Innovate, cut costs: how a Russian oil firm navigates global supply curbs

ALMYETYEVSK, Russia (Reuters) - A global deal cutting crude output has forced mid-sized Russian oil company Tatneft to curb flows at some fields, leaving it with lower revenues but little relief from maintenance and running costs. Its response: innovation.

Employees are seen at the Taneco refinery complex, which is part of Russia's oil producer Tatneft group of companies, in Nizhnekamsk, in the Republic of Tatarstan, Russia, July 26, 2017. Picture taken July 26, 2017. REUTERS/Sergei Karpukhin

Yelkhovneft, a Tatneft unit in the semi-autonomous republic of Tatarstan some 1,200 km (750 miles) southeast of Moscow, has cut oil output by 6.6 percent since May, following an extension of the supply-reducing deal led by Russia and Saudi Arabia.

“Faced with lower profits due to the cut in production, we have put greater emphasis on bringing down operating costs,” Azat Khabibrakhmanov, head of the Tatneft unit, which produced 3.3 million tonnes of oil last year, told Reuters.

The unit has oil pumps in two colors: green brings lighter crude to the surface while yellow draws heavier oil. Under the global deal, aimed at boosting the price of oil, Yelkhovneft’s output of both types is down.

Standing near one of the pumps, surrounded by yellow rapeseed flowers, Khabibrakhmanov said his unit was scaling back production mainly at wells with low flow rates, particularly those with a high water content.

“This has given us a certain stimulus to find new solutions for cutting production costs, bringing in new energy-efficiency technologies,” he said.

Yelkhovneft, which accounts for around 12 percent of Tatneft’s oil production, is not altering key processes such as drilling or enhanced oil recovery - indeed, the company wants to be able to ramp up output quickly once the supply deal expires.

Instead, Yelkhovneft is scaling back measures aimed at limiting water flow and various other types of work, including in the rock formation at the bottom of a well.

“This way, we will be able to restore oil production to its previous levels quite quickly, I think in a month or two,” Khabibrakhmanov said.

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Yelkhovneft has also started drilling more smaller-scale wells, allowing it to halve drilling-related spending. It has begun to use lighter or fewer metal parts in equipment, cutting costs further, Khabibrakhmanov said.

Yelkhovneft has more than 5,800 wells drilled in Tatarstan’s Almetyevsk area, in a swathe of land three times the size of Hong Kong. Of those, 2,300 produce oil. This number was cut from 2,500 after Russia backed the extension of the OPEC/non-OPEC deal until March next year.


Tatneft, which itself produces almost 600,000 barrels of oil per day, is substituting revenues it would have otherwise received without the cuts by trying to limit costs.

“This (cost-cutting) project ... is actively developing and will allow the company to reach its strategic goal of increasing production while cutting costs,” Khabibrakhmanov said.

Khabibrakhmanov did not say how much Tatneft had saved. In total, Tatneft will cut its oil output by around 350,000 tonnes (2.6 million barrels) this year under the global deal.

Tatneft was spending an average of 235 rubles ($4) to extract a barrel of oil in the first quarter of this year, down almost 15 percent quarter-on-quarter thanks to cost savings, the company’s latest report showed.

Tatneft, which did not provide a comparison with global oil producers, has yet to present second-quarter results.

Rosneft, Russia’s biggest oil producer, has long said the cost of extracting oil in Russia is among the lowest in the world thanks to a favorable rouble exchange rate.

Before the global oil pact took effect in January, officials had said Moscow would find it hard to cut production without risking damage to some of its wells, due to harsh, icy weather.

But the decision was made and output is being curbed in different ways: some are curbing flows at the newest fields, such as Rosneft; others, including Gazprom Neft and Tatneft, are focusing on aging deposits.

Apart from adapting to output curbs, the Russian oil industry was forced to seek new ways to extract crude after the imposition of sanctions in 2014 that limited the use of Western equipment in offshore Arctic, shale and deepwater projects.

Although Tatneft was not affected by the sanctions, it started to substitute foreign equipment essential for its high-viscosity oil projects - which it sees as a source of future growth - with domestic equipment.

Tatneft mainly operates mature fields in its native Volga-Urals region of Tatarstan, where the Romashkinskoye oilfield, launched more than 70 years ago, still accounts for more than half of the company’s production.

Of 29 million tonnes of oil planned to be extracted this year, some 1.5 million - double last year’s amount - should be high viscosity, which requires heating to extract crude.

“At the beginning (of the high-viscosity oil project), we used mostly foreign equipment, starting to implement substitution step-by-step. Now, over 95 percent of the equipment is domestically produced,” Robert Akhmadullin, first deputy head of Tatneft’s high-viscosity oil department, told Reuters.

Tatneft plans to invest around 20 billion rubles into developing high-viscosity deposits in 2017-2018 compared to an overall investment program of 100 billion rubles for this year.

High-viscosity oil resources in Tatarstan are estimated to be over 1.4 billion tonnes, Tatneft says, hoping the company will be able to substitute aging deposits for this type of crude as time passes.

Additional reporting by Maxim Nazarov; Writing by Katya Golubkova; Editing by Dale Hudson