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Focus on Gazprom production

15 Mar 2006 00:00:00 | egm

Taking back production assets is one way for Gazprom to try and halt the drop in gas production, particularly where other companies have already invested in developing the assets. Northgas, a former Russian independent gas producer which was last year taken back under Gazprom control, plans to produce 3.858 billion cubic metres (Gm3) this year, up 22.8% on the 2005 figure of 3.142 Gm3.

“The increase in Northgas’ forecast production volumes has been made possible in part due to the regularising of relations with OAO Gazprom and agreement on the transfer of 51% of Northgas to the holding”, the company said.

Northgas received the production licence for North Urengoy in 1994 and was regarded as one of the dubious Gazprom asset divestments that occurred under the chairmanship of Rem Vyachirev. A few years ago Gazprom began its efforts to regain control of Northgas by disputing the licence and there was much to-ing and fro-ing through the Russian courts involving the two companies and ministries conferring the licence. However the real pressure on Northgas came not so much from the courts as from Gazprom refusing pipeline access. Last year Northgas’ owner Farkhad Akhmendov finally ceded control over the company saying “it is better to have 49% of shares in an asset with no problems than 100% in an asset with problems”

The settlement between the two companies meant that Gazprom would buy all of Northgas’ production at a price no lower than the regulated price set by the Russian federal tariff service. Gazprom has now said its contract with Northgas is “to take up to 4.2 Gm3 dry gas this year at a price of RUB 450/thousand (K) m3 (excl. VAT)”. This price, equivalent to $16.1/Km3, represents cost plus a small margin according to Mikhail Korchemkin of East European Gas Analysis. “But it was an offer Northgas could not refuse – Gazprom is using similar bullying tactics in Russia today to those of Standard Oil in the US in the 1880’s. The same thing is happening at Beregovoye where Gazprom is forcing Itera to cede control of the production company Sibneftegaz by refusing pipeline access ”.

Northgas says it will continue to develop the West Dome of the North Urengoy field, assigning particular importance to the preparation of necessary permissions and documents regarding both the West and East domes. Capital investment in 2006 is planned at $27.410 million. The company is regarded as being very efficient, having developed the difficult N. Urengoy deposits at two or three times less than the development costs of similar deposits in Russia. Northgas still retains some of its former managers so it may be able to maintain its efficiency despite its takeover by Gazprom, a notoriously inefficient producer.

As at 1.1.2006 Northgas had drilled 41 wells of which 35 were considered commercially viable. Total neocomian reserves at N. Urengoy are 353.08 Gm3 gas and 74.72 million tonnes of oil and gas condensate.

Shtokman reserve increase boosts Gazprom figures

With respect to reserves it has now been reported that the increase in Russian gas reserves for the first time has topped production figures. In 2005 the increase in Cat A,B, C1 gas reserves in Russia came to 660 Gm3 while annual production came to 598.2 Gm3. The reserve increase was attributed to the recently upgraded reserve figure for Shtokman, which had been 3.2 trillion m3 but has been adjusted upwards following latest exploration data. The exact figure of the latest increase in Shtokman reserves is not known but thought to be 10%.

Though the figures for Russian reserves are increasing Gazprom’s production in 2005 – 548 Gm3 - only showed a 0.5% increase from the 2004 level (total Russian production rose 1.1% over the same period). Gazprom has said that in order to meet the needs of the domestic market and to fulfil export requirements it planned to increase its gas production up to 550-560 Gm3 /yr by 2010 and 580-590 Gm3 by 2020. Up till 2010 this increase would be achieved by giving priority to the Nadym-Pur-Taz region because this area is nearer existing transport infrastructure. After 2010 it is planned to bring on production in the Yamal peninsula, the Arctic sea shelf, the Ob and Taz estuaries, Eastern Siberia and the Far East. Gazprom added that its development strategy envisaged the “complex synchronization of the development of capacity in production, transport, processing and storage of gas. This will allow the optimisation of the company’s long term investment portfolio”. Peak production has now been reached at two of the fields in these areas. The Vyngayakhinskiy and Ety-Purovskiy, operated by Noyabrgazdobycha as one complex, reached peak production of 20 Gm3/yr in February. The fields are 40 km apart but served by one gas processing plant and compressor station which meant the capital costs of the project could be minimized.

For this year however Gazprom has said it expects production to remain around last year’s level, due to depletion of the easily developed horizons in the older production fields Medvezhe, Urengoy and Yamburg. High international gas prices have meant that it has been able to concentrate on exports rather than production, Denis Borisov of investment group Solid told the Russian daily Vedomosti. The company can buy gas from independents at prices of $15-$22/Km3 and export it for over $200/Km3 – and without having to cover production costs. The independents produced 96.6 Gm3 in 2005. The cost of production is also increasing in Russia now that the fields available for development are becoming more difficult to develop. Gazprom also has to digest its acquisition of oil major Sibneft, where ironically oil production has started to drop off. Mikhail Lozovoy of Novatek said that a lack of transport infrastructure was also holding back production both for Gazprom and the independents. In 2006 Gazprom says it will prioritise gas transport and plans to put 60% of its total RUB 310.1 billion planned investments into this area.

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