Investments and innovation in unconventional hydrocarbons

26.07.2011

MOSCOW, 26 July 2011 — Even with abundant conventional hydrocarbon resources, CIS oil and gas producers still show little interest in unconventional hydrocarbons, according to the report Coalbed methane from Ernst & Young. This fact will constrain investments in unconventional hydrocarbons for many years ahead.

Prioritizing coalbed methane prospects in the CIS is the key output of this work. Ernst & Young considered fields of 100 sq. km so they could perform a comparative analysis. The larger a field is, the more interesting the project is to potential investors.

«As characteristics of the discussed parameters often demonstrated excessive spreads, a decision was made to independently interpret the available information,» said Andrey Kobzev, Ernst & Young Director, Moscow Oil and Gas Center. «Obviously, reliance only on public sources enables just a very general evaluation of specific acreages in terms of potential for developing coalbed methane.»

«In such terms, Kemerovo’s total coal resources make the region an unquestioned leader,» said Victor Borodin, Ernst & Young Tax Partner. «However, we decided to summarize a number of parameters in one table, such as recoverable reserves per well, discounted production cost (including capex), number of wells in a field and each well’s calculated absolute open flow and a field’s overall guaranteed production rate (plateau production). As mentioned above, it is now difficult to forecast the output of pilot coalbed methane projects. Therefore, we developed three potential scenarios, including low productivity, expected productivity and high potential.»

By comparing Kazakhstan’s, Ukraine’s and Russia’s figures, Ernst & Young concluded that coalbed methane projects are very attractive in the Kuznetsk Basin.

Ernst & Young’s estimates are derived from preliminary data and cannot form the only basis for a decision. The company ranked countries based on aggregate results and concluded that projects have strong potential in Russia, while Ukraine and Kazakhstan are about equally competitive.

«But the technical component is often not the main consideration in the choice of a country for investing. Potential investors would also evaluate debt burden, costs to overcome administrative barriers and other factors inherent in major projects», said Alexey Kondrashov, Ernst & Young Partner, Moscow Oil and Gas Center and Global Oil and Gas Tax Leader.

«Estimating and forecasting permeability of reservoir rocks at planned development sites is the most relevant issue in the CIS,» noted Andrey Kobzev. «Of course, companies could ignore that stage and immediately proceed with implementation, but they will face this issue again at a later stage when testing different technologies and well designs.»

Such projects will drive technological innovation and investments in logistics and infrastructure. They will also boost economic growth in the regions which have coal reserves.

«We estimate potential investments in such projects in the CIS at hundreds of millions of US dollars,» commented Victor Borodin. «Addressing the issues described above will help accelerate investments. Hopefully, we will see at the ‘round table’ not only company executives interested in coalbed methane projects, but also regulators. It is time to discuss burning issues. If the dialogue takes place, we may see an independent sector emerge in three to five years that will rely on innovative technology and management solutions.»


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