Unrealised potential

31 July 1995 00:00  [Source: ACN]

A shift in investment strategy could make elusive Russian resources more accessible

By Mary Heathcote

IN principle, the opening up of the former Soviet Union (FSU) brought with it the promise of new and plentiful energy supplies virtually within the Asia Pacific region. In practice, the logistical problems of tapping these resources and the political difficulties associated with investing in the economically straitened Russia and its neighbouring republics has dampened the initial enthusiasm of prospective Asian investors.

In 1992, Japan's Ministry of International Trade and Industry (Miti) estimated that Russia could supply 1.5-2m tonne/year of LPG to Japan alone, for example. However, the distances involved are enormous, even from Sakha in the Russian Far East. Though Sakhalin is much closer, development and operating costs will be high. Continuing political disagreement over the sovereignty of the islands north of Japan is also a key factor in clouding the issue.

Nonetheless, the republics of the FSU urgently need foreign investment in their oil and gas industries, particularly petrochemicals, and the sheer size of the reserves will be sufficient to justify foreign involvement in a phased, selected programme of development, consultants at Poten & Partners believe.^* But a different approach to investment will be required.

The tendency by both FSU governments and foreign investors has been to promote and give priority to mega-projects. 'In our view, this single-minded focus has been a mistake,' the US consultancy emphasises. 'Very attractive returns with significantly less risk are available for much smaller projects that will enhance the economic and physical infrastructure in Russia and other countries of the FSU. In turn, these will lay the framework for more efficient investment in larger projects.'

The extent of oil and gas resources in the FSU is not a problem, Poten says. But their location and utilisation are. FSU gas reserves were estimated by Russian gas conglomerate Gazprom at 545 000bn m³ at 1 January 1991, 47 070bn m³ of this in Russia, 7440bn m³ in Turkmenistan, Kazakhstan, Uzbekistan, and Ukraine, and 24bn m³ in the other republics. Most gas production is non-associated and originates in five fields in the Yamalo-Nenetsk Okrug in the north of Tyumen Oblast. Output at the Urengoy, Yamburg, Medvesh'ye, Severo-Urengoyskoye and Vyngapurskoye fields has totalled about 550bn m³/year since 1991, with Uregoy and Yarnburg alone accounting for about 450bn m³/year, Poten says.

Associated gas production in Tyumen Oblast in 1993 was reported as 28.1bn m³, of which 4.8bn m³ was flared, though both these figures are probably below what actually occurred, Poten says. Flaring probably increased in 1994 because of transportation constraints.

LPG reserves in Russia are around 1.3bn tonne, and ethane reserves about the same. About 81% of the total is found in non-associated gas and 19% in associated gas, the majority of each located in West Siberia.

Contraction of the economy and deterioration of infrastructure and the oil industry have forced a 42% drop in LPG production in the FSU between 1990 and estimated 1995 levels. Production is expected to rebound sharply over the next 15 years, however, reflecting investment in gas-processing plant, oil and gas production and refining, coupled with the easing of constraints that currently limit the production of gas liquids or make it economically unattractive, Poten predicts.

LPG consumption has fallen in all sectors. Resident-commercial consumption is estimated at 3m tonne this year, down from 5.3m tonne in 1990. Petrochemical consumption has dropped from 3.5m tonne in 1990 to an estimated 1.7m tonne this year. Both are expected to reverse this trend, and petrochemical demand is expected to rebound vigorously, Poten says. Demand currently is mainly for steamcracking and synthetic rubber production, but other uses, notably MTBE production, are expected to gain in importance after 2000.

Gas-processing is primarily oriented to pipeline gas. LPG, C5+ streams and ShFLU (a wide-fraction, light-hydrocarbon mixture composed about 70% of propane and butane) are a necessary but not always welcome or economic by-product, Poten says. All Russia's non-associated gas-processing plant is west of the Urals. Over 70% of its associated gas-processing capacity is in West Siberia. Capacity to produce fractionated gas liquids at these plants is 11.9m tonne/year.

Non-Russian capacity to process non-associated gas is in Uzbekistan, and about two-thirds of associated gas-processing capacity in Kazakhstan.

Fifteen of Russia's 29 refineries and five in other republics can produce LPG. However, all FSU refineries have outmoded equipment and technology, lack of upgrading capacity, and poor environmental performance.

Both production and fractionation capacity is grossly underused. The West Siberian gas-processing plants operated by Sibneftegaspererabotka (SNGP) produced 1.8m tonne of ShFLU in 1994, compared with 3.1m tonne in 1992. The Tobolsk Petrochemical Combine fractionated 1.65m tonne of ShFLU in 1994, 55% of its 3m tonne/year capacity. Overall refinery production of LPG in 1994 was 1.5m tonne, compared with 2.6m tonne in 1990.

^*The study Gas liquids in Russia and the FSU is available from Poten & Partners, tel +1 212 230 2000, fax +1 212 355 0295.

Potential investment opportunities

• Most urgent - upgrade of oil and gas wells, easing of infrastructure constraints, modernisation of existing gas-processing, refining and petrochemicals
• Second phase - oil and gas development, more complex revamping and expansion of refineries, gas-processing and petrochemical plant, environmental compliance
• By 2000 - exploration and development in new areas, new refinery, gas-processing and petrochemical plant construction, supporting infrastructure

By: Mary Heathcote, Asian Chemical News
+65 6780 4359

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