September 9, 2011 – By Melissa Akin
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VERKHNECHONSK, Russia (Reuters) - Oil was discovered in 1978 deep under the forest floor in this corner of Eastern Siberia, but the challenges of drilling here were created hundreds of millions of years ago in a churn of silt and sea water.
"There was a migration of liquids into the reservoirs."
The modern-day result is one of the more difficult drilling propositions in the Russian oil industry -- layers of hard rock and pockets of salt deep under the Siberian taiga, 1,200 km from the nearest major city.
The oil which emerges is shipped eastward through a newly built $25 billion pipeline and loaded onto tankers at the Pacific port of Kozmino, where it competes with Middle Eastern crude in the lucrative Asian market.
It also crosses the Pacific to refineries in the United States, where it has acquired a following as a replacement for crude from Alaska's declining North Slope.
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For all the field's complexity, such challenges may be the new normal in Russia, the world's largest oil producer, which is struggling to keep output steady at 10.2 million barrels per day as Soviet-era fields decline.
Fields like Eastern Siberia's Verkhnechonsk, set to pump nearly 100,000 bpd this year and reach its plateau of over 150,000 bpd in 2014, are ever more complex and remote, but essential to maintaining Russia's oil exports as the Soviet oil heartland of Western Siberia declines.
While the bulk of Russia's output will come from those old fields -- Western Siberia still holds nearly 3/4 of Russia's reserves -- East Siberia is keeping the oil flowing to growing markets of Asia via the ESPO pipeline, which is due to expand to 1 million bpd in 2012, or a tenth of Russia's total output.
Western Siberia, too, requires heavy investment in technology to maximize output from crudely tapped wells, but the wells are already drilled and the pipelines, power lines and roads built.
In the east, oil companies face up-front costs to get oil flowing from fields surrounded by nothing but forest for hundreds of kilometers. Even drilling contractors willing and able to work here are harder to come by.
Up to $6 billion in investment have been committed to Verkhnechonsk with a view to healthy returns at oil prices from $75-$120 per barrel.
"I am positive that Verkhnechonsk will eventually be more profitable than Western Siberia," Nikolai Ivanov, TNK-BP's director for upstream planning, said in a telephone interview.
High up on a rig, an operator tracks progress as length after length of pipe bears down through layers of rock, then gradually veers off to the side, using a state of the art tracking system to adjust the path as it goes, tapping the richest beds.
Seen from above on a map, the wells wend their way outward from the pad -- more horizontal than vertical, said one rig worker at Pad 19, where one of a dozen contractors at the field, KCA Deutag, was drilling its newest well.
"If you take an ordinary pencil and bend it, it will break," he said, drawing a parallel to the steel pipe used to drill the curving wells, some of them 2,800 meters long or more. "But what if the pencil is a meter long?"
Similar technology is in use at only one other Russian field: Rosneft's <ROSN.MM> Vankor, a 300,000 bpd Arctic field, which this year has kept the country's oil output at post-Soviet peaks with a stepped-up drilling campaign.
That oil companies are willing to spend billions of dollars to drill here is in part due to the government's willingness to hand out exemptions on mineral extraction tax and export duty on crude.
The operators, encouraged by the duty break, had already decided to add a new drilling rig to speed up development at the field when the government, noting the rise in oil prices in the two years since it began to produce, canceled the exemption half a year earlier than planned.
The government defends the move, saying it is targeting internal rate of return of around 15 percent on behalf of the companies.
But ad hoc tax breaks for individual fields are controversial and may be consigned to the past if the government, due to implement a reform of export duty in October, follows through with a more radical move to field by field profit-based taxation.
"East Siberia is being incentivized not because it is the only way to sustain its oil production but that is what Russian government has decided to do," Burgansky said, adding: "It also has political implications for the Asian markets and Southeast Asia."
A more serious consequence of the field's location is the fate of the associated gas extracted as a by-product of oil production from the gas-rich field. For lack of a nearby market, hundreds of millions of dollars worth of gas is burned off, or flared.
With an accelerated field development plan in place, the more oil it produces, the more gas it will have to flare.
"The lost revenue is taken into consideration, but it's never in favor of the gas," Rustamov said. "The most economical way of using the gas is to flare it."
In Western Siberia, oilfields regularly burn power at their own plants and sell their excess electricity to the grid, if they cannot deliver it directly to Gazprom.
Far from the grid, Verkhnechonsk burns associated gas in two captive power plants which consume just 8.5 percent of the associated gas. A third, more powerful 63 mW plant will be built next year.
From 2013, when a new $168 million gas re-injection facility comes on line, it will be pumped back underground to wait for Gazprom <GAZP.MM> to build a new pipeline that could also link Verkhnechonsk to a market for its gas.
The gas export monopoly must build new pipelines in the area to supply Siberia's own customers as well as to ship gas from its Chayandinskoye field to the Pacific coast, more than 2,000 km to the east of Verkhnechonsk.
Said Rustamov: "It's just where Mother Nature put it."
(Reporting by Melissa Akin, Editing by Douglas Busvine)