Russia draws inspiration from US shale oil playbook

MOSCOW (Reuters) – Russia is drawing inspiration from the U.S. shale playbook so that it can quickly increase oil production and maintain its share of the global market when demand finally picks up after the coronavirus pandemic.

FILE PHOTO: A view shows an oil derrick at the Vankorskoye oil field owned by the Rosneft company north of the Russian Siberian city of Krasnoyarsk, March 25, 2015. REUTERS / Sergei Karpukhin

At least two public banks, Sberbank SBER.MM and VEB, plan to lend oil companies some 400 billion rubles ($ 6 billion) at virtually zero interest rates to drill about 3,000 unfinished wells, officials involved in the project told Reuters.

Once oil prices recover, wells can be completed faster than starting from scratch so Russia can bring production back to levels reached before it agreed with other major oil producers. reduce supply due to fallout from COVID-19.

U.S. shale producers tend to drill but not complete wells when oil prices are low, rather than freezing all activity, so they can complete wells and quickly ramp up production when demand picks up.

A geologist advising Russian oil companies said the new wells would add at least 200,000 barrels per day to production based on average flow rates, but if their large reserve assumptions materialize, the wells could increase production by 2 million barrels.

The geologist declined to be named because he is not authorized to speak to the media.

While Energy Minister Alexander Novak said last week how much would be invested in the drilling program, details on how the program would work, the number of wells and how much oil production could increase were not disclosed.

Novak’s deputy Pavel Sorokin, a former oil and gas analyst at U.S. bank Morgan Stanley and one of the architects of the plan, declined to comment on the number of wells or their expected production.

Russia pumped an average of 11.3 million (bpd) from 180,000 wells last year, according to the Energy Ministry. Since the OPEC + agreement to cut global crude supplies, its production has fallen by 2 million barrels per day, Novak said last week.

Russia has mainly closed older or less productive wells that won’t necessarily be relaunched when the supply deal expires in April 2022, so the government is helping oil companies ensure lost production can be replaced quickly. .

“Such support … would allow us to create a critical number of unfinished wells, ready to go when we need to increase production,” Sorokin told Reuters.

Russia has outlined various stimulus measures to deal with the fallout from COVID-19, and spending over the next two years is expected to reach 5,000 billion rubles. It was not clear whether the planned support for the oil companies would come from these funds.

GRAPHIC: Oil production in Russia, from the end of the USSR to the present day –

CHEAP LOANS AND TAX CLAIMS

Saudi Arabia and the United States are able to resume interrupted oil production faster than Russia, analysts say, and Moscow fears losing as the market returns to normal.

Cold is the main reason why it is more expensive and longer to restart wells in Russia than in Saudi Arabia, said Daria Surova, an analyst at consultancy Rystad Energy.

Russian oil tends to be deeper in the ground and in thicker layers, while heavy drilling equipment must be moved to Siberian fields in winter when swamps and rivers are frozen, director Sergei Klubkov said. research at Vygon Consulting.

The level of investment announced by Moscow would be enough to drill around 3,000 production wells of different types, according to Klubkov at Vygon, who conducts research for Russia’s energy and natural resources ministries.

The drilling plan, which has yet to be finalized by the energy and finance ministries, would involve bank loans, as well as tax breaks and preferential interest rates, according to a banker and a draft document. .

Sorokin told Reuters that ministries were finalizing an idea that oil companies would only pay interest on loans above the central bank’s key rate, which is 4.5%, so that the loans would probably be almost interest-free.

Anatoly Popov, vice chairman of the board of the largest Russian lender Sberbank, told Reuters he is in talks with the Energy Ministry over the project and details have not yet been finalized. .

State development bank VEB confirmed to Reuters it was involved in discussions about its possible role in Moscow’s broader coronavirus stimulus package, without giving details.

According to a draft plan for Russia’s post-pandemic recovery strategy until the end of 2021, seen by Reuters, oil companies could also benefit from tax breaks on loans.

A Russian oil industry insider, however, questioned whether global demand for oil would ever recover enough to warrant the new wells: “Will we ever need them?”

Reporting by Olesya Astakhova and Vladimir Soldatkin; Additional reporting by Tatiana Voronova and Darya Korsunskaya; Written by Katya Golubkova; Editing by David Clarke

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