Meanwhile, Rosneft has bolstered its gas business but while a tie-up with Gazprom would make sense on paper, the two are rivals. Rosneft’s frustration at being blocked from LNG exports from Sakhalin, and its so-far fruitless plan, with BP, to become a gas producer and exporter to Europe, point to a deadlock only the Kremlin can resolve, and it has bigger problems at home than that to deal with.
However, Gazprom Neft has no such qualms and it is working with partner Rosneft at the nearby Messoyakha field, rich in associated gas. Messoyakha also has 188bn m3 dry gas which could also be routed to Yamburgskoye or another connection point of Russia's gas system. Interestingly though the associated gas is not being flared but reinjected into producing reservoirs to boost recovery. The pair have also been storing some of it in undeveloped reservoirs for future, unspecified use: this looks like a new approach to an old problem, and not an obvious one in today’s low-priced market.