Khanti-Mansiysk geology holds no secrets for Gazprom Neft

Oil and Capital

Interviews Alexei Vashkevich, Head of Geological Exploration and Resource Base Development at Gazprom Neft

Oil and Capital

Alexei Vashkevich

Russian companies have been quick to investigate opportunities in shale oil, and since August 2013 Gazprom Neft has been involved in prospecting and appraisal at the Bazhenov-Abalak complex in the Krasnoleninskoye field, currently being prepared for shale drilling by Salym Petroleum Development, a 50:50 joint venture between Royal Dutch Shell and Gazprom Neft. Oil and Capital magazine spoke with Alexei Vashkevich, Head of Geological Exploration and Resource Base Development at Gazprom Neft, to find out just how much the company plans to invest in shale development, as well as the company’s plans for its new joint venture with Shell.

— What proportion of Gazprom Neft’s total reserves currently comprise ‘tight oil,’ and what proportion shale oil?

— Following detailed analysis, we have come to the conclusion that at least two reserve categories must be defined as ‘tight oil’. The first of these concerns reserves whose geology is understood, but which will be difficult to develop — reserves with low-capacity deposits, or poor reservoir properties. These might be flooded, located beneath a gas cap, or on the periphery of a reservoir — typically those reserves remaining once more easily accessible oil has been extracted. Until quite recently, work on these was not considered cost effective — although now everyone is trying to develop them. About a third of Gazprom Neft’s С1 reserves, roughly 500 million tons, fall into this category.

The second group concerns what you might call ‘unconventional’ reserves, including shale oil. That would include hydrocarbons in the Frolov, Bazhenov-Abalaksky and Tyumen suites, and the pre-Jurassic basement. Hitherto, these reserves (about one million tons of C-1 category reserves) have been viewed as marginal since, for a long time, they were not considered to be commercially viable and were not, accordingly, either studied or taken into account. Generally, in the context of drilling in the Khanty-Mansiysk Autonomous Okrug (KMAO), the Bazhenov suite was not viewed as a priority and was not investigated — with the result that those reserves were never counted. Work is only now just beginning. For example, the Salym Petroleum Development concession (in the Upper Salym field) currently shows less than one million tons of oil in the Bazhenov horizon. Following completion of geological surveys, however, it is possible that reserve estimates could be increased to as much as 50 million tons.

— How much is the company prepared to spend on geological exploration for shale oil?

—We plan to spend approximately RUB3 billion in 2014–2015, on two projects: the Palyanovskaya area at the Krasnoleninskoye field, and the Salym project. In addition to this, work is also being done on geological surveys of potential shale oil zones throughout the KMAO. We plan to invest around a further RUB300 million in this over the next year.

— Gazprom Neft’s most promising results, in terms of shale oil, have been at the Palyanovskaya area in the Krasnoleninskoye field, where natural flows have been obtained from the Bazhenov-Abalak horizon. Has the flow rate decreased? Has it been confirmed that this oil is indeed from the Bazhenov suite?

— The flow rate is holding steady, at 80 tons per day. Research thus far, including biomarker studies, have shown that yes, this oil is from the Bazhenov-Abalak complex. As to whether or not this is mixed with oil from transit zones and adjacent formations — this, I think, is something we will never know.

— Why did you not invite Shell to participate in the Krasnoleninskoye project?

— Shell is one of the world’s market leaders, involved in 80 percent of all non-conventional extraction projects. Nonetheless, we had several hypotheses of our own, which we were keen to test. Results here have proved highly encouraging, and have enabled us to significantly improve our understanding of the geology of the KMAO. Accordingly, we are now continuing our work to identify, among our existing assets, locations similar to Palyanovskaya area that we would not, hitherto, have viewed as priorities. We are conducting these studies independently: the joint venture with Shell was established, primarily, for work on newly licensed blocks.

— What is the future work program at the Palyanovskaya area?

— We have confirmed a program of work for further investigation at the Bazhenov-Abalak complex at the Palyanovskaya area. Over the course of the next year we plan to drill a further four directional wells, each to a depth of 3,000 meters.

— Why were Salym Petroleum Development so long in commencing drilling into the Bazhenov formation? Was particular or especially complex preparation required there?

—A directional well had already been drilled at the Palyanovskaya area, which allowed the use of proven industry practices. Drilling into the Salym’s Bazhenov strata will involve horizontal drilling, much of which will be undertaken for the first time, giving rise to serious technical challenges. Generally, solutions proven to work in conventional reserves are often far from appropriate for the Bazhenov formations. We are currently in the process of making the necessary calculations, developing an appropriate strategy, and selecting the specialist contractors and equipment we are likely to need. Appropriate drilling of horizontal wells into the Bazhenov layer is fundamental to ensuring the successful development of these reserves.

The first such well will be drilled in December—January. The first phase in 2014 will see the successive drilling of five wells, each to a depth 3,600–3,800 meters with a horizontal section of 500–1,500 meters. Thereafter, we plan to undertake multistage hydraulic fracturing, involving five to ten stages for each well.

— When might commercial production of shale oil in the Salym field begin?

— If our expectations are confirmed, then towards the end of 2014 we can proceed to the second phase of the project, which envisages the drilling of 16–18 wells.

Our task now is to test the technology and undertake so-called ‘long-term’ testing. During this first phase it is essential that we understand how long initial flow rates can be maintained. We know of cases where flow rates have shown significant reductions even in first weeks of well production: and every time, unfortunately, this cannot be attributed to any single factor

— What stage are you at in your new joint venture with Shell (signed last spring) on shale oil development in the KMAO?

— That field is already producing. We’re currently in the process of developing strategy and researching unlicensed concessions.

— In your view, what might the total capacity of the KMAO’s currently unlicensed shale oil reserves actually be?

— Unfortunately, we have access to only a fraction of the available information here. You hear wildly diverse estimates of the KMAO’s unlicensed reserves, but in our view these are likely to be in the order of 8–10 billion tons. Taking all risks into account, this might result in 300–500 million tons of recoverable shale oil reserves.

— It’s recently been suggested that Russia could face a shortage of drilling rigs if all Russia’s upstream companies suddenly decide to develop shale oil. Do you agree?

— Eighty five percent of the world’s drilling rigs are currently located in the United States: and 70 percent of these are being used on shale oil projects. But you have to bear in mind that, in America, developing such projects gave rise to a sharp increase in the volume of drilling. Russia, I think, will see a far smoother transition from the development of conventional to non-conventional reserves. We face a more urgent problem, however, in the rapid aging of our drilling rigs, most of which are, on average 20–25 years old. Our drilling rigs, therefore, will be retired at a much faster rate. The service companies began modernizing their equipment only as late as 2004–2005 — and stopped during the crisis, although it is gradually resuming now.’

— Amendments to the Tax Code set a zero rate for oil produced from the Bazhenov and similar formations. How far will this compensate for the high costs of shale oil production?

— Without these concessions those projects we are just starting to develop would be completely unviable. But remember, Russia has only just embarked on shale oil development. It’s possible that the Bazhenov formation could, in due course, become more readily accessible — or, conversely, could require still further incentives.

When drilling began on one of the world’s most significant shale oil production projects — the Bakken field, USA — the average break-even price was $100–105 per barrel. Now, as a result of better technology — as well as greater competition between service companies, and an overall improvement in quality of service — this has dropped to $60–80. Concurrently with this, tax policy on such projects is also in a state of flux.

In Russia, the costs of developing the Bazhenov formation are far higher than on Bakken, so a zero-rated mineral extraction tax is an essential precondition. Deducting the costs geological surveys in calculating mineral extraction tax liabilities might be a further incentive here, and one that would considerably increase interest in a regional study of the Bazhenov deposits. On that basis, the existing system allows us to continue our work: but as regards the conditions necessary for the profitable development of shale oil reserves in Russia — that’s hard to say.

Alexei Vashkevich

Date of birth: 1978

Alexei Vashkevich has been Head of Geological Exploration and Resource Base Development at Gazprom Neft since 2012. Prior to joining Gazprom Neft he worked at American oil company Hess Corporation (which he joined in 2004) where, in 2011, he led the team involved in the Bakken shale project. Prior to this he was responsible for managing operations on several rigs throughout offshore Equatorial Guinea, as chief engineer. His early career was spent in various Russian companies within the Hess Corporation.

Mr Vashkevich graduated from Tomsk Polytechnic University in 2001, majoring in Oil and Gas Field Development and Operations and concurrently studying for a bachelor’s degree in management at the university’s Russian—American Center. He gained a master’s degree in petroleum engineering from Heriot-Watt University (Great Britain) in 2002.

In October 2012 he was appointed Director of the Northwest Russia Section of the Society of Petroleum Engineers (SPE).