Measures Urged to Boost Oil Recovery
02.04.2008 (12:06) | RBC
Oil industry officials are concerned with declining oil recovery rates in Russia.Arkady Bokserman, adviser to Zarubezhneft General Director, told RBC Daily that the Federal Energy Agency’s working group was developing a plan to boost oil recovery levels, which could be approved as a federal program before the end of this year. The program could help increase Russia’s oil production potential by at least 160 million tonnes a year by 2020, also increasing oil reserves by up to 4 billion tonnes, according to Bokserman. To meet the target, the government should exempt 5 million tonnes of oil from tax for five to seven years, experts calculated.
The concept of the program to boost Russia’s declining oil recovery levels was developed in 2005 by the State Duma’s committee for the use of natural resources in cooperation with experts from oil companies such as Zarubezhneft, RITEK, Gazprom Neft, as well as research workers and oil industry officials. The idea was to amend the law on subsoil resources and the Tax Code, encouraging the use of enhanced oil recovery technology through tax incentives for the production of high viscosity heavy oil and production from tight formations.
Oil recovery efficiency in Russia has dropped from 51 percent in 1960 to 25-28 percent in 2008, against more than 45 percent in the United States. The same level can be achieved in Russia with the help of enhanced oil recovery technology.
The first meeting of the working group for the development and industrial use of enhanced oil recovery methods was on February 14, and the next meeting is scheduled for April, according to the Federal Energy Agency. Officials from the Industry and Energy Ministry, the Natural Resources Ministry and Khanty-Mansi municipal authorities take part in the discussions, as well as research workers, managers and oil company experts, including from Zarubezhneft, LUKoil, RITEK, Gazprom Neft, Tatneft and Assoneft.
Arkady Bokserman, deputy chairman of the working group, said the group recognized the need for tax incentives to encourage oil recovery in Russia. Zarubezhneft proposes that up to 5 million tonnes of oil produced with the use of enhanced oil recovery technology should be exempt from tax for a period of five to seven years. In addition to exemption from the oil production tax, profit tax exemptions should also be granted for investment in such projects, selected on a competitive basis, Bokserman stressed.
Oil companies agree that tax incentives are needed to stimulate oil recovery levels, but they doubt that the government could grant such concessions. A source in LUKoil said such tax incentives could support investment in hard-to-recover oil reserves, while current oil production tax preferences remain inefficient because of the requirement to report the amount of such oil. At the same time, he expressed doubts about the expediency of lifting customs duties on such oil as it could also be intended for the domestic market.
Elena Korzun, General Director of the Assoneft oil company, believes that tax incentives should not apply to specific quantities of oil as it would lead to complicated administration schemes. It would make more sense, she argues, to use them at the level of technology, instead of granting them on a competitive basis. A source in the Natural Resources Ministry agrees, noting that the issue was to be discussed by a government commission back in June 2007, but the meeting was postponed because the document needed more work. He said the Natural Resources Ministry had criticized the program concept as failing to meet the requirements of subsoil use legislation and not in line with the administrative reform. At the same time, the ministry supports the idea of using enhanced oil recovery methods, hoping that in future, this would help develop oilfields like the Bazhenovskaya suite in Western Siberia, with estimated oil reserves of between 800 billion to 1 trillion tonnes.
According to the Economy Ministry’s scenario for Russia’s socioeconomic development until 2020, the use of enhanced oil recovery methods could increase Russia’s oil reserves by up to 5 billion tonnes, including by 800 million in 2008-2010. If the government accepts Zarubezhneft’s tax incentive proposal, oil companies will save about $667 million a year on the oil production tax alone, estimated Denis Borisov, at IFC Solid. He added that the use of enhanced oil recovery technology would help reduce the decline in oil production from a number of West Siberian oilfields, also cutting the costs for the development of tar sand formations and the production of high-viscosity oil.
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