Yamal gas is turning into gasoline

23.11.2011 — Analysis

By putting the Nord Stream gas pipeline into operation, Russia has substantially improved its potential in blue fuel export operations. The further extension of the gas transportation network will require new contracts and new gas fields. The strategy crafted for development of Yamal - the main gas storehouse of Russia - provides for ramping up hydrocarbon production both on shore and off-shore in the area of the northern seas. High expectations are pinned on the reserves of low pressure gas, which is already being produced and converted into motor fuel in some other countries worldwide. Russia, as the RusBusinessNews columnist has found it out, is still far away from cutting-edge technologies, but the decreasing levels of production at the traditional fields entail the urgent solution of the issue.

Today, 85% of all the Russian natural gas is produced within the territory of the Yamal-Nenets Autonomous District (YaNAD). The total reserves of the Medvezhie, Yamburgskoye, Urengoyskoye and Vyngapurovskoye fields, which have been developed vigorously within the recent decades, are estimated at 16 trillion cubic meters. The fat years of these fields have already passed - the gas output is steadily going down. For example, at the Medvezhie field, according to experts of the Russian Gas Society, the annual gas output had decreased from 500 to 30 billion cubic meters by the mid 2000s. Consequently, the production cost of "blue" fuel is also rising: When the field reserves reach 70-85% depletion, it increases many times. At the Medvezhie, Urengoyskoye and Yamburgskoye fields, the natural gas recovery levels reached 60-80%, thus, necessitating the adoption of a new development strategy for the Yamal-Nenets Autonomous District till 2020.

In the next years, the higher gas and oil production levels are planned to be reached both through development of the older centers (the Nadym-Pur-Tazovskoye interfluves area and the Krasnoselkupsky District) and through development of new fields located on the continental shelf of the Kara Sea. By today, 32 fields have been discovered on the Yamal Peninsula and within the water area of the Gulf of Ob and the Kara Sea. Experts estimate that the explored onshore reserves alone amount to 10.7 trillion cubic meters. Another 2 trillion cubic meters are awaiting their development at the Leningradskoye and Rusanovskoye fields.

The development of the new resource areas is scheduled for 2012. The development will start with the Bovanenkovskoye field where the annual output is expected to reach 115 billion cubic meters in eight years. Then, operations will start at the Kharasaveyskoye and Kruzenshterskoye fields; due to their development the output within the Bovanenkovo group will total 220 billion cubic meters. The launching of operations at the fields of the Tambei and South group will result in the output of about 360 billion cubic meters of natural gas.

Alexei Belogoriev, the head of the Expert and Analysis Department at the Institute of Energy Strategy, thinks that the Bovanenkovskoye field will not have difficulties reaching the estimated output, provided that the demand for gas remains stable. Taking into account the present-day export sales to Europe and uncertainly about the construction of the Russia-China gas pipeline, the annual output of 115 billion cubic meters will not have any sense: 70-80 billion is sufficient to perform obligations under the existing contracts.

The decreasing demand for Yamal gas can result in temporary postponement of development of the upside fields. Experts think that this intermission can be used to try out technologies for production of low pressure gas, which is typical of the existing YaNAD fields, totaling about 4 trillion cubic meters. According to Alexander Brui, the head of the Geological Exploration and Subsurface Use Division at the Department for Natural Resources Regulation, Forestry Relations, Oil and Gas Sector Development, gas can be extracted at the formation pressure of 75 atmospheres, while it sometimes drops below 20 atmospheres after the recovery of the most part of the field. The costs of low pressure gas production increase significantly due to additional equipment, application of other drilling methods, etc. Russian companies have only a pilot technology of low pressure gas production. Its application at the field similar to the Yamburgskoye field resulted in a 2-3-fold increase in production rates.

However, the problem is that Gazprom is still not ready to make investment in low pressure gas production: the costs of its recovery and treatment increase, but the tax deductions to the state remain unchanged. The level of development of the older fields depends directly on the pricing and taxation policy pursued by the government. A. Brui thinks that without tax remissions operations related to production of low pressure gas and, actually, development of oil reserves with challenging reservoirs is going to encounter numerous difficulties.

Vladimir Arutyunov, a professor of the Gas and Chemistry Department at the Gubkin Russian State University of Oil and Gas, thinks that gas companies demand benefits from the government for justified reasons: Costs of extraction of low pressure gas and its transportation to consumers are much higher than the costs incurred when gas "flows naturally" at high-pressure fields. "However, in my opinion, the expert notes, the comprehensive and feasible solution could be reached through development of gas and chemistry technologies that involve conversion of low pressure gas into easily transportable and much more expensive chemical products and motor fuels. This problem is facing all the gas producing companies, but I am not sure that anyone looks into this issue, as such operations are troublesome and costly, bringing much less profit than operation of conventional fields. However, this problem is facing all the producing companies, Gazprom, in particular".

The YaNAD government thinks that the most rewarding approach to application of low pressure gas could be its conversion into synthetic liquid fuel (SLF). The SLF factory is planned to be built in the vicinity of Nadym, i. e. not far from the fields experiencing the decreasing levels of output. High-quality diesel fuel, gasoline and naphtha will be produced by using the GTL (gas-to-liquid) technology; the estimated output is 3 million tons a year. The experts of the YaNAD government explained that at the moment the government authorities are looking for an investor. It would be logical to give this project into the responsibility of Gazprom; however, it may be a foreign investor. The GTL technology has been tried out in countries of South-East Asia where it has shown good results: In addition to diesel fuel, gas can be used to produce lubricants and cosmetic raw materials.

The construction of the factory could become a profitable business project for Gazprom, taking into account that development of new fields on the shelf requires approximately the same expenses as utilization of low pressure gas. Jan Helge Skogen, the president of Statoil in Russia, has recently announced that the project for the development of the Shtokmanovskoye field is not economically profitable and cannot be implemented without substantial tax relief offered as a reduced tax rate applied to mineral extraction operations and export duties for gas.

Experts are sure that the government authorities will have to deal with the issues related to production of low pressure gas, as their solution is important for Russia's security of energy supply and thrifty use of the available resources.

Vladimir Petrov