Russia replaces imports [NGW Magazine]
While Russia has long aspired to cut back on imports of equipment and technology in the oil and gas sector, the issue has assumed much greater importance since some of the country’s trade links with the West broke in 2014.
Following Moscow’s takeover of Crimea, the US and EU imposed restrictions on the supply of equipment and technology to unconventional and deepwater Arctic fields in Russia. These sanctions and other efforts to isolate Russia both politically and economically, led the government to fix its attention on import substitution.
By localising as much content as possible, Russia aims to safeguard its oil and gas industry, which accounts for two third of its exports and half of its federal budget revenues, from a potential tightening of sanctions in the future. In the longer term, it wants to overcome restrictions and continue Arctic and unconventional development, with these two areas seen as key for Russia to maintain its oil and gas output over the coming decades.
How much progress has been made towards this goal is difficult to gauge, in the absence of comprehensive data from the authorities. According to the industry ministry, around 61% of oil and gas equipment used in Russia was imported in 2014. In cases of critical equipment, the share was 80%. Regarding high pressure pumps, for instance, dependency stood at 80%, while for downhole well equipment it came to 77%. Reliance on foreign contractors in the drilling services was at 67%, while for software processes used in the upstream sector, it reached 100%.
The ministry’s most recently published data shows that by 2017, the share of imports had fallen to 52%, surpassing a set target of 55%, and by 2020 it should reach 43%. While this appears to signal some progress, the ministry does not expand on how many new types of equipment have been developed, in comparison with what Russia could already produce.
Between 2015 and 2018, the government has not published any thorough results from monitoring its import substitution programme, according to to Ekaterina Grushevenko, an expert at the Moscow-based Skolkovo energy centre. And there are cases where little to no progress appears to have been made.
In 2015, the energy ministry forecast that to keep up with demand, Russia needs to produce 15 new hydraulic fracturing units, 48 large-scale high-pressure pumps and 150 rotor-driven drilling systems each year. Between the start of 2015 and August 2019, according to Grushevenko, not a single hydraulic fracturing unit rolled off an assembly line.
Domestic production of rotor-driven systems was still at the testing phase in 2016, under work carried out by Gazprom Neft. The tests were continuing last year.
The ministry also said Russia would need to manufacture 30 new drilling rigs for offshore exploration and production. No such vessels have been built, with Russian operators continuing to rely on foreign suppliers.
The Arctic is a core focus of oil and gas development as producers look to exploit ever more remote resources to offset falling production in mature basins further south. This is also one of the areas where Russian manufacturing is most deficient, according to the energy ministry.
With sanctions in place, Russia has resorted to using Chinese rigs and equipment to explore the offshore Arctic. But it is uncertain whether Chinese partners alone are enough to overcome the region’s challenging geological and climatic conditions. This has made it difficult for Russia to advance any new offshore projects in the area, although low oil prices have also been a major factor.
“Russian equipment will not soon be ready to meet the entire list of international technological standards that are needed for offshore drilling and in the Arctic zone,” Grushevenko told NGW. “Most likely, Gazprom Neft’s Prirazlomnoye field will remain the only Arctic field to be developed in the near future.”
Moscow is hoping to establish a major domestic hub for rig and platform manufacturing at the Zvezda shipyard in the Far East, which is undergoing an expansion. But orders at Zvezda have so far all been for oil and gas tankers and various support vessels.
In the area of gas liquefaction, ambitious plans are afoot. Novatek has patented its own liquefaction technology, known as Arctic Cascade, which makes use of the cold climate to maximise the efficiency. Arctic Cascade is to be trialled at a small 0.9mn mt/yr LNG train at Yamal LNG, now being built. It will also be applied at the 4.8mn mt/year Obsk LNG, which is slated to become first largescale Russian LNG plant to be built largely using domestic equipment. It is due online in 2023.
Back in 2015, use of Russian technology in liquefaction stood at 20%. Beyond Arctic Cascade, Russia has not showcased any other innovations in the sector since then, placing doubt on whether Obsk LNG will be as import-free as planned. There is plenty of gas on the Gydan Peninsula to support Obsk LNG having a larger liquefaction capacity. But technology is a constraint.
“Novatek wants to localise production as much as possible, but immediately building a large plant using new Russian technologies is a difficult task,” Grushevenko told NGW.
Another area where Russian manufacturing lags behind Western standards is hydraulic fracturing, despite its common use in the country for decades. Hydraulic fracturing plays a critical role in enhancing oil recovery at mature, conventional oil and gas fields, in addition to its use at unconventional projects. The share of imports in the process stood at 90% in 2015, with the necessary software at 99%.
The government unveiled plans two years ago to reduce imported software to 90% by 2020, but no tangible accomplishments have been announced.
While overall this paints a grim picture of Russia’s efforts, there are pockets of encouragement. In addition to Novatek’s work with Arctic Cascade, Gazprom Neft has emerged a key pioneer of oil and gas technologies. It has developed new methods for both hydraulic fracturing and horizontal drilling – techniques now used commonly at its Arctic fields. It has its own fishbone technique, which involves the drilling of multiple branches leading off from a single horizontal wellbore.
The company is also at the forefront of efforts to exploit the Bazhenov shale formation in Western Siberia, estimated to hold 12bn barrels of oil and 75 trillion ft3 of gas, having set up its own research centre to make advances in unconventional oil and gas development. Bazhenov was one of the early victims of the sanctions: French Total had plans to participate in its development which it had to abandon as it could not bring in the technology needed.
As the oil arm of state-owned Gazprom, Gazprom Neft’s attention is primarily on oil, with plans to start commercial extraction in 2025. Similarly, many of the partnerships between Russian and international companies targeting shale and tight resources that collapsed after Western sanctions were applied were oil-focused. This said, some of the experience garnered by Gazprom Neft and the technologies it develops will be applicable to unconventional gas as well.
Bazhenov has very different characteristics to the prolific shale and tight oil and gas plays in the US. Gazprom Neft’s research could therefore result in “a breakthrough in unconventional oil extraction technologies,” according to Maxim Khudalov, director at Moscow-based ratings group ACRA.
Gazprom cuts down on imports
Selling gas for dollars or euros and buying goods and services in roubles has created a good opportunity for import substitution: Gazprom now sources nearly all its materials from the domestic market. It has also forged alliances with the Russian military, which also carries out major research into new technology such as turbines, as well as into new materials and their applications.
Speaking at the company’s June annual general meeting, Gazprom CEO Alexei Miller said that last year, the share of domestically-manufactured equipment and materials in Gazprom's overall procurements amounted to 99.7%, and all its pipelines were made in Russia.
In 2016–2018, the aggregate economic impact of import substitution activities totalled rubles 20.7bn, he said.
Last year, 500 types of domestic import-substituting products were accepted for use at Gazprom's facilities.
Import substitution and local manufacturing are finding applications in such projects as the integrated gas processing complex near Ust-Luga, the Amur gas processing plant, the Power of Siberia gas line that the plant will feed, and also Nord Stream 2.
Gazprom is also “successfully implementing the 2025 Innovative Development Programme. In 2018 alone, rubles 9bn were spent on research and development activities, with 279 solutions put into practice,” he said. This would yield a total economic effect exceeding rubles 204bn, Miller said.
Gazprom is also streamlining its corporate system for intellectual property management. In 2018, the company obtained upward of 300 Russian and foreign patents and applied for more than 260 new ones, he said.