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Salym Shell development in Siberia

Screen Shot 2015-01-06 at 21.26.38By Olga Ivshina, BBC News, Western Siberia, published 27 Nov 2014 under the headline:

Russian oil industry facing deep freeze

Without visiting a well in Western Siberia, you would never realise just how hard it is to extract oil in Russia.

Two hours’ drive from the nearest village of Salym, the snow banks are huge and the closest airport is over 300km (185 miles) away.

The temperature is down to -26C, but locals say winter temperatures normally drop to -40C, and Russia’s oil industry has more serious challenges than the cold.

Oil prices are falling and the cost of extraction is rising as resources are becoming exhausted. And then there are the Western sanctions imposed on oil companies as a result of Russia’s actions in Ukraine.

As Opec oil producers meet in Vienna to consider how to respond to falling prices, Moscow is particularly keen for concerted action.

The pressure on Russia’s oil industry is increasing. Oilfields that were within relatively easy reach have already been explored.

“It is becoming harder and harder to extract oil,” says Petr Fedorov, the supervisor on the Salym Petroleum drilling platform.

“We will have to develop new projects in more complex conditions, in particular on the sea shelf and in the Arctic.”

And the sanctions are adding to the problem.

Russia used to import most of the technical equipment needed to mine less accessible reserves.

But the imports have dried up and one after another ambitious, hi-tech projects are being frozen:

  • Exxon Mobil has halted work in developing Arctic fields, which it had begun in collaboration with Russia’s Rosneft
  • Shell suspended participation in a joint venture with Gazprom Neft to develop shale oil in the Khanty-Mansiysk region
  • Salym Petroleum development – a Shell project with Gazprom Neft on a shale field in Western Siberia – has slowed down, although the company says work will continue

The sanctions cover not only technological equipment, but also oil services, such as construction, repairs, and drilling preparation and exploration in new oilfields.

“This is way more crucial for industry than the development of the shelf in the Arctic,” says oil expert Vitaly Bushuev.

The Arctic may represent the future of the industry but servicing and developing wells should be tackled now, he believes.

More than half of Russia’s budget is paid for with oil and gas revenue and the country is heavily dependent on exports.

But it needs to develop oilfields to maintain its current rate of production.

Prior to the sanctions, an 11.5% decline in oil production was already predicted for Western Siberia by 2020.

Now it may drop much faster. And it may be difficult to find a way to substitute these losses.

“The situation is really alarming,” says Alexander Khavkin, professor at the oil and gas institute at Russia’s academy of science.

“In theory we can replace Western technologies by domestic ones in a couple of years.

“But someone should start doing it. Many companies are now preferring to wait and observe the situation, and meanwhile time is playing against us.”

Russia needs to embrace innovation such as nanotechnology, Mr Khavkin argues, to increase oil production and extraction.

But that requires investment, and that is looking unlikely when spending is being squeezed by Western sanctions.

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