Western Siberia is opening up

Western Siberia, a vast, inhospitable wilderness, is waking up to the hunger of foreign investors who can help it reap its potential riches as an oil producer.
Opening up lucrative oil production contracts to Russian and outside investment is expected to help drive Russia's developing economy for years to come.

Russia, the world's second biggest oil exporter after Saudi Arabia, currently produces 8.2 mm bpd of oil. Oil has been coaxed from beneath western Siberia since the 1960s.
Today the Khanty-Mansi Autonomous District, which covers an area about the size of France but has a population of just 1.5 mm, boasts annual trade of $ 16 bn. Since the collapse of Soviet communism, foreign companies have arrived in the region attracted by the huge oil reserves. As the market opens up, more are expected, bringing more investment.

Russia also has huge but untapped oil reserves in eastern Siberia and needs international investment to explore them. Khanty-Mansi last year produced 210 mm tons of crude oil -- around 6 % of total world output and about half of Russia's annual production.
Part of that total came from the Zapadno-Malobalyk field where oil is extracted jointly by Russia's second largest oil producer Yukos in a unique joint venture with Hungary's biggest revenue earner, oil and gas group MOL. The project is Yukos' first with a "western" partner and a straight 50:50 partnership. Yukos, Hungary's main oil supplier, will soon merge with rival Sibneft to form Russia's largest oil firm and the world's fourth biggest oil producer, YukosSibneft.

The Yukos-MOL venture sets a precedent which local officials hope will lead to more international money coming into a region beginning to enjoy its new-found oil wealth. In a landmark deal in February BP agreed to buy 50 % of Russia's third largest oil firm Tyumen Oil, which produces 1.2 mm bpd, mainly in the Khanty-Mansi region.
Taxes from oil make up 80 % of the district's annual budget, though two-thirds of this has to be paid to the federalstate budget in Moscow. The oil income has transformed the local community, bringing in the latest technology, boosting construction and creating wealth.

The average gross monthly wage in the oil industry, at about 20,000 roubles ($ 650), is well above the national average, said Khanty-Mansi Governor Alexander Filipenko. Some 200 km (124 miles) south of Nefteyugansk, Yukos and MOL plan to produce almost 3 mm tpy of crude oil by 2005, requiring an investment of $ 300 mm-$ 350 mm.
Daily production on the field has already hit 19,000 barrels and set to almost treble over the next three years. For MOL, producing oil in Siberia will allow it to double its crude production at lower cost.
"Why is it good for us? The production cost at about $ 2 a barrel is relatively low, and we will be able to reach quite a high output with significantly fewer wells," said Laszlo Gerecs, managing director of MOL CIS, a wholly-owned offshore subsidiary which holds MOL's stake in the venture. This production cost is about half that in Hungary and below the Siberian average, he added.

Drilling for oil in Siberia's uncompromising climate is tough. Just building some kind of access road to oil facilities requires massive logistics -- chopping down pine and birch trees to clear a path and lay a foundation which is covered in sand to prevent the upper asphalt cover from sinking.
A 14 km (8.7 mile) stretch of road to Yukos-MOL drilling and production sites needed about 200,000 truckloads of sand. All production facilities stand on huge concrete pillars. "The building of the infrastructure and the weather pose the biggest difficulty and, without the experience of Yukos, it would have been very hard to do this project," Gerecs said.

The proven reserves of the Zapadno-Malobalyk field, which covers around 200 sq km (77 square miles), are estimated at about 20 mm tons or 145 mm barrels of oil. This is twice as much as MOL's domestic reserve base.
Hungary's annual oil consumption is 6.5 mm to 7 mm tons. By 2005, MOL plans tooperate some 240 wells on the field, producing Ural blend quality oil, the type of crude used in its refineries. MOL and Yukos will treat the oil at an on-site processing station before transporting it via pipeline monopoly Transneft's network to be sold at the best possible market price.