WoodMac: Russia's energy trade with China could quadruple by 2025
Wood Mackenzie says Russia is shifting its outlook east and engaging with China on a range of huge deals that could see energy trade between the neighboring countries quadruple by 2025. Agreements for oil, coal and power supply have already been struck and while negotiations on a gas deal have proved more difficult, Wood Mackenzie anticipates an agreement could be reached in the next two years. Keen to secure the large volumes of energy that Russia can provide, China is providing finance to underpin much of the required infrastructure costs. The Global Horizons research report cites three key components driving cooperation: Russia's desire to develop its East Siberia mineral and hydrocarbon reserves; Russia adjusting to the new realities of the European gas market; and China's precipitous demand growth over the last decade.
Paul McConnell, Senior Global Horizons Analyst for Wood Mackenzie opens; "Historically there has been very limited energy trade with China, as Russia has focused on large West Siberian resources and European markets. Fears of increased Chinese economic and demographic influence have traditionally limited Russia's willingness to open East Siberia up to direct Chinese investment. Instead, loans for long-term supply have characterized trade between the two countries. Therefore the recent offer of equity in Arctic and East Siberian acreage and CNPC's 20% farm-in to Yamal LNG mark a significant breakthrough. Together, with upfront financing in return for guaranteed supplies, a model for increased cooperation appears to be emerging."
Wood Mackenzie forecasts that this closer engagement and a growing mutual dependency could lead to energy trade quadrupling by 2025 to over 100 million tonnes of oil equivalent (Mtoe).
Wood Mackenzie's report, titled ‘Russia's pivot east: the growth in energy trade with China', points to three key drivers behind this wider political alignment which is underway. Ian Thom, Head of Russia Upstream Research comments; "As legacy West Siberian oil production declines, Russia is undergoing a period of renewed interest in exploring and developing the energy resources of its Far East and East Siberia regions. These key provinces are sparsely populated, highly resource rich and adjacent to a large and resource-hungry Chinese population, and their development is a major priority for the Russian government. Exploiting the mineral and hydrocarbon wealth of the Far East and East Siberia allows Russia to diversify markets, maintain energy production levels, develop industry and increase local incomes."
The report says that Russia's oil sector is leading the way and East Siberia is becoming a major producing region, "The construction and expansion of the Eastern Siberia Pacific Ocean (ESPO) pipeline has been a critical piece of infrastructure," Thom comments; "In return for guaranteed crude supplies, US$25 billion of Chinese finance underpinned the construction of the second stage of the pipeline. ESPO has opened up East Siberia for large-scale commercial oil production, resulting in a significant increase in upstream investment. Oil production from East Siberia is expected to exceed 1.2 million barrels a day (b/d) by 2017."
Simultaneously, Russia is being forced to accommodate the new realities of the European gas market. McConnell expands: "As a result of the North American shale gas revolution, Qatari LNG cargoes have been diverted to Europe, where gas demand has been effectively stagnant since the Global financial crisis. As a result, Russia has reduced its target price for gas into Europe and is seeking alternative markets for new supply."
"The Russia-China energy relationship is very different to the one that exists between Russia and its traditional market of Europe. The latter operates in an established legal context, features commercial arrangements with a variety of state-owned and private companies across a number countries, and has a track record of many decades. In contrast, there is a very short history of energy trade between Russia and China," McConnell adds.
McConnell continues; "Now, a wider political realignment is underway, reversing the historical trend of limited engagement between China and Russia. CNPC has acquired a 20% stake in Yamal LNG and will purchase at least 3 million tonnes per annum of LNG. Chinese support is a crucial step in building a broad-based financial platform for the project."
While progress has been made with oil trade and access to upstream assets this year, gas exports from Russia to China have been almost 20 years in negotiation. A Memorandum of Understanding was signed in March 2013 for 38 billion cubic metres (bcm) of supply from Russia's East Siberia gas fields, with first delivery scheduled for 2018. Gas developments are on hold until the pipeline agreement and gas sales contract is finalized.
China's rampant demand has led to re-evaluation of the strategic need to access Pacific basins for energy exports. "We forecast China's total oil imports will overtake those of the United States by 2017, and reach 9.2 million b/d in 2020. China's gas market is now the third largest globally, with total demand expected to reach over 170 bcm in 2013. Power demand is also growing at a tremendous rate, and trade with China could make Russia the world's largest electricity exporter by 2030," says McConnell.
However, Wood Mackenzie warns that negotiating the future terms of cooperation between Russian and Chinese companies will be challenging; "Remarkable progress has been made since the ESPO spur to China was agreed in 2009, but negotiating the future terms of cooperation between Russian and Chinese companies will be challenging. If large projects are to be realized, Russia may have to allow deeper Chinese involvement, for which there is little historical precedent," offers Thom.
The report concludes that both Russia and China have strong incentives to access new sources of growth and develop new energy trade routes; "We expect further investment from China in LNG, gas pipelines and gas processing, and in power generation and transmission capacity. Russia's proximity, the quality and scale of its eastern resource base, and the new willingness of its energy companies to trade, could make it China's most important single energy supplier for some decades to come," concludes McConnell.
Repsol makes oil discovery in Libya's Murzuq basin
Repsol has made a high quality light oil find (40º API) in Libya's Murzuq basin, the company said October 21. The find was made in block NC115 in the Sahara desert, 800 kilometers south of Tripoli.
The discovering well, called A1-129/02 was drilled to a total depth of 1,836 meters and has produced good oil flows during initial testing. The well flowed 528 barrels of oil per day with a choke size of 32/64 inches and a perforated interval of 4,502-4,522 feet in the Mamuniyat formation. It is the third of eight wells that the company will drill in this block, which covers 4,400 square kilometers.
News of the discovery pushes Repsol to continue its exploratory program which began in 2013 and is expected to continue through the end of 2015. Repsol serves as operator of the block with a 40% stake, while Austria's OMV and Total of France each hold a 30% share.
During 2013, Repsol has already made other valuable oil discoveries, in Brazil, Alaska (U.S.) and Russia, and has brought online production from new fields in Brazil, Russia, Oklahoma (U.S.) and Bolivia.
Senex makes oil discovery in Cooper-Eromanga Basin
Australian energy company Senex Energy Ltd. has discovered oil in the Dunlop-1 exploration well in southern Cooper-Eromanga Basin permit PEL 113 (Senex 100%) in South Australia, the company said October 10.
Wireline logs have confirmed a net pay interval in the McKinlay Member of approximately 10 feet and a subsequent drill stem test has resulted in oil free-flowing to surface at a rate of 1,200 barrels per day.
Dunlop-1 will be cased and suspended as a future oil producer and will be brought on production this quarter.
The success of Dunlop-1 confirms the opportunity to add reserves and increase oil production across Senex's South Australian Cooper Basin permits from the current 30 plus well drilling program.
Ensign Rig 48 commenced drilling Dunlop-1 Oct. 1 and reached a total depth of 4,820 feet. The rig will now move to the Pirraminta-2 exploration well in PEL 514.
Briefs
Eagle ford production hits 1MMBPD
Total production from the Eagle Ford in South Texas is projected to eclipse production from the Bakken, beating the more mature play to the 1 million barrel per day milestone, noted an October 22 report by the US Energy Information Administration. Production from the Eagle Ford hit 1 million bpd in August.
The report showed production from the play is expected to continue its ascent, reaching 1.07 million bpd in October and to 1.09 million bpd in November. Meanwhile, the Bakken is expected to produce 935,000 bpd in October and 960,000 bpd in November.
CORRECTION
An article in the October 2013 issue of OGFJ ("US Seismic deploying fiber optics to digitize the sub-surface") erroneously attributed a comment stating that "only 20% of frack stages are producing 80% of the hydrocarbons in a given well" to Welling & Company. The information is actually from a Bernstein Research report dated Oct. 26, 2012. Welling commented: "The Welling report states that approximately 24% of the frack stages perform below expectations and the key reason is due to a lack of understanding of the reservoir. This has resulted in an increase use of reservoir characterization to help better understand the subsurface and better understand where to place, drill the well and where to best hydraulically fracture the well along the lateral. In a $30 billion/year market, this translates into approximately $7 billion/year of non-optimized frack jobs/inefficiency + any unnecessary drilled footage. Still, a very significant number."
