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Reuters: Shell signs heavy oil deal with Russia’s Tatneft

Thu Sep 27, 2007 2:26 PM BST

MOSCOW, Sept 27 (Reuters) – Royal Dutch Shell and Tatneft signed on Thursday a deal which can strengthen the oil major’s position in Russia’s energy sector and help Tatneft tap hard-to-extract oil.

Under the agreement, the two companies will jointly develop vast heavy bitumen oil deposits in the Volga region of Tatarstan, the home-base of Tatneft.

“(The companies) will conduct a feasibility study and assess technologies for extraction and processing (upgrading) of heavy oil, which is part of existing exploration and production licenses held by Tatneft,” the companies said in a statement.

Tatneft, the largest oil producer in Tatarstan, controls 12 bitumen oil deposits with reserves estimated at 50 million tonnes. But the firm and industry analysts say Tatarstan may hold between 1.5-7 billion tonnes of bitumen oil resources.

The biggest figure, if confirmed, would represent over a half of Russia’s total crude reserves estimated by BP in its latest Annual Statistical Review at 79.54 billion barrels or 10.85 billion tonnes.

Analysts said the news was positive for Tatneft, which would benefit from Shell’s large experience in tapping heavy oil.

“Choosing a heavy oil specialist such as Shell as a strategic partner for the project is particularly important, not only sentiment wise, but also as a funding source that can help accelerate the project,” Troika Dialog said in a note.

Deutsche UFG said Shell has relevant experience of developing high-viscosity oil due to its involvement in oil sands projects in Canada.

Shell would in turn get a chance to improve its positions in Russia, the world’s No.2 oil exporter, after suffering a setback last year when it was forced to surrender control in Sakhalin-2 offshore project to the state gas monopoly Gazprom .

Analysts at Alfa Bank and Deutsche UFG said they were not convinced the project would be profitable as bitumen oil is among the most difficult and costly hydrocarbons to extract.

Russia has this year introduced tax breaks for highly viscous oil and Tatneft hopes it will be extended to comprise bitumen oil as well.

Deutsche said Canada’s Petro-Canada recently released the budget for its Forst Hills oil sands development and, according to its estimates, the project generates only eight percent return at long-term oil prices of $45 per barrel and 12-13 percent at $60 per barrel, according to Deutsche estimates.

“Bitumen is believed to be an even more difficult and costly type of hydrocarbon than oil sands,” said Deutsche.

But Troika Dialog noted that Tatarstan differed from other Russian regions as its relatively large share of easier to develop heavy oil deposits was located at an average depth of 80-200 metres compared to 1,000-1,500 metres in other areas.

“Tatneft probably had to bring Shell on board in order to obtain a financial backer for the project,” said Alfa.

Tatneft has said it plans to produce 1.5 million tonnes of bitumen oil per year by 2017, which would represent about six percent of its annual production of 25 million tonnes.

Shell and Tatneft said they might also consider establishing a joint venture in the future to acquire new licences for hydrocarbon exploration in Tatarstan and elsewhere.

© Reuters 2007. All rights reserved.
 

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