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We’re now producing 85,000 barrels a day – and think we’ve reached an effective production plateau

We’re now producing 85,000 barrels a day – and think we’ve reached an effective production plateau

With complex geology and high costs having led Gazprom Neft to rethink expanding production at its Badra oil project, the company is now trying to agree a plan with local government to maintain production at current levels.


Denis Sugaipov

Gazprom Neft, Gazprom’s oil wing, is operator under a service contract on a major project in Badra, controlling 30 percent of the project. Under the terms of this service contract Gazprom Neft and its consortium partners are reimbursed for project expenses and paid a fee of USD5.50 for each barrel of oil equivalent produced — a rate that declines steadily once the payback point has been reached.

Denis Sugaipov, Head of Major Projects, Gazprom Neft, in an interview with Reuters, has explained that the company had reached a viable production level in terms of balancing expenses and outgoings, and is expecting to maintain production at the level achieved.

“We’re now producing 85,000 barrels a day — and think we’ve reached an effective production plateau”, Sugaipov.said.

Consortium members in addition to Gazprom Neft include Korea’s KOGAS, Malaysia’s Petronas, Turkey’s TPAO and Iraq’s state oil company, OEC. The contract runs for a period of 20 years, with possible extension for a further five.

“Our project partners understand and support our position in revising the target production plateau down to this level. We’ve gone back to the Iraqi government with this proposal in a revised version of the field development plan,” said Sugaipov.

The consortium had initially planned to take maximum daily production at Badra to a level of 170,000 barrels a day; however, the complex geological structure of the field and, consequently, increasing costs, together with the collapse in the global oil price, have changed these expectations.

“The field structure is complicated ... and the oil ‘difficult’, with a high sulphur content, requiring special and expensive equipment — which increases costs in its transportation and processing,” said Sugaipov.

According to Sugaipov, the Iraqi side imposed further infrastructure requirements in the course of implementing the project, leading to project costs increasing by USD700 million.

Expectations regarding reserves also proved misplaced:

“Having drilled the first wells, we were not given confirmation of basic assumptions, in one of two horizons.”

Vadim Yakovlev, First Deputy CEO, Gapzorm Neft, had, in an interview in October, told Reuters that maximum potential production at Badra was 110,000 barrels per day — but that reaching this level would require drilling additional wells: a decision that was not, ultimately, taken.

Yakovlev said that while vertical drilling is currently being used at Badra, there was also the option of drilling horizontal wells, which would increase the oil recovery factor (ORF) as well as extending the production plateau, increasing the productivity of the project.

“... But horizontal wells are more expensive, which requires additional consent from the Iraqi side,” Sugaipov added.

Payback on the Badra project depends on the oil price: Payback on the Badra project depends on the oil price: at an average price of USD50 per barrel payback on the project, in which some USD4 billion has already been invested, including USD1.6 billion from Gazprom Neft, would be reached in 2022, said Sugaipov, adding that at an average oil price of USD63 per barrel payback would be reached two years earlier.

Gazprom Neft’s Russian competitor, LUKOIL, is also operating in Iraq under a service contract, developing one of the world’s biggest oilfields, West Qurna-2, with production currently running at 400,000 barrels per day. LUKOIL was reimbursed for its project costs in early 2017, at USD6 billion, the company receiving a fee of USD1.15 per barrel of fuel produced.

LUKOIL has also reduced its forecast plateau production at West Qurna-2 to 2024, down to 800,000 barrels per day from the previously forecast 1.2 million.

Gazprom Neft reported in December that it was investigating the possibility of developing a promising new asset — the Zurbatiya block — in Iraq. Sugaipov said that potential resources at the block are expected to be in excess of one billion barrels; the geology at Zurbatiya being similar to that at Badra, meaning the experience gained in developing that field could be useful on the new project.

“We have confirmed our interest ... a lot depends on the economics — on what terms the Iraqi government is prepared to offer for managing development of this field,” said Sugaipov.

According to him, the Middle East is an important region for the company, strategically, but not one in which the objective is to secure the maximum number of projects, at any cost.