- Sep 18, 2018
Over the of course 2017, a number of landmark events took place in the oil and gas industry of the Republic of Kazakhstan (RK).
By year’s end, oil production was at an all-time high, at 86.2 million tonnes, exceeding the 2016 level by 10.5%. This growth, amounting to more than 8 million tonnes, was achieved due to Kazakhstan’s three “mega-projects” managed by some of the leading international oil and gas companies: The Kashagan Project produced 8.2 million tonnes (a growth of 7.5 million tonnes YoY); Tengiz and Karachaganak put on 8% each in annual terms, making up a total of 3.2 million tonnes.
As a result, the share of mega-projects (referred to as “M3” in this article) as a percentage of country-wide production exceeded 50% for the first time, up from 49% in 2015 (before production started in Kashagan), it increased to 57% in 2017.
Given the current and expected plans to increase production across all M3 projects, their aggregate share in the country’s total production will continue to grow, promising to reach 2/3 in the foreseeable future.
At the same time, the active development of M3 projects comes with the risk that government support for the development of oil production in the rest of the industry may not be viewed as a high priority. This is further reinforced by the fact that the global oil pricing environment is currently favorable and is expected to remain so in the mid-term future.
In response to the drastic deterioration of the economics of oil production caused by sinking global oil prices in 2014, the government took a number of measures, mainly tax exemptions, aimed at providing ad hoc support to large, socially significant companies. However, the existing government agenda does not seem to offer well-defined systemic support to the oil production industry that would take into account the deteriorating quality of the resource base, especially in relation to medium and small oil companies. As can be inferred from the new Code on Subsoil and Subsoil Use, adopted this year, the government is focusing its efforts on setting the stage for the exploration of new fields and formations, apparently based on the view that the traditional oil-producing assets have weak prospects of increasing production.
This article focuses on oil production and drilling beyond the M3 perimeter – the part of the industry (hereafter referred to as the “Industry”) which has the largest number of companies, drilling volumes and number of persons employed. Unless otherwise specified, it is this group that we will be referring to.
Comparison will be mainly drawn between the data for the following years: 2017 (post-crisis), 2015 (crisis peak), and 2013 (pre-crisis). For a number of key figures, our industry-wide or company-level comparison will be made vis-a-vis the Russian Federation (RF) and the United States (e. g. Tatneft, which has some important similarities with the Industry).
Oil production across the Industry in 2017 declined by more than 6%, the rate of decline doubling year-over-year (compared to the 3% in 2016). KMG EP, the largest player in the Industry, registered a 2% YoY drop in production (for its key assets – OzenMunaiGas and EmbaMunaiGas). Out of six companies with an annual production exceeding 2 million tonnes, three showed growth in production, only one of them reaching the level of 1% (KarazhanbasMunai).
The Industry’s total production drilling reached 1.26 million tonnes, exceeding the level of the crisis year of 2015 by 11%. At the same time, the figure for 2017 remained way below the pre-crisis level of 2013 – almost 40% lower.
57% of all incremental production in the Industry for 2017 came from new wells, which is considerably lower than the 2015 level (64%), but roughly the same as the 2013 figure. The second largest contribution of 25% was from bottom-hole zone treatment methods. For comparison, new wells in RF account for about 65% of the total incremental production.
The volumes that new wells contribute to the total production across the Industry has reduced sharply in recent years: their share was less than 4% in 2017, whereas in 2013 it stood at 6.4%. For comparison, the 2017 figure was twice lower than the average for RF (7.9%). Individual Russian companies performed very differently in this regard: Tatneft stood at 4.4% (comparable with RK’s Industry), LUKOIL’s figure was approximately twice higher (8.5%), and Gazprom Neft’s – 4 times higher (16%).
Thus, the role of drilling remains dominant and generally representative of a highly depleted resource base. At the same time, room for cutting back on drilling without risking a landslide decline in production are all but exhausted now – which is what pushes the question of efficiency into the foreground with all urgency.
Considered below are the basic metrics characterizing the efficiency of drilling and well construction.
Drilling productivity, expressed as the incremental production output per production well, remained more or less in the same range between 2011 and 2017, making up some 8.5–9.0 t/day on average across the Industry, with the exception of the pre-crisis year of 2013, when it reached 10.3 t/day. Such stability has been registered for the Industry as a whole, but the situation differs significantly by company and region (see Fig 3).
Kyzylorda Region was the leader in terms of the level of drilling productivity throughout the entire period. The second place went to Atyrau, which registered the highest rate of growth in the period from 2013, at 60%. Aktobe and Mangistau both performed at about 20% below the Industry average.
As a comparison, the same figure for KPO (the Karachaganak field development operator) is almost 100 times higher than the Industry average, and for TCO it is even higher.
Russia-wide, the same figure (amounting to 34 t/day) is 3.9 times higher than its counterpart for RK’s Industry (which corresponds to the index value of 387), while Tatneft’s performance is 14% above the Industry average.
According to the results of 2017, the drilling efficiency index, expressed as the incremental production output per meter of production drilling, was equal to the 2011 value Industry-wide (1.15 t/m), after a 20% decrease by 2013 (see Fig 4). The highest performers (leading the rest by a wide margin) were KazgerMunai, PetroKazakhstan Kumkol Resources, and Caspiy Neft.
The steady growth in production drilling meterage, totaling to 10% between 2015 and 2017, when considered on the back of the declining efficiencies, points to the balance between the Industry’s demand for drilling and its economic feasibility.
When comparing this with Russian companies working with highly depleted reserves, per-unit metrics (production per meter of drilling) are quite comparable between RK (Industry) and RF (see Fig 5).
Analysis of capital investments in production drilling shows that the related unit costs (in U. S. dollars per 1 m of production drilling) in RK’s Industry, in RF (industry average), and in the US (average for shale oil production) compare as follows:
• unit costs for directional wells are 50–70% higher in RK vs. RF
• unit costs for horizontal wells are 2–2.5 times higher in RK vs. RF
• unit costs for horizontal wells are 1.5–2 times higher in RF vs. US
When comparing the RK’s Industry vis-a-vis Tatneft, it shows that capital investments in production drilling (US$/m) are 50% higher in the Industry, productivity (t/well) is more or less on par (the difference is 10%), and production drilling efficiency (t/m) is 75% lower. Thus, given the comparably low level of well productivity, the difference in overall economic efficiency is ensured by the optimal drilling technology (from well design to supervising contractors) and lower level of unit costs.
Sustainable development of oil production within the Industry is only achievable through a systemic increase in the overall efficiency of well construction – by both spending less and producing more – backed up by sound application of the latest technological and managerial solutions in the field of drilling, workover, and completion of wells, primarily horizontal ones.
The official Forecast of Socio-economic Development of the Republic of Kazakhstan for 2018–2022 points out that, in the mid-term future, “the increase in hydrocarbon reserves will occur primarily due to offshore fields in the Pre-Caspian Basin,”
Prospects for further production growth associated with the implementation of large-scale joint projects, such as the Eurasia project to drill a super-deep well, are, in our opinion, a more remote possibility.
New promising development targets (hard-to-recover reserves of various types, subsalt reservoirs) are located in traditional oil production regions with developed infrastructure. At the same time, the prospect of their effective development faces the challenge of putting in place the right combination of prerequisites, including adequate technological capabilities, a developed oilfield services market, government incentives, etc. Reaching a new higher level of technology and management in well construction, in turn, requires the subsoil users and the government to adopt a package of measures to that effect, including those promoting the use of novel approaches to management as well as the development of competition in subsoil use and in the oilfield service market.
An added challenge for the Industry is the small number of large players who are able to leverage economies of scale to achieve strategic goals. In 2017, only 5 companies delivered a drilling output of more than 50 production wells per year, and only 3 of them delivered more than 100 (MangistauMunaiGas, OzenMunaiGas, KarazhanbasMunai).
Transitioning the Industry to a new level of technology calls for a set of necessary and sufficient conditions, which are still in the pipeline, but coming quickly. A whole group of companies are currently steadily advancing up the learning curve for modern well construction techniques. An important foundation for these were the serious efforts and investments made over a number of years by the oil companies in the Industry with the aim of reaching a new level of reservoir knowledge at their fields.
The Karachaganak field development project boasts some of the most advanced expertise in drilling and completion of horizontal wells (HW) in onshore fields in Kazakhstan. HWs are a primary tool for the development of these fields, with an average metered depth of about 6500 meters. They are the testing ground for the high-tech solutions, including selective multi-stage hydraulic fracturing using gelled acid. However, there are only indirect opportunities to transfer this expertise to the industry as a whole.
The level of horizontal drilling activity in Kazakhstan is still relatively low, amounting to about 3% of the total production drilling meterage.
The Industry’s leaders in testing and implementing advanced drilling technology are the largest oil producers, in particular KMG EP and MangistauMunaiGas (MMG); mid-size companies also play a role that is becoming more and more important.
KMG EP began implementing HW construction projects before the crisis of 2014, mainly at OMG. In the last few years, valuable experience has been accumulated at the sites of Kazgermunai, a company controlled by KMG EP. For example, the Akshabulak field saw an application of HW targeting techniques using Rotary Steerable Systems (RSS) as well as an implementation of the multi-stage hydraulic fracturing (MSHF) method.
KMG Nabors Drilling, the JV set up in 2015 to implement drilling programs at the Tengiz field, is an important contributing factor for KMG NC to build up their competencies in high-tech drilling.
MMG and CNPC-AktobeMunaiGas (both controlled and/or operated by Chinese oil and gas companies) had also launched some sizable HW drilling projects before the oil pricing environment began to change for the worse.
MMG carries out horizontal drilling at its key fields of Zhetybai and Kalamkas; it also has certain experience in reconstructing wells by horizontal sidetracking (HST). CNPC-AMG is making HWs at the Zhanazhol, Kenkiyak, and North Truva fields; its HW drilling experience also encompasses the use of RSS.
Mid-tier companies whose experience in the field of horizontal drilling and completion may be of interest to other players in the industry, include, in particular, the following:
• Ansagan Petroleum (North-West Zhetybai field): 8-stage MSHF planned for 2018
• KoZhan (Morskoye field): the first 4 HWs were drilled in 2017, their average productivity combined with that of 13 inclined wells was 18 t/day (more than 2 times higher than the Industry average)
• Maersk Oil Kazakhstan, now Total Dunga (Dunga Field): one of the largest horizontal drilling programs in the Industry based on international best practices
• Falcon Oil & Gas / Condor Petroleum (Shoba field): the first to apply inflow control devices (ICD) for a HW project in Kazakhstan (2016); the first HWs drilled in shallow well projects in the Caspian Depression, including sand control.
Other mid-size subsoil users with relevant experience are Emir-Oil, Kazpetrol Group, Maten Petroleum, Sagiz Petroleum Company.
To date, the number of horizontal wells commissioned in RK’s Industry can be estimated at 3–4% of the total number of production wells. For comparison, in RF the same figure for 2017 was just upward of 40% industry-wide. The figures for large Russian oil companies vary greatly – from Tatneft’s 21% to Gazprom Neft’s 76%.
Mid-term projections of the rate of growth in horizontal drilling, expressed in physical units, place it somewhere between 30 and 50% by the end of the next 5 years (2018–2022), provided that global oil prices remain at a level not lower than US$ 50–60 per barrel.
Wider use of horizontal drilling in the Industry will of course spell market growth for related services and equipment, including directional drilling services, well completion, and others. The nature of contractual relationships between customers and contractors will also have to change: from the turnkey contracts that are currently dominant in production drilling – toward enhancing the role of separately contracted services, including on day-rate terms. This should help strengthen competition on the drilling market, which at present is characterized by established relations between key customers and traditional drilling contractors.
The market for directional drilling (DD) services, which includes measurement and logging while drilling (MWD and LWD), RSS, PDMs, has a significant growth potential. To compare, today the DD spend on an average production well (all types taken into account) in the Russian oil industry is more than US$ 60 per meter – about 4 times higher than the respective figure for RK’s Industry (estimates for RK have been prepared based on market size data for geological and geophysical services, as published by KazService). The average annual rate of growth of the Russian DD services market from 2011 to 2017 – that is, for the period when the share of horizontal drilling increased from a modest 11% to 41% – was 14%.
The multi-stage fracturing (MSF) market is currently at a very early stage of development in the Industry. Only about 1% of production wells involve MSF jobs. As a comparison, in 2017 MSF technology was applied in almost one-half of all horizontal wells in RF, which translates into approximately 20% of all production wells. In absolute terms (number of MSF jobs), the Russian industry is more than 100 times larger than RK’s Industry, which may make it an important source of technological expertise.
In the future, services and equipment associated with horizontal drilling will be the main driver of the oilfield services market in the Industry. At the point when horizontal drilling reaches 10% of total production drilling, the size of the market for oilfield services associated with the construction of horizontal wells is estimated to exceed US$ 400 million per year, of which more than US$ 100 million will be for DD services.
The development of the Industry’s technological capabilities in the field of horizontal well construction (including design, drilling, and completion) will also increase its readiness to embark on developing the shale oil resource base.
In 2015, the US Energy Information Agency (EIA) published a shale oil resource assessment for Kazakhstan (Technically Recoverable Shale Oil and Shale Gas Resources: Kazakhstan). Oil resources classified as risked, technically recoverable resources amounted to 10.6 billion barrels. The assessment did not consider formations at depths exceeding 5000 meters (Devonian).
Two thirds of the resources were in the Pre-Caspian (North Caspian) Basin, of which 90% were located on its southern and eastern margins. The formation depths varied from 3000 to 4500m, net thickness from 45 to 100 m, and total content of organic carbon was on average 2–3%.