ABOUT THE ECONOMIC ESTIMATION OF RUSSIA’S ARCTIC OFFSHORE OIL AND GAS RESOURCES

KALIST L.V.
All-Russia petroleum exploration research institute (VNIGRI), Russia

Oil and gas potential of Russia’s continental shelf in a petroleum equivalent exceeds 100 billion tons. Thus the share of sea oil and gas resources in Russia’s ultimate volume of production and hydrocarbon (HC) reserve growth is now insignificant and makes only some percents that does not correspond to potential opportunities of sea HC base. The degree of exploration of offshore oil and gas commercial resources categories makes 3 % of oil and 7 % of gas.

The main reason of low rates of Russian offshore oil and gas production development connected with absence of the key technical and geologic-economical problem decision.

The technical problems for development of Arctic HC shelf are determining.
Because of difficult ice conditions the volume of technically accessible and conditional-technically accessible for development of offshore oil and gas reserves and localized resources, i.e. those resources for which development technologies and equipment can be only created in middle and long-term prospect makes 58 % of initial ultimate potential of recoverable oil resources or around 8,0 billion tons (Bt) and 52 % of initial ultimate gas resources or 41,5 trillion mP3P (Tcm). Technically accessible HC resources for which development technologies and equipment are now available comprise 5,7 Bt of oil and 22,2 Tсm of gas.

The geological-economic problems of offshore HC reserves and resources development are connected to uncertainty of their industrial importance. The resources estimation on the basis of available classification at present does not allow to have real sight about investment attractiveness of oil and gas offshore objects that are in various geological and climatic conditions. Some of these objects are located in technically inaccessible zones or are unprofitable for development. However their reserves and resources are taken into account as recoverable. Obviously the answer to a question on the industrial importance of such objects can be received only on the basis of a geological-economic estimation of offshore HC reserves taking into account criteria and parameters of new Classification of oil and combustible gas reserves and forecast resources beginning in 2009.

In this classification the exact economic criteria of commercial HC reserves and resources for the first time are given. The allocation of commercial reserves and resources according to the classification is made on the basis of their development profitability parameters - net present value (NPV) and internal rate of return (IRR).
According to the classification, all reserves of estimated oil and gas objects are divided on commercial representing real or potential interest for the investors and noncommercial, which development is inexpedient in the current economic conditions. Noncommercial are the reserves of fields with negative NPV and IRR equal to zero. The commercial reserves are divided on normally profitable (10 % < IRR < 20 %) and conditionally profitable (0 < IRR < 10 %) which can be the second echelon of reserves development.
In addition in structure of commercial reserves it is expedient to single out the group of highly profitable reserves (IRR > 20 %) as most attractive for the investors. The choice of these reserves is especially important for the offshore HC reserves that development is connected to the raised investment risks.

Unfortunately recently has appeared the opinion that in conditions of the high prices on energy sources all oil and gas fields will become profitable for development and their economic estimation will not be render influences on development of representations about their commercial importance.
However it is not necessary to forget that with a rise in oil and gas prices essentially raise the cost of materials and equipment used in oil and gas production industry. So by expert estimations for the last 7 years the expenses on separate kinds of the offshore seismic survey have increased in 4-5 times and on wildcat drilling in a number of regions - on the order.

Besides the scales of the tax on minerals production (TMP) and export duty (ED) are arranged in such a manner that provide withdrawal of the greatest part of the price rent arising as a result of oil price increasing. So, at the oil price incorporated in the Russia’s budget in 2007 - 61 dollars / bbl - the rate of TMP was about 83,5 dollars / t, and export duty - 200 dollars / t; at the price 126 dollars / bbl the rate of TMP comprises 187,8 dollars / t, and ED - 508,5 dollars / t.

That is at a level of the oil price around 125 dollars / bbl the share of TMP and ED in the oil price exceeds 75 %.
In result the oil and gas production companies’ incomes do not cover the full inflationary jump of the prices on materials and equipment. Hence the investment attractiveness of offshore HC fields especial on the Arctic shelf is not obvious and should be confirmed by geological-economic accounts.
In July of the current year the amendments in the tax laws were authorized according to which since 2009 the tax privileges are entered at account of TMP: instead 9 dollars / t - 15 dollars / t, and also for fields of the Arctic shelf are established a tax vacation on TMP for the period of 10 years or up to achievement the cumulative production 35 million tons (MMt).

It is necessary to notice that the application of a tax vacation for offshore fields is the compelled measure as the present tax system does not ensured an acceptable level of offshore oil fields development profitability.
Let's consider the influence of oil prices change and tax vacations on Arctic offshore fields development profitability on an example of two objects with volume of reserves 126 MMt and 21 MMt.

The accounts shows that with growth of the oil price and increase of expenses the profitability of these objects development raises not radically and the size of IRR remains in the same classification cell: for small object - in group of conditionally profitable, for large object - in group of normally profitable reserves. Thus the incomes as mineral users as state are increased. For the state – because of price rent withdrawal.

In case of TMP tax vacation and expenses rise the profitability of development even insignificant on reserves object becomes much higher and its reserves pass in a category of normally profitable. The larger object also becomes more investment attractive and its reserves are highly profitable. Net present value of mineral user grows considerably too.

However at a similar tax vacation the state will receive less income of these fields development because of TMP payments reduction - in discount sizes this income will decrease from 1 up to 5 billion dollars in account on one object.

So in modern economic conditions at the high oil prices and introduction of a tax vacation the profitability of offshore reserves development for the investors appreciably raises at the same time the importance of offshore hydrocarbons in connection with reduction of tax receipts for the Russia’s budget is reduced. Therefore special importance is got by a problem of a choice of the most economically effective oil and gas objects whose development capable to ensure the maximal income of their resource potential realization.
Taking into account instability of the world and internal prices on energy sources and constant changes of tax system and as a consequence opportunity of essential change of representations about the economic importance of offshore HC resources the geological-economic estimation and the reestimation of offshore oil and gas objects should be carried out systematically in a mode of monitoring that will allow to have objective representation about a degree of their investment attractiveness in a real time scale.

OIL AND GAS OF ARCTIC SHELF 2008

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