Energy Sector in Search for New Resources

1 july 2015

When oil was selling at USD 100 per barrel, investing in oil exploration was a simple and straightforward affair: drill as much as possible in a hope for staggering corporate revenues and lots of taxes for governments. However, payment balance shocks and clearly “excessive” revenues of oil exporters prompted the creation of a consumer market. The defining moment was when emphasis began to be made on energy efficiency and energy conservation and when industry began to turn increasingly way from oil and natural gas towards renewable energy. To that end subsidies were allocated to renewable energy and development of new technologies. Now things are a lot more complicated than before, experts say.

A lot of oil and natural gas deposits could only break even at USD 60-70 a barrel so their exploration can be postponed, write the experts of the Analytical Center in the new issue of the Energy Review. As oil from Iran, Iraq and the US shale deposits is expected to hit the market, investments in exploration and extraction shrink even further. The review notes that at the moment a balancing game is being played: the western mass media are prophesizing plummeting prices while the finance ministries of oil exporting countries are trying to estimate how much they’re going to lose if the exporters make for the fourth time the same mistake they made after 1985, 1998 and 2008. Saudi Arabia has updated its budget for 2015, revising the assumed price of oil down to USD 59 per barrel. However, the experts are confident that while a global cartel is politically impossible, there is no need to make the same mistakes as were made in the past as long as oil companies behave prudently and cut back investments as revenue falls and risks increase.

In this situation serious doubt is cast on investments in the exploration of the Russian Arctic shelf, without environmental risks having to be brought into the equation. And this is a serious reason for revising the priorities in the national energy strategy of Russia. Exploring the hydrocarbon resources in the Russian shelf, primarily in the Artic, increasing the yield at old deposits, exploring hydrocarbon deposits in Eastern Siberia and the Far East as well as exploration of shale hydrocarbons are all desperate measures the Russian oil and gas sector has to resort to. However, this process is characterized by the highest risks and highest costs among all available options for increasing the production of natural gas and stabilizing the output of oil in Russia. This means that priorities have to be reassessed as options for the development of the domestic oil and gas industry are being explored, especially given the current economic and foreign policy conditions.

The experts do not regard Russia’s continental shelf as the only available reserve for expanding the country’s cache of resources. The resource potential of traditional and new oil producing regions, in their opinion, remains fairly high and allows Russia to maintain and even expand oil production through 2020. In addition, they also point out that Russia could produce shale hydrocarbons that it has significant reserves of (50 billion tons in oil equivalent). As far as natural gas is concerned there is no problem with maintaining the current output level there. Despite significant continental shelf deposits, production is going to be expanded using only mainland deposits.

The fast growth in energy consumption prior to the global economic crisis of 2008-2009 and immediately after it sent the prices of hydrocarbons soaring and had hydrocarbon producers thinking hard about what other global oil resources could be tapped to meet the runaway demand. However, the changes in the situation that occurred in 2014-2015, including the soft OPEC policy, have caused producers to question the advisability of exploring new resources because the explored oil reserves are more than enough to meet global demand through 2040 at least. However, as investments in upstream dwindle this may cause imbalance in the oil markets further down the road, experts write.

There is another issue and that is the rational use of associated petroleum gas or APG. It is a very relevant and important issue for Russia where more APG get burned in torches than anywhere else in the world. In future, increased use of APG can help develop the petrochemical industry and significantly reduce emissions into the atmosphere. The government has implemented a number of measures to tackle this issue: serious fines were introduced in 2013 for companies burning more APG than they are allowed to burn (over 5% of the output) and this policy has already produced first results. In 2014, a significant increase in APG utilization was recorded (up to 85%). However, there are still some problems in this field.

For more, see In Search for New Resources Review

For other issues of the Energy Review see the Publications section.