OREANDA-NEWS. September 15, 2009. Angara river area is turning into an oil and gas region. This year will be memorable for Irkutsk Oblast economy, particularly for its oil and gas industry. While they never produced more than 200 thousand tons of oil per annum in Angara region some time ago, this year’s ‘black gold’ production will be in excess of 1 million tons. The hero of the day is Verkhnechonskoe Oil and Gas Condensate Field (OGCF) commissioned by Verkhnechonskneftegaz (VCNG). The oilmen plan to increase production to 7 million tons within the nearest five years, reported the press-centre of TNK-BP.

Amid the started overall decline of Russian oil production, the experts deemed this event to be a landmark for further development of the East Siberian economy and full loading of the new trunk pipeline connecting East Siberia and the Pacific Ocean with hydrocarbons. Besides, the ‘Verkhneshonskoe increment’ might also make salutary adjustments to the overall Russian oil industry statistics.

How they dispersed the ill repute
Verkhnechonskoe field lived a fairly troubled life. Discovered back in 1978 in the north of Irkutsk Oblast in the upper reaches of Chona river by Soviet geologist Boris Sinyavskiy, it pleased everyone with its C1+C2 oil reserves of 201.6 million tons, gas reserves (including free gas, gas caps and dissolved gas) of 95.5 billion cubic meters, and condensate reserves of 3.36 million tons. But they still remained indecisive about developing it for almost 30 years.

For all those years, the field was viewed as uneconomic. Subsoil users had great doubts about that its separate zones and geological structures communicate with each other and, therefore, the development of such resource would be economically unjustified since it would be required to drill too many expensive wells.

Another problem was the hardness of access. The field is located in taiga, far from the transportation infrastructure in roadless terrain. The distance to the nearest town of Kirensk is 250 km, and it was only possible to get there by helicopter. So, huge expenditures were required to lay roads and pipelines, construct life-support facilities, and set up production.

After the collapse of the Soviet Union and onset of the market economy, Verkhnechonskoe came to be managed by RUSIA Petroleum that was established in April 1992 to develop the largest hydrocarbon fields of Irkutsk Oblast. The company was founded by a number of businesses and administrations of the towns of Raduzhnyi, Usolye-Sibirskoe, Sayansk, Irkutsk and Angarsk whose initial letters made up this acronym, RUSIA. The license was obtained in 1993 but the subsoil users never got to develop the field as vigorously as possible due to the nationwide crisis.
Irkutsk authorities understood that field commissioning would provide a chance for faster regional development and did their best to find the investors who would be capable of implementing the project.

However, the ice broke up in the next millennium only. JSC “VCNG” was registered in 2002, and the license for the right to use the field including exploration, production and sales of produced hydrocarbons valid until December 31, 2042 was formally assigned to JSC “VCNG” in August of the same year. In 2003, VCNG shares were distributed among the shareholders in proportion to their interests in the company charter capital: TNK-BP – 62.71%, Interros – 25.94%, Irkutsk Oblast State Property Management Committee – 11.29%.

The principal field setup burden was shouldered by the major shareholder, TNK-BP, who came to the Russian market on September 1, 2003 as a result of merger of Russian oil and gas assets owned by BP of Britain, Alfa Group, and Access/Renova (AAR). Since 50% of company shares were held by one of the world’s oldest oil and gas corporations, BP (that celebrated its 100th anniversary this year), TNK-BP added BP’s experience, advanced technology, human and financial resources to its own armory.

So, TNK-BP was not scared by the ill repute of Verkhnechonskoe that had been deemed uneconomic for so many years. The best company experts were engaged to explore the field. First, they drilled wells and tested them for interference. Interference testing is a process when fluid is injected into a well and then they check the impact of this operation on what is going on in other wells located at a distance. The conclusion was that the oil formation had a high degree of communication, and the drilled wells demonstrated a good production rate that turned out to be above the original expectations.

It was also determined that Verkhnechonskoe has a unique structure that is completely different from the West Siberian fields dating back to the Jurassic period. Their oil-bearing rock is softer since it was subjected to pressure for a shorter time. Verkhnechonskoe has a more ancient, pre-Cambrian rock that emerged at the time when the earliest life forms arose on the Earth, and this rock is very hard. Only two fields of such kind are discovered in the world. It is a problem for oilmen since they never had a chance to work with such a resource before. Besides, they found substantial salt depositions in the field structure.

Both of these factors make the traditional drilling techniques that are applied in West Siberia inefficient. So, the engineers had to make a lot of efforts to find the right process solution. They decided to drill deviated wells with horizontal sidetracks. Moreover, it turned out that special PDC bits with heavy duty cutters approaching diamond hardness had to be used for drilling due to a ten-meter layer of hard rock.

However, the key result was achieved. The myth that the field was uneconomic faded like morning mist.

First oil
The next piece of good news came in December 2004 when the Russian Government decided that Verkhnechonskoe would be the basic field for the state-designed trunk pipeline to connect East Siberia with the Pacific Ocean (ESPO). According to specialist calculations, the field should load ESPO with up to 9 million tons of product per year in the future. This allows subsoil users to reduce their transportation costs drastically. In pre-Perestroika time, they planned to pump the product from Verkhnyaya Chona to Ust-Kut by a pipeline and then load it into rail tank cars. So, there would be no exaggeration in saying that ESPO pipeline gave a new life to the project by making its economically attractive.

From that time on, the field was developed with greater vigor. While VCNG spent only \\$7.7M to set up the field in 2004, 2005 saw a fifteen times greater figure of US110M. An optimal scheme was designed to construct and commission production and infrastructure facilities so that the financial costs are minimized. In addition, it was required to build a chain of operating processes from hydrocarbon production to delivery to the customers.

In October 2005, Verkhnechonskoe project received another slice of state support, although not explicitly. The matter is that Rosneft purchased 25.94% of shares owned by Interros thus becoming one of VCNG shareholders. The government-owned status of the new shareholder added certainty to the operator’s work. They made it possible to overcome administrative barriers and engage with ministries and government agencies in a more efficient manner.

In addition, Rosneft expressed a desire to accept Verkhnechonskoe oil for processing at its refineries, the nearest one located in the town of Angarsk (Irkutsk Oblast). The shareholders agreed that Verkhnyaya Chona ‘black gold’ would also be supplied to the refineries of the Far East after ESPO construction is completed.

Joint efforts yielded fruit. The first development well was drilled in 2005, two more in 2006, and the total number of wells increased to 16 in 2007. The field started to change. 37.6 thousand tons were produced in a test mode for the first time ever.

Oil was produced from just one of the field horizons bearing the same name, Verkhnechonskiy, and there are actually three horizons in the field geological structure.

In terms of salt content, Verkhnechonskoe oil belongs to Group 2 although it complies with the requirements for Group 1 treated stock tank oil in terms of vapor pressure, viscosity and sulfur content (0.2%). An oil treatment unit was constructed to remove any doubts about the oil quality. The unit is used to separate the recovered hydrocarbons from any foreign matter and bring them to the marketable condition. The unit capacity is 3 million tons per annum. Upon treatment, Verkhnechonskoe oil becomes similar to Urals in its properties and is somewhat in between Samotlor and Volgo-Urals oil. It may already be exported in that condition.

Since ESPO commissioning was earlier planned for late 2008, the subsoil users also strove to put the field in commercial operation by that time. In midsummer of the last year, they completed laying of a 530 mm oil export pipeline that connected Verkhnyaya Chona with ESPO trunk line. The length of the pipeline was 87 km. They also constructed a pump station, control room and laboratory, the first stage of a power supply center with a capacity of 6.6 MW to generate power for the field needs, brought new drilling rigs, and built a motor road that connected the oil field with ports on the Lena, and other infrastructural facilities.

Four drilling contractors (Nabors, KSA Deutag, NizhnevartovskBurNeft and Integra-burenie) are engaged. They drill wells in clusters with 7 to 13 wells drilled on the same pad (spaces between wellheads are 6 to 18 m). The average vertical depth of the wells ranges from 1650 to 1700 m. The length of several wellbores is more than 3000 m due to well design specificities.

In total, they managed to drill 26 wells in 2008, most of which end with horizontal sections of up to 500 m. High-angle wells are different from vertical ones in that their wellbores can penetrate several layers of productive reservoirs. This results in developing a field with a smaller number of wells and achieving a high oil recovery factor.

Although high-angle wells are more expensive to construct than traditional vertical ones, construction of a high-angle well still requires less investment than setup of two or three usual ones, which, taken together, produce the same amount of oil. Application of this technology in Verkhnechonskoe also allows reducing the number of gravel pads, which not only cuts costs but also (not less importantly) mitigates the impact on the soil.

The last year was anniversary for the field because 30 years lapsed since the field had been discovered. It was also the point to start counting commercial oil production. 156 thousand tons of oil was recovered from the subsoil. In addition, VCNG is the first company in Irkutsk Oblast to deliver its oil to ESPO. The oil was pumped to Rosneft-owned Angarsk Refinery in a reversed mode.

The feat of hard work was expensive for the company. Starting from 2005, VCNG invested US1B in oil production. About US 3—4B more will be invested in infrastructure development over the next five to eight years. However, there is no doubt that the expenses will pay back.

First million started
Despite the global crisis, VCNG intends to achieve new operational records this year. They plan to drill 32 wells in the field and produce the first million tons of oil. The statistics shows that the company is moving steadily towards its objective so far. Thus, 250 thousand tons of oil was recovered from the subsoil of Verkhnyaya Chona in Q1 2009. If the trend persists, the one million frontier will be crossed. At the same time, experts believe VCNG has opportunities to produce even more ‘black gold’ given that the production volumes are growing each month. The company said to Neft Rossii that they recovered 75,600 tons in the field in April. If this growth continues, the annual production will be ca. 1.3 million tons.

Despite the troubles of the crisis period, capital expenditures for Verkhnechonskoe development will amount to ca. RUR19B this year including more than RUR12B for setting up field infrastructure. In particular, they intend to increase power supply center capacity, raise oil treatment unit throughput, and launch a reservoir pressure maintenance system.

Almost RUR4B will be invested in drilling production and injection wells. It is planned to reduce well drilling time. While it took 60 to 80 days to construct each well some time ago, the current average drilling time is 39 days. Most wells will have horizontal ends of up to 500 m in the same way as before.

RUR1.4B will be allocated to improve the social and transport infrastructure. This includes the expenses to arrange an industrial and domestic waste landfill.

Irkutsk Oblast has no experience of implementing oil projects of such scale yet, so highly skilled oilmen are rare. The company has to import capability. The contractors include companies from Russia (Moscow, Tyumen, Tomsk, Buzuluk, Novosibirsk, Irkutsk, Ust-Kut, Usolye-Sibirskoe, etc.), the USA, Canada, France, and Germany.

Thanks to the development of oil reserves of Verkhnechonskoe and other fields, a second life started for Ust-Kut logistical businesses (Osetrovskiy River Port and Alrosa-Terminal) where most cargoes arrive. The settlement of Peledui revived after turning into a transshipment base for transporting the cargoes to the field. Kirensk airport where silence reigned some time ago accommodates aircraft every day now.

JSC “VCNG” transferred RUR225.6M to the budgets of all levels last year including RUR134.5M to the budget of Irkutsk Oblast. In 2009, they expect to increase these figures to RUR322.1M and RUR202.7M, respectively. Besides, VCNG contributed one seventh part of the total investment of big and medium-sized businesses in the regional fixed capital in 2008. The sum total of company investments amounted to more than RUR9B.

The event Irkutsk Oblast was waiting for 30 years has finally taken place. The time has come for big oil. The first million will be produced this year. But this is just the beginning. Decree No. 574 on Introducing Amendments to the Customs Tariff of the Russian Federation in Relation to Crude Oil that was signed by Prime Minister Putin in July to stipulate zero export tariff for 13 oilfields including Verkhnechonskoe is expected to facilitate company operations to a great extent, and the companies will be able to invest additional funds in oil production development.

According to experts, Verkhnechonskoe and the adjacent Talakanskoe Fields will shortly lay a foundation for future development of East Siberia and give birth to a new oil and gas province of global significance.