The Soviet Union's petroleum industry has been battered during the past 3 years by the most severe and broad based setbacks ever suffered by a nation not involved in a major war or crippled by deliberate government decisions to limit oil flow.
If early 1991 results are a reliable indicator, the U.S.S.R.'s recovery from its present oil crisis will take considerable time.
But there is general agreement among western geologists and economists that the Soviet Union can, by adopting a rational energy policy and attracting substantial Western financial and technological assistance, halt the drop in crude/condensate production by the mid-1990s. Some observers believe that the most frequently cited estimates of current U.S.S.R. "explored" (proved plus probable) oil reserves are low and that the nation's ultimate crude/condensate reserves are enormous.
Overall, the Soviet Union apparently has more BTU of principal fuels--oil, gas, and coal--than any other nation in the world.
The West has expressed willingness, even eagerness, to help the U.S.S.R. develop its abundant energy resources. However, Moscow has demonstrated that it can be a difficult partner.
What could change the entire scenario of Soviet/Western cooperation in achieving a Russian petroleum industry rebound is the possibility that the U.S.S.R. will slip from deep crisis into complete political, economic, and ethnic chaos. This could lead to a breakup of the union, would likely stifle "perestroika's" reforms, might cause rejection of Western assistance (or increased reluctance by the West to provide it), and, at worst, see the U.S.S.R. revert to a form of Stalinism.
CLOSE TO COLLAPSE
Evidence that the Soviet Union's petroleum industry is close to collapse abounds.
After sliding by 6.1% to 11.4 million b/d in 1990, the U.S.S.R.'s oil production skidded 9% in first quarter 1991 from the same 1990 period. In March alone, Soviet crude/condensate flow plummeted 10% from March 1990 to an estimated 10.65 million b/d, the lowest level since 1976.
The loss of about 1.9 million b/d of Soviet oil production between May 1988 and March 1991 exceeds the entire flow of Kuwaiti oil wiped out following Iraq's invasion.
Meanwhile, the U.S.S.R.'s first quarter 1991 budget deficit leaped far above the official projection. Individual Soviet republics did not remit a large portion of tax revenue owed to Moscow, resulting in central government income of only 21 billion rubles vs. the expected 55 billion rubles. This forced the central government to slash its already declining capital investment in a petroleum industry that was almost everywhere falling apart at the seams.
Contrary to expectations, the Persian Gulf war did not provide the predicted bonanza in oil revenues--estimated at $5-10 billion--from higher world prices. The price hike was almost completely offset by falling domestic crude/condensate production, which limited supplies available for export; by the end to all Soviet exports, mainly armaments, to Iraq; by failure of Baghdad to pay its debts to Moscow; and by other economic disruptions.
Soviet oil exports tumbled further in early 1991, depriving the U.S.S.R. of the hard currency required to purchase badly needed petroleum industry equipment and other goods.
Official figures show that the Soviet Union's crude exports dived from 2.546 million b/d in 1989 to 2.172 million b/d in 1990. Pres. Mikhail Gorbachev has predicted that the U.S.S.R.'s 1991 crude exports will fall to 1.2 million b/d, down from the record 2.884 million b/d in 1988.
Moscow press reports predicted that the U.S.S.R. would become a net oil importer by 1993 if not before. They said that the nation was already importing substantial volumes of refined products.
Even more worrisome was speculation that Western nations were contemplating cancellation of proposed large loans to the U.S.S.R. in view of failure by some Russian firms to pay for goods delivered by foreign companies, sharply anti-Western statements made by the Soviet prime minister and a top KGB official, together with hostile articles regarding "capitalist exploitation" published by hard line Communist newspapers.
Still by far the world's largest hydrocarbon producer, the U.S.S.R. showed signs of economic stress in the early 1980s.
But the Soviet petroleum industry, which had spearheaded the nation's industrial growth since shortly after World War 11, didn't begin its headlong decline until the spring of 1988.
GAS GROWTH SLOWS
Much less expected than the big drops in Soviet oil production during the past several years has been the deep erosion in gas flow gains, which had been spectacular during 1960-85. Gas flow rose only 0.3% in the first quarter of 1991 vs. about 2.4% during calendar 1990, 3.8% in 1989, 5.5% in 1988, 5.9% in 1987, 6.8% in 1986, and 10% in 1985.
Refinery throughput has fallen along with crude production. Refinery capacity utilization has dropped significantly, and the government target for increasing the proportion of light products obtained from a barrel of crude was not met during the recently ended Soviet 5 year economic plan (1986-1990).
Petrochemical output has fallen as quotas for delivering necessary products from refineries and gas processing plants were not achieved. Ambitious plans for construction of huge new petrochemical facilities in western Siberia during the late 1980s and early 1990s were cut back drastically.
Domestic oil consumption has fallen considerably less than production and remains high, in comparison with the West, per unit of gross national product. Indications are that after peaking at 9.1 million b/d in 1982, U.S.S.R. oil consumption eased only slightly to 8.9 million b/d in 1985-87, 8.8 million b/d in 1988, 8.5 million b/d in 1989, and 8.4 million b/d in 1990.
Soviet officials say the U.S.S.R. must produce at least 12 million b/d to meet domestic requirements and obtain sufficient hard currency from exports. An intensified program of energy conservation combined with falling gross national product could slash Soviet domestic oil consumption another 1 million b/d during the next several years, easing the supply/demand deficit somewhat.
EARLY WARNINGS
The decline in U.S.S.R. crude/condensate production from its 1987 peak of 12.48 million b/d was not entirely unexpected. Some western economists and geologists warned several years ago that oil flow might level off or even slip during the early 1990s.
Prof. Thane Gustafson of Georgetown University, in his book Crisis Amid Plenty, strongly suggested that another U.S.S.R. oil crisis was imminent even though much of his research was done at a time when the country's crude/condensate production was setting records and gas flow was still showing healthy gains.
Noting that Soviet leaders were complacent and ignored signs of difficulty in the energy sector during the 1970s, Gustafson pointed out that the U.S.S.R.'s command economy leads inevitably to artificially induced scarcities.
"If they do not act decisively, Soviet leaders will find that the energy sector will continue to generate crises, diverting their resources and attention from the most difficult and fundamental tasks of reform elsewhere in the economy. In that case, the most reformable sector of the (Soviet) system will continue to block reform elsewhere, and the country with the world's biggest energy supplies will continue to be the only industrial nation still locked in an energy crisis," Gustafson concluded.
But apparently nobody in the U.S.S.R. or the West anticipated the magnitude of the 1988-91 tumble in Soviet oil flow and, especially, exports. On the contrary, one Western study made just before the latest Soviet petroleum industry crisis warned that the U.S.S.R. might flood the world oil market with exports during the late 1980s.
In a much ridiculed report published in April 1977 the U.S. Central Intelligence Agency predicted that Soviet crude/condensate production "will soon peak, possibly as early as next year (1978) and certainly not later than the early 1980s." The agency indicated that the U.S.S.R.'s oil flow might fall as low as 8 million b/d by 1985.
Had the CIA study been issued 10 years later, the prediction of an approaching Soviet oil production slump would have been amazingly prescient.
Moscow officials who scoffed that the CIA's prediction of falling U.S.S.R. oil production by the early 1980s have been almost as inaccurate as the CIA in their long term forecasting. In late 1987, the trade union newspaper Trud indicated that crude/condensate flow would continue to climb, reaching at least 13 million b/d and possibly as much as 13.5 million b/d in 2000.
Some Soviet authorities believed that western Siberia's huge discoveries in the 1960s and early 1970s meant that the U.S.S.R. would have ample oil supplies "for centuries."
Indications that Soviet oil output wouldn't climb strongly and steadily during the remainder of the century appeared in the late 1970s, when flow from western Siberia's largest fields started to fall. After an unprecedented gain of 640,000 b/d in 1975, the nationwide increase fell to 570,000 b/d in 1976, 530,000 b/d in 1977, 510,000 b/d in 1978, 320,000 b/d in 1980, 150,000 b/d in 1981, and only 70,000 b/d in 1982. It was anticipation of this trend and the problems causing it that led to the CIA's controversial 1977 analysis.
MOSCOW'S RESPONSE
Shortly after the intelligence agency's report, Moscow rushed equipment, materials, and workers, together with the required increased funding, to western Siberia. By 1983 oil production responded grudgingly to the huge rescue effort, and nationwide flow rose 80,000 b/d from 1982 output.
But in 1984, the U.S.S.R. suffered its first decline in oil flow since World War 11. In 1985, overall production fell to 11.9 million b/d, the lowest level in 5 years. Vigorous recovery followed in 1986, when flow rose by 400,000 b/d, and in 1987, when output increased by 180,000 b/d to the U.S.S.R.'s all time peak flow of 12.48 million b/d as the annual average.
Soviet gas production, on the other hand, has gained every year since World War 11. Annual output hikes were phenomenal during the late 1970s and early 1980s.
Yearly increases in flow rose from 317 bcf in 1972 to more than 1 tcf in 1975 and to a record 2.1 tcf in 1985. Annual gains have since fallen to 1.5 tcf in 1986, 1.4 tcf in 1987 and 1988, slightly over 1 tcf in 1989, and 760 bcf in 1990, when total flow was 28.7 tcf.
If the 0.3% hike in gas production during first quarter 1991 sets the pattern for the rest of the year, the annual gain would be only about 86 bcf, lowest since the 1950s.
The U.S.S.R.'s unmet official target for 1990 gas flow was 29.5-30 tcf. Unless annual gas production increases make an enormous recovery very soon, there is apparently no possibility of the U.S.S.R.'s attaining its original long term objectives of more than 35 tcf in 1995 or the 45 tcf predicted for 2000.
POTENTIAL STILL HIGH
Convinced that most estimates of the U.S.S.R.'s oil reserves are on the low side, one American expert on the U.S.S.R.'s petroleum industry says flatly that the Soviet Union's main problems are organization and that there is no lack of petroleum resources.
It's pointed out that western Siberia, which produces close to two thirds of the U.S.S.R.'s crude and condensate, is still relatively lightly explored. While no supergiant fields such as Samotlor, where production peaked at more than 3 million b/d, may be found, the area is still very promising for discovery of medium sized deposits, extension of existing fields, and discoveries below the prolific Cretaceous.
Including proved and part of what would be considered well substantiated probable reserves by Western criteria, western Siberia is believed to have a reserves/production ratio of about 20:1. Depletion of fields in other leading oil provinces such as the Volga-Ural area may have reduced the overall Soviet R/P ratio to roughly 15:1, a figure far below that of some Persian Gulf nations but well above that of the U.S.
Western geologists have estimated Soviet proved oil reserves at 5-6% of the world total. Various authorities put the U.S.S.R.'s "explored" gas reserves at about 1.8 quadrillion cu ft and estimate that they constitute 40-50% of global supply.
During the period of maximum euphoria regarding western Siberia's oil reserves, Soviet officials forecast peak area production of 10 million b/d or more. Actually, according to estimates by International Geology Review, western Siberia's crude/condensate flow grew rapidly from about 2.9 million b/d in 1975 to 6.25 million b/d in 1980 and nearly 7.57 million b/d in 1983.
Following a dip to 7.36 million b/d in 1985, western Siberia's oil production climbed to 7.9 million b/d in 1986, 8.25 million b/d in 1987, and a peak 8.3 million b/d in 1988. The area then became the main factor in the U.S.S.R.'s recent crude/condensate output decline, with flow falling to 8.12 million b/d in 1989 and an estimated 7.5 million b/d last year.
WORKER UNREST
Hopes for again raising western Siberia's oil production could be dashed by increasing unrest and threatened strikes by the area's disgruntled petroleum workers. Partial and brief stoppages of oil deliveries from Tyumen Province to European Russia have already occurred.
The Moscow newspaper Trud reported that unrest among oil and gas workers in western Siberia and other areas reached fever pitch in April. It said that the petroleum workers had not received any response to the letter of complaint sent to the U.S.S.R. Supreme Soviet in February.
According to the letter, Soviet petroleum workers have never suffered such indifference to their legal and economic rights as they have now. Never has the standard of living fallen so low, leaders of the oil and gas producers' trade unions asserted.
"The programs for development of the oil and gas industries and of the government's oil and gas construction concern are in a critical state," they declared.
"Under conditions whereby the government allocates 100% of fuel production to itself and sets low fixed wholesale prices for it, we have no money despite government promises.
"We have not yet reached agreement on buying urgently needed material resources abroad. Construction organizations are refusing to sign contracts to build housing and other social facilities.
"It is impossible for petroleum industry personnel to live and work normally. The atmosphere is exceedingly tense despite government promises."
V. Sedenko, chairman of the central council of the oil and gas production workers' trade unions, criticized a decree by the U.S.S.R. Cabinet of Ministers providing for centralized distribution of material and technical resources to petroleum associations in 1991 to ensure planned volumes of oil production, for gas treatment and production, and for geological exploration.
The decree, he said, exists only on paper.
"Delivery of oil pipe and pump-compressor pipe, together with such equipment as Christmas trees, hoists, and pumping units, is only 41-85% of contracted amounts. Shipments of drilling rigs and other equipment have also been disrupted.
"The situation with respect to food for petroleum industry personnel working in the extreme conditions of the far North is very serious. It is creating an explosive atmosphere."
Sedenko said that if the government didn't act quickly to meet oil workers' demands they would resort to "defensive protest actions."
THE REGIONS
Best prospects for finding and producing new reserves in western Siberia continue to be in Tyumen Province, which accounts for about 96% of western Siberia's oil. Tomsk Province, southeast of Tyumen, has been a disappointment to the Soviets, with crude/condensate flow increasing only from 262,000 b/d in 1985 to 300,000 b/d in 1987-90.
No commercial oil production has been reported from Movosibirks or Omsk provinces in the southern sector of the Western Siberia basin, although small fields have been discovered.
Crude/condensate flow continues to drop slowly in the Volga-Ural area, the northern Caucasus, the Ukraine, Byelorussia, and especially in Azerbaijan, which has been racked by ethnic unrest and strikes. Flow from Azerbaijan, the U.S.S.R.'s leading oil producer just before and after World War 11, has fallen from 445,000 b/d in 1940 and 430,000 b/d in 1965 to 260,000 b/d now--more than three fourths from offshore fields in the Caspian Sea.
The Komi Autonomous Republic in the northeastern corner of European Russia has also failed to live up to expectations of Soviet oil industry officials.
Production was projected to reach 500,000 b/d in the area's Timan-Pechora basin during the 1980s.
Instead, after reaching 380,000 b/d in 1980-85, crude/condensate flow began to decline and is now believed to be only about 300,000 b/d.
Timan-Pechora reserve estimates have been greatly downgraded recently, although good prospects appear to remain in the Pechora Sea, an eastern arm of the Barents Sea.
The Soviet Union now produces relatively little oil in central Asia, where Turkmenia--the leading area--once reached 324,000 b/d. Flow is now down to less than 120,000 b/d.
A speaker at the latest plenum of the U.S.S.R. Communist Party in Moscow complained that smaller Soviet petroleum producing regions are suffering from the same neglect and lack of funds that are plaguing western Siberia. Turkmenia's prime minister, Kh. Akhmedov, disclosed that development work in existing oil fields has fallen by more than half.
"Oil production has also declined in Turkmenia, forcing hundreds of highly qualified workers to become unemployed in a region already hard hit by social and economic problems," Akhmedov declared.
"The Ministry of Oil Industry in Moscow has ignored Turkmenia's pleas and reduced the volume of geological exploration while cutting investment in developing fields with deep pay zones."
According to Akhmedov, geologists believe that Turkmenia has large undiscovered oil reserves onshore and on the republic's Caspian Sea shelf.
Uzbekistan, Kirgizia, and Tadzhikistan together produce only about 60,000 b/d, according to International Geology Review.
The huge Kazakh Republic north and east of the Caspian Sea remains a puzzle with respect to future production. There has been little exploration of very deep subsalt formations in the Pre-Caspian depression north of the Caspian Sea, where large gas and condensate reserves may exist.
Big differences of opinion prevail among Soviet and Western geologists regarding the hydrocarbon potential of eastern Siberia. One prominent Russian geologist during the early 1980s asserted that eastern Siberia's oil potential rivaled that of western Siberia and might be even greater.
But eastern Siberia's oil production, excluding Sakhalin Island in the Far East, is believed to be less than 1,000 b/d. Plans to build a small refinery near the Lena River in Yakutia have fallen far behind schedule.
Dr. James W. Clarke of the U.S. Geological Survey believes prospects for finding large oil reserves in eastern Siberia are favorable and notes that the huge area is still very lightly explored. He sees considerable hydrocarbon potential in the ancient Vendian and Lower Cambrian formations.
KEY QUESTIONS
Salomon Bros. emphasizes that the question is not whether the U.S.S.R. has the resource base to remain the world's largest oil and gas producer; rather, it is whether the nation has the technology, organizational skills, and political unity to develop its vast petroleum resources in a sensible and far sighted way.
Salomon Bros. analysts Bernard Picchi and Ann Kohler in a recent report agreed with Gustafson that the current disarray in the U.S.S.R.'s petroleum industry--falling production, soaring costs, environmental travesties, labor unrest, and union/republic rivalries--constitutes "crisis amid plenty."
Political and economic causes of this crisis are clearly evident, Picchi and Kohler declared.
"The political cause is that most key decisions--from allocation of exploration capital to selection of exploitation targets to volumetric production goals and the siting and selection of pipelines, compressors, and roads--are made by a handful of (administrative) officials responsive only to senior Politburo politicians.
"Field managers, in turn, respond to the production targets spelled out for them in Moscow-drafted 5 year plans." Efficient management of natural, human, and financial resources is thus subordinated to "politically inspired production mandates."
The analysts noted that during the early years of western Siberia's development program the sheer size of the resource targets forgave many sins. They said that among the many hasty shortcuts Soviet managers have taken over the years, the most important are:
- Reliance on fast but imprecise turbodrill boring rather than rotary drilling.
- "Mechanization" (waterflooding) almost immediately after well completion.
- Failure to use gas lift as a supplementary drive mechanism in older fields and related flaring of gas.
- Routing long distance gas pipelines from western Siberia close to one another, saving the cost of building multiple service roads and other support facilities but making the lines vulnerable to calamitous accidents.
- Injection of wet natural gas in some gas trunk lines, leading to internal corrosion of the pipe, compressor failure, and pipe breaks.
STARTING ANEW
The Salomon Bros. report said that ethnic unrest early last year in Azerbaijan, which still produces 60% of Soviet oil field equipment, forced the U.S.S.R. to curtail 1990 drilling activity. It quoted Soviet oil and gas ministry officials as stating that the U.S.S.R. last year drilled 11 million ft less than it would have--the estimated equivalent of 1,500 wells--because of equipment shortages.
The Salomon Bros. analysts asserted that even if the U.S.S.R. had the funds to remount an aggressive exploration and development campaign, it probably could not reverse the oil production slide.
"Current water cuts and depletion rates seem too high for such a turnaround. The Soviets must start anew with fresh exploration prospects, better paced development, more effective equipment, and new ideas about managing the country's energy resources as well as its energy consumption pattern.
"Western oil firms, which can provide the investment capital as well as the technology and management skills necessary for such a shift, are the best source--in truth the only source--of these funds."
Thus far, the report declared, the Soviet Politburo has given a lukewarm welcome to Western investments in the petroleum sector.
"Officials want the West's capital and equipment but have ambivalent feelings about Western ownership of (the U.S.S.R.'s) 'national patrimony.' The picture is complicated further by frictions between the republic governors and the (central) union government.
"A pattern has developed in the past year: The union government awards Western oil firms concessions in politically truculent republics. The locals, in turn, quickly sabotage Moscow-inspired plans to take their resources.
"When the local governments, in turn, have made their own arrangements with Western firms, the ventures seem destined to snag on Moscow's red tape."
The Salomon Bros. report concluded that until the Soviets sort out their political and legal problems, Western firms for the most part will not touch Soviet energy investments.
"There is hope, however. A few low profile ventures seem to be succeeding. The Soviets at least now seem to understand the need for reform and outside help in their energy sector.
"Although (oil) production is now falling sharply, that situation could turn around in the next several years if the legal, administrative, and political roadblocks to progress are removed or at least lowered."
Copyright 1991 Oil & Gas Journal. All Rights Reserved.
