Aleksei KONTOROVICH

Director Institute of Petroleum Geology Siberian Branch of Russian Academy of Siences Academician

When we discuss the problem of developing resources of Eastern Siberia and the Far East, the key issue is that of the raw material base. At the same time, it is absolutely obvious that loud statements about availability of abundant oil and gas resources cannot improve the situation with reserve replacement unless they are accompanied by a policy of extensive geological exploration activities. This is one thing.

Another thing is that, unfortunately, the transport infrastructure here is still extremely underdeveloped. A systemic approach is required to address this problem. Why explore resources when they are not going to be developed? For instance, a draft program for development of gas resources in Eastern Siberia, which is being considered

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today, does not envisage starting development of Yakutia fields before the year 2030. The question therefore is, why should business start making resources available when the State intends commencing their development only in a quarter of a century?

It was Academician Arkhangelsky who first said back in 1929 that Eastern Siberia may be rich in oil and gas. The first Stalin Prize for ancient oil in the Siberian Platform was awarded to Vassily Mikhailovich Sinyakov even before the war. Yet it was only after the war that the true development of this region started. The first discovery, Markovskoye field, was made in 1960. It was followed by a lengthy period of failures. And it was not until the well-known resolution of the CPSU Central Committee and the USSR Council of Ministers passed in 1979 that extensive exploration was launched in this region, resulting in discovery of over 30 oil and gas fields. Unfortunately, since 1991, all these activities have been stalled, and no new discoveries have been made.

Speaking of the known fields, the Yurubcheno-Tokhomskoye field is a really interesting one, holding considerable reserves of oil and about a trillion cubic meters of gas. It is the most ancient field on our planet. And it is a very complex field, hard for exploration. The Verkhnechonskoye field comes next in this region, in terms of oil reserves, with the Talakanskoye field being the third biggest.

In the Verkhnechonskoye field, which is fully explored, we have around 200 million tons of oil. In the Talakanskoye field, about 100 million tons of oil. In both cases, there is a potential for resource growth.

Finally, there are also two giant gas fields. In the first place, it is the Kovyktinskoye field, whose reserves are currently estimated at

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2 trillion cubic meters with a potential for further growth to at least 2.5 - 3 trillion cubic meters (placing it among the top ten biggest gas fields of the planet). Secondly, there is the Chayandinskoye field, currently holding about a trillion cubic meters of gas and also possessing good prospects for resource growth.

With the basis for the raw material base allowing to start extracting oil and gas in the region now established, all further development of the region will only depend on how fast industry will be able to come here. The region lacks infrastructure. It means it is not going to be developed unless it gets roads, pipelines, and electricity. The State has declared that pipelines are its domain. Today, the issue has finally got rolling.

After the construction of the pipeline "Eastern Siberia - Pacific Ocean", at least half of its oil will be supplied from Western Siberia until at least the year 2030. This, in its turn, is going to create serious problems.

As of 2005, Western Siberia is the major oil producing region of Russia. In the European part of Russia, we produced 127 million tons of oil, yet it is absolutely obvious that production is going to decline here in the coming decades. It may only get support from LUKOIL's discoveries in the Caspian Sea and the northern Timano-Pechora province, as well as the Pechora Sea, i. e. sea shelf production.

All estimates indicate that Western Siberia is definitely going to remain Russia's major oil and gas producing base until at least the year 2030. At present, about 70% of oil and over 90% of gas is produced in Western Siberia.

One sometimes hears that Eastern Siberia is going to succeed Western Siberia, that it has the same immeasurable wealth of oil

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and gas as Western Siberia. This is definitely not true. According to experts' estimates, about 54% of Russia's recoverable oil resources are concentrated in Western Siberia, with another 20% in the sea shelf. Eastern Siberia comes third largest, with about 14% of Russia's oil resources. Of course, this is a good deal, too - about 10 billion tons of recoverable oil reserves.

In gas, despite the unique resources of Western Siberia, the situation is somewhat more uniform. Firstly, the Russian sea shelf, especially the Arctic shelf, is uniquely rich in gas. Even initial prospecting in the Kara and Barents Seas immediately produced three very big fields. In gas reserves, therefore, Western Siberia accounts for somewhat above 40 % of the overall figure. About 30 % is located in our sea shelf. Finally, Eastern Siberia, Yakutia and Sakhalin account for about 20 %, or over 40 trillion cubic meters of gas.

Today, we are ahead of the targets set by Russia's Energy strategy in oil production, yet one should not be overly optimistic about this. In the situation when there is no reserve replacement, this progress may appear to be a Pyrrhic victory, because it will be followed by a production decline, which will be hard to reverse. According to our estimates, in order to at least replace all we intend to extract in Western Siberia until the year 2020, we will have to locate new reserves amounting to around 6.5 billion tons of oil and around 11.5 trillion cubic meters of gas. In doing this, we may only achieve simple replacement of reserves, to say nothing of extended replacement.

Oil and gas development and prospecting in Eastern Siberia should take priority. Until the year 2020, we will have to locate new resources here, amounting to around 2.5 billion tons of oil and around 3.5 trillion cubic meters of gas.

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As for the Far East, we will need to find new resources here, amounting to around 400 million tons of oil and 300 billion cubic meters of gas.

According to studies currently done by Gasprom, the production rates of the Sakhalin shelf are going to be even above those of Eastern Siberia. I believe there is some misinterpretation of the existing raw material base taking place here. I believe that the prospective levels of gas production in the Sakhalin shelf are substantially overestimated.

Besides, there is a matter of costs. It is known that world oil companies buy oil reserves or spend 8% to 10% of their earnings on oil reserves. The world's average cost of explored reserves stands at about $6 a ton.

Our calculations and estimates of the costs of oil and gas reserves increment in Western Siberia for the coming decades are as follows. The average cost of oil will stand at $2.4 - 2.6 a ton. That of gas will be slightly less than a dollar per a thousand cubic meters. Reserves in Eastern Siberia will be more expensive due to both severe climatic conditions and a harder field situation. Oil here will cost $3.7 - 4.5 a ton ($4, on the average). The cost of gas will reach $1.5 per a thousand cubic meters. In the Far East, with due account for specifics of shelf production, the cost of oil will reach around $5.6 a ton, i. e. drawing closer to world standards. Gas will cost less than $2 per a thousand cubic meters.

In any case, in terms of prospecting for reserves, all these projects seem feasible enough. With due account for the hard climatic, natural and geological conditions of Eastern Siberia, the cost of these reserves is going to be considerably higher than in Western Siberia yet lower than global standards.

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What allocations are required to provide for a growth in reserves? In Western Siberia, one will need to invest around 26.5 billion dollars in geological prospecting through the year 2020. In Eastern Siberia, to provide for an oil production of 80 million tons through the year 2030, one will need to invest no less than 14.5 billion dollars. Plus another 2.8 - 3 billion dollars for the Sakhalin shelf.

Is it too much or too little? As we were preparing our estimates, we looked at the price of $26 per barrel, so the figures we arrived at amount to no more than 2% of the price of sold oil and gas. This is way below the expenses of ordinary oil companies. In other words, the geological prospecting process is going to be highly efficient, possessing a potential for attracting serious investors.

What needs to be done in order to implement the program of incrementing reserves and developing oil and gas production in Eastern Siberia? It is necessary, as has been said more than once, to outline and implement a far-reaching plan of regional activities in order to reduce risks and improve the region's investment attractiveness.

Justice should be done to both the government and the Ministry of natural resources that are largely aware of this requirement. In the past two years, both the Ministry of natural resources and the Agency for Subsurface Management have fundamentally changed their attitude to Eastern Siberia. For instance, it is planned to annually invest no less than 2 billion rubles in the region in only 2005 - 2006. These are simply gigantic figures, compared with what we had three or four years ago. And I am not at all sure we would be currently able to use any

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bigger funds. The thing is that in the past 15 years the magnificent geological exploration organizations, geophysical and drilling teams formerly created in Krasnoyarsk Territory, Irkutsk Region and Yakutia, have ceased to exist. There is currently not a single proper drilling crew there, or at best they might be counted on the fingers of one hand. The volume of geophysical works has been drastically cut down, and there is a lack of geophysical staff. A long-term policy is required here, so when they refer to the figure of 14 billion dollars, it does not seem frighteningly high to me - but it is not very clear where one can get the army of prominent, intelligent, talented specialists that had been busy there until 1991, or how it may be recreated anew. The personnel issue is acquiring major proportions here.

A serious licensing policy is needed, too. Business should supply about 90 - 92% of the required 14.5 billion dollars. For this, a state licensing policy needs to be elaborated.

It is fine to have Surgutneftegaz come in and start developing the Talakanskoye field. A couple of years ago, I happened to visit this company with a team of experts of the Ministry of natural resources. Surgutneftegaz is surely among the most advanced companies in the field of geological prospecting. They have even "ploughed" their license areas through with seismic prospecting, kilometer after kilometer. They have done such an amount of exploratory drilling they have no place left for sinking any more wells. The company makes profits, the company is able to invest in geologic exploration, yet it has nowhere to invest unless it has a field for developing its geological exploration activities.

The same situation is typical of other companies, too. This calls for an appropriate licensing policy which would require

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companies to make substantial investments in reserve replacement in Russia.

We proposed such a program a couple of years ago. At present, it has been approved by the Ministry of natural resources. However, consistent efforts backed by political will are required to implement this program. You are aware that, in the past 15 years, we have elaborated numerous programs, including several versions of the Energy strategy, yet afterwards no one lifted a finger to have them realized. We are drastically losing momentum.

Next, license agreements require a firm scientific basis and, if necessary, an audit in order to be sure they have been properly prepared. In issuing a license for an area, we need to be aware of the amount of oil or gas we are more or less likely to extract there in a decade. Otherwise, we shall not be able to elaborate a long-term state policy. Today, it is essential to improve the level and quality of scientific substantiation of state licensing policy. What is done today in this field is absolutely insufficient.

As for forecasts of oil production in Russia, no major changes in its regional structure are to be expected in the next two or three decades, except formation of a new major center in Eastern Siberia and Sakha Republic. In the post-2030 period, serious changes may take place in this regard thanks to sea shelf development. I hope, however, that development of the Russian portion of the Caspian Sea shelf and the Pechora Sea shelf will start earlier. (We do not believe more than 20 - 25 million tons is going to be extracted in the Sakhalin shelf).

With an appropriate licensing policy, oil production in Eastern Siberia may be increased to 80 million tons by the year 2020, yet one should also remember that domestic consumption is going to

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rise, too. Due to this, on no account will this production be sufficient to cover both domestic consumption of Eastern Siberia and export commitments provided for in the oil pipeline project "Eastern Siberia - Pacific Ocean", even if we make proper arrangements for geological prospecting activities. But if we temporize, like we are doing now, the situation will only change for the worse.

As for the gas situation, we expect that in the post-2010 period gas production will start rapidly growing - we make these estimates based on an expected speedy development of the Kovyktinskoye field.

However, the plans that are currently being submitted for consideration and the proposals I saw in Gasprom envisage slower development rates. According to these plans, development of the Chayandinskoye field and other fields in Yakutia has been postponed till after the year 2030, which I consider an error.

We believe that gas production in Eastern Siberia and Yakutia could be increased to 30 billion cubic meters by 2010 if Kovykta is intensively developed. In this case, by 2020, gas production in the region (including Kovykta, Chayanda, fields in Krasnoyarsk Territory) could be brought up to 100 - 115 billion cubic meters. We do have this gas available. So what we need is analyzing the existing demand situation.

According to our estimates, gas demand in Eastern Siberia and the Far East will amount to a maximum of 14 - 15 billion cubic meters by the year 2010. By 2020, this figure may go up to 37 billion cubic meters, reaching 45 billion cubic meters by 2030. As for the demand in the Asian and Pacific region, where our potential

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customers are located, in 2003 they consumed over a billion tons of oil. According to our estimates, with due account for the anticipated GDP growth rates in these regions, oil consumption is going to at least double here by the year 2020, reaching the annual level of 2.3 - 2.4 billion tons by 2030. It is also important to keep in mind the particular countries that are going to provide for this growth. Consumption in South Korea can hardly be expected to increase by more than half. Japan's growth rates will even be lower, and one cannot even rule out, at one time or another, a reduction in oil consumption in Japan, brought about by innovative technological solutions. Oil consumption is going to grow very rapidly in China. In 2004, it already exceeded 300 million tons, with about 140 million tons being annually imported. China is going to demonstrate an enormous demand, incomparable to either Japan or South Korea.

When I visited China, my Chinese colleagues used to tell me they were planning to produce 300 million tons at the turn of the century. I objected, saying they did not have such resources available. Today they saw it for themselves, so they are making somewhat lower oil production forecasts, no longer anticipating annual domestic production to rise above 200 million tons. With gas, however, the situation is repeating itself. In order to knock down prices, the Chinese try demonstrating they are able to bring their domestic production to 200 billion cubic meters. In fact, however, they do not have such a potential even in the long term. Though it should be admitted that China is really making miracles. In the past three years, coal production has increased here by a billion tons, reaching almost 2 billion tons a year.

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Gas consumption in the Asian and Pacific region may reach 770 - 820 billion cubic meters, with China, Japan and South Korea accounting for 340 - 390 billion cubic meters. China's share is 190 - 220 billion. These estimates are three years old.

It is anticipated that China's gas demand will reach 211 billion cubic meters by the year 2020, with about 70 billion to be consumed in North-Eastern China and the Bahai Gulf, i.e. the regions which may be the first to get East Siberian gas. We possess a raw-material base for this. In South Korea, gas demand will stand at about 45 - 55 billion cubic meters; in Japan, 80 - 115 billion. This adds up to a total of 340 - 375 billion cubic meters. So even if China really increases its annual gas production to 200 billion cubic meters by the year 2020, which I find incredible, we are going to have a big sales market.

What is going to happen to our oil exports? The maximum export figure we can expect by the year 2020 is 30 - 35 million tons; by 2030 (if we launch geological prospecting activities on a scale I am referring to), a maximum of 55 million tons. In other words, 30 to 35 million tons will need to be supplied from Western Siberia. This requires a very serious and careful analysis. These are exports in excess of domestic requirements of the Far East, there will be another 25 - 30 million tons.

Oil production is going to decline in the European part of Russia. This decline will need to be compensated for. We have obligations to European countries which we have to meet. Our President said recently that Russia can supply up to 50 million tons of oil to the US Atlantic coast. So when we add it all up, we do not see the required 35 million tons of oil. A very serious analysis is needed here. I am not sure that our top authorities are sufficiently well informed of our export capacities in oil and, probably, gas.

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Speaking of the oil pipeline "Eastern Siberia - Pacific Ocean", decision has already been taken regarding the route (Taishet - Skovorodino and further on to the Pacific Ocean), so it should not be discussed. Though, to my mind, another, Southern, route would be more preferable. But the government has taken a decision, and Transneft has highly skilled experts who are aware they are going to lay the pipe mostly through highly seismic areas (a magnitude of 10).

It is very fine that we have finally ended our discussion as to where oil should be supplied in the first place - to Nakhodka (where it is not yet clear whether or not we are going to have any demand for our oil) or to China, where we definitely have it. In September, our President unequivocally ended the dispute, saying that, after the pipe reaches Skovorodino, a branch pipeline will be built to the Chinese border, making oil available for China, to an amount of approximately 25 - 30 million tons. There is a problem, however. It is known that, as agreed, the branch line from Skovorodino to the Chinese border, including the 70 km portion through the Russian territory, will be built by the Chinese side. CNPC representatives declared they had "given their consent to build the pipeline from Skovorodino to the Chinese border for Chinese money", making it a "gift to the Russian people". I am not sure we should accept this "Greek gift".

As regards gas exports forecasts, we do not believe gas exports from Sakhalin are going to exceed 20 - 25 billion cubic meters. Gasprom plans are based on a figure of 70 billion. There are currently no reserves of this size in Sakhalin, it is not clear where they can be found, and it is not too clear how long it will take to increment the reserves. At the same time, we already have Kovykta

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in Eastern Siberia, and we also already have Chayanda there, where a minimum of 60 billion cubic meters of gas can be extracted. We believe that, if development of Eastern Siberia is treated as a project of national significance, annual gas exports can be increased to 60 billion cubic meters by the year 2020.

Speaking of the East Siberian program, it should be noted it must not be restricted to just gas production and pipeline construction. We are able to export not only raw materials but also higher added-value products. Our Chinese neighbors, of course, will be happy to get our gas - especially with helium in it. They will set up processing plants right on the border and offer us competition in our own field. In other words, we will not be able to do without a long-term program for extraction and storage of helium, without an appropriate helium policy, without development of gas processing. Matters of gas production, processing and exports should be considered in their entirety and set down in government documents.

Our APR partners believe that even if our export figures reach a maximum we will only be able to meet 17 - 20% of their requirements. The more time we lose, the faster Qatar and Iran, possessing enormous gas resources, will emerge as alternative suppliers. The Chinese also assert they may reach an agreement on gas supplies with Kazakhstan and Turkmenistan. Negotiations around this are really taking place, though I do not believe this discussion is being conducted in earnest. Central Asian gas has a high content of hydrogen sulfide. Astrakhan Region, for instance, has a potential for production of 60 - 70 billion cubic meters, yet only 12 billion is produced, due to restricted sulfur removal

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capacities. The main thing is there is currently no demand for sulfur. Sulfur prices have dropped. Kazakhstan and Turkmenistan face an even more serious problem, because their gas has a maximum content of hydrogen sulfide. Due to this, we are not likely to face competition from this side. At the same time, Iran and Qatar, capable of supplying enormous quantities of liquefied gas, may offer us serious competition.

As regards development of gas transportation systems, there are two problems we need to address. Firstly, Gasprom wants to lay a gas pipeline from Chayanda to Ust-Kut and afterwards turn to the southeast, bypassing southern areas of Eastern Siberia. Due to this, a question arises - what can be done with helium in the area of Ust-Kut, what can be done with ethane, propane and butane? One can either build product pipelines, starting by analyzing the costs of this (because this industry should be developed in the south, where there already exists a base for this), or all this wealth is going to be wasted.

Secondly, where should one direct gas flows from Kovykta, after all? To the west, as it is proposed to do following provision of gas supply for Irkutsk Region, or to the east, having in mind provision of gas supply for Irkutsk Region, Buryatia, and Chita Region, and future gas exports? I do not regard the proposed western route for Kovykta gas as well thought out, because it can never successfully compete even against Yamal gas. I do not know why the government does not take this into consideration.

And the key thing is we need an integrated, systemic government program for development of Russia's East. Only this will let us provide for a reasonably high production, radically raise living standards of people in

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Eastern Siberia and Baikal region, and ensure an inflow of people to the trans-Urals part of Russia, raising it by at least half a million.

RA

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