Authorities have their face burnt with associated gas

27.07.2011 — Analysis

The prosecution authorities of Yugra have started systematically to penalize extracting companies for flaring of associated petroleum gas. In this way the government authorities demonstrate their disaffection with the performance of oil companies that derailed the implementation of the program for gas recovery. In the meantime, experts state that much of the blame lies with the government authorities that failed to consolidate efforts of the public and private sectors in developing of cost-effective gas processing technologies. The "RusBusinessNews" columnist has found it out that officials are not interested in imposing stringent control over mining development, being totally dependent on petroleum revenues.

The environmental prosecutor's office of Yugra accused the NAK AKI-OTYR OJSC of unauthorized flaring of 18 million cubic meters of associated petroleum gas. The company recovers only 57% of gas, whereas the license for the right to use subsurface mineral resources requires processing of 95%. The similar situation is observed in other oil companies operating in Yugra. Previously, the courts of the autonomous district imposed a penalty in the amount of 1.2 million rubles on LUKOIL-Western Siberia, LLC, ST Goloil CJSC, RFK CanBaikal Resources Inc., Tomskneft-VNK, OJSC, which flared more than 60 million cubic meters of gas within a few months in 2011. The court compelled all these companies to organize recovery operations in compliance with the applicable regulations.

Processing of associated petroleum gas has been discussed for a long time. In 2004, the Yugra authorities declared that recovery of associated gas would reach 95% by 2008. The intention was secured by the respective programs prepared by oil companies. However, in 2009 the Yugra Government Department of Investment, Science and Technology reported that in 2008 only a fifth of associated gas was flared. Experts tend to doubt about this number: The metering of associated petroleum gas is still far from being satisfactory in Russia, while oil companies are not willing to disclose the actual situation. It is evident that the program for recovery of 95% of associated gas was not fulfilled.

In 2009, Alexander Filipenko, the Yugra governor, offered to build an oil-and-gas cluster in the region, which would allow oil producing companies not only to reach the established standard in gas processing, but also to set up production of ammonia, polyethylene, propylene, nitrogenous fertilizers, films and pipes. Today, the project is still at the stage of eye-catching promotional materials that travel from one exhibition to another. Oil producing companies did not go far in recovery of associated gas: According to the Ministry of Natural Resources of Russia, LUKOIL is still flaring 23% of associated gas, TNK-BP - 14%, Rosneft - 47%, Gazpromneft - 44%.

In 2011, the new governor of Yugra, Natalia Komarova, introduced an investment project for advanced processing of associated petroleum gas at oil fields; she believes that the project will help to reduce greenhouse gas emissions, create new jobs, adopt advanced recovery technologies, and increase efficiency of transportation of associated gas products. The feasibility of these plans is doubted even by Yuri Trutnev, the Minister of Natural Resources, who recently has stated that most of the participants of the fuel market are not ready to recover 95% of gas by 2012, though the recovery level is realistic.

It is obvious that oil companies are sabotaging the government ordinance, while regional authorities, who must supervise over performance of license agreements, are trying to appease them. The fact becomes clear in the context of Tatarstan's experience, which has been recovering the lion's share of associated gas for quite a long time. The regional government followed the "carrot and stick" policy to put it into action: On the one hand, the authorities gave oil producing companies assignments in supply of ethane, propane-butane, isobutane to petrochemical companies; on the other hand, they conciliated differences between gas owners and gas processors, arranged for transportation of dry gas via Gazprom pipelines and provided problem-free conditions for operation of small gas-generator plants consuming associated gas.

In 2008, experts said that if other Russian regions capitalized on experience of Tatarstan, the country, as a whole, would be able to recover up to 95% of the associated petroleum gas even before 2012. However, the advice was not followed. Scientists explain this phenomenon by the fact that the conditions for oil production in Yugra are much more challenging, and the infrastructure is not as well developed as in Tatarstan, to say nothing about North America.

Anton Maksimov, Deputy Director of the Institute of Petrochemical Synthesis at the Russian Academy of Sciences, says that Yugra has a lot of gas-and-oil fields that make no economic sense for building of gas transmission lines. Therefore, there is no sense in dry and wet gas separation. The investor who is offered by Natalia Komarova to set up high-level processing operations at an oil field will realize very soon that approximately 30% of gas can be flared to receive electric power, some part can be re-injected to increase pressure, while the rest will be in the company's ballast. The fat fraction can be recycled and converted into straight-run gasoline at small-size plants, but its transportation causes problems. Scientists suggest that it should be pumped into the oil pipeline; however, gasoline can damage crude oil. Therefore, there should be innovative technologies for processing of wet gas to allow coexistence of two products in one pipe. That is the problem the Institute of Petrochemical Synthesis is trying to solve at the moment.

Vladimir Arutyunov, a professor of the Gas and Chemistry Department at the Gubkin Russian State University of Oil and Gas, thinks that such technologies have not been developed solely through the fault of officials: "The reason for the failure of the associated petroleum gas recovery program should be looked for in economic demotivation of large companies that are not interested in solving this problem (understandably and naturally), in the fact that small companies have no economic capacity to be able to develop the required innovative technology by themselves (which is also evident and natural) and in unwillingness of officials to spearhead pooling and financing of joint efforts of the government and mining companies to develop the required innovative technologies (which cannot be understood and is not natural). Without this, all the legislative efforts will be useless and senseless in this area".

Vladimir Koltsov, head of the technological department at the NizhnevartovskNIPIneft, OJSC, point out that the Yugra authorities make no attempt to use such instrument as the license for the right to use subsurface mineral resources to solve the problem. They explain that the revocation of the license will result in lost tax revenues to the budget. The expert sees this explanation as odd. Even if the price is $150 per barrel, oil producing companies are still going to refer to insufficient profits that prevent them from recovery of associated gas. However, according to V. Koltsov, they will be able to incur additional expenses even if the price per barrel is much lower than it is now. It will result in increased production cost of oil, but there will be no adverse impact on the budget: having "low" profitability, managers at oil companies still receive billion bonuses, and Swiss banks are running short of storage space to stockpile petrodollars. Therefore, when issuing a license, it should be agreed "ashore" that all expenses on recovery of associated petroleum gas will be included in the oil field development project. Those who ignore the regulatory act should be taken to court.

Time after time, experts inform officials about their proposals, but the issue is still unsolved. The reason is not difficult to guess. According to V. Arutyunov, the 95% is actually pulled out of a hat, having no economic grounds underneath. Each oil-and-gas field need individual calculations, taking into account specific environment and existing technologies, with further application of these calculations in the development project. Apparently, the authorities are not willing to spearhead this work, as feasibility studies may reveal that the 95% level is not realistic with today's taxation.

In the meantime, experts have no doubt that the Russian government will defer the fulfillment of its ordinance concerning associated petroleum gas recovery to a later time. It may even forget about it for good. There is ample evidence that, eventually, recovery of associated gas will be brought by large companies to the economically feasible level of 70-80% (which will be adequate to the real-life conditions specific to each individual company условиям), and that is how it will play out. The government will never drive them into bankruptcy, as it lives on the unearned income received from sales of primary resources. Small companies (their number exceeds one hundred) will face more difficulties trying to cope with actual penalties; however, their liquidation is also not feasible from the government's perspective. Thus, the government authorities are most likely to be the only adversely affected party in the situation with associated gas recovery. However, they are used to losing face.

Vladimir Terletsky