Turkmenistan shedding complex licensing process

March 1, 1998
Lam and Zdhanov lie on trend with numerous other fields in the productive Aspheron Sill. [63,445 bytes] Block II and its export system to the Cheleken Peninsula. [30,351 bytes] Probable future export routes in the Caspian/Black Sea regions. [65,635 bytes] 1. Connection into existing Russian trunkline including Tengiz to Novorossiysk announced May 1997. 2. Announced pipelines by BP consortium. Southern pipeline under construction, northern pipeline completed. 3. Gas pipeline into Turkey and Iran

Field revitalization, new production, new pipeline viewed

While interest in the Caspian Sea sectors of Azerbaijan and Kazakhstan continues to scale up, Turkmenistan offshore is rarely mentioned, despite known potential. Partly, the problem has been an over-complex authorization procedure causing business negotiations to drag on unresolved.

Perceptions should change, however, following the recent creation of the new Turkmen State Agency for Foreign Investment and the new petroleum law. These should lead to coherent guidelines laws for oil development contracts, and create a more stable investment environment.

The new procedures apply to last September's eastern Caspian licensing round, for which the Turkmen government offered 11 contract offshore areas. It also took the trouble to mount presentations in Houston, London, Vienna and Ashgabat. These outlined over 60 untested and undrilled structural and stratigraphic leads, which could hold combined reserves of over 20 billion bbl of oil and 168 tcf of gas.

More foreign intervention, it is hoped, will galvanize exploration and eventually hike daily Turkmen production to the government's target of 200,000 bbl and 12.5 bcf by 2028 - a conservative estimate if the sector's potential is fully realized. But at present, that ambition looks a long way off being fulfilled, based on 1996 production figures which showed national oil output plunging to 79,000 b/d.

Slowly, however, the situation is turning, thanks to an extensive workover program in offshore Block II. Here a joint venture between Europe's Dragon Oil and state-owned company Chelekenneft is realizing the potential of Turkmenistan's oldest producing offshore fields, Lam and Zhdanov. Both fields have been in service since the 1970s, but went into decline following under-investment.

The reversal process was started in 1993 when Turkmenft brought in Dutch oil independent LEA to co-operate the project. LEA provided US$90 million for associated infrastructure upgrades, but more was needed to achieve a planned eightfold increase in oil production. In 1995, when new suitors were sought, remaining Block II reserves were put at 384 million bbl and 2.67 tcf. Daily output was just over 4,500 b/d, and falling rapidly.

Dragon Oil, listed in Dublin and London, purchased 60% of LEA, promising to advance up to $35 million for ongoing development. Dragon had been eager for such an opportunity to step up its worldwide production.

Prolific trend

Block II covers an area of 950 sq km stretching seawards from the coast of the Cheleken Peninsula. Water depths vary from 40-100 ft. The two producing fields, Lam and Zhdanov, lie within the Aspheron Sill, on trend with a string of Caspian Sea fields stretching west to Baku. The reservoirs are nearshore marine to deltaic in origin and of middle Pliocene age (Lam) or early to middle Pliocene (Zhdanov). Lam's stacked reservoirs are over-pressured, located at depths of 7,200-13,600 ft beneath the seabed. As for Zhdanov, hydrocarbons are present in numerous horizons.

Oil production from the two fields heads through a network of pipelines to facilities onshore where it is processed and stored. Some of the crude is delivered to a Turkmen refinery, while the rest is exported to world markets. The crude is high quality (39 degree API) and low in sulfur. Until recently, the chief outlet for the associated gas was a local carbon black plant on the mainland.

Zhdanov, the first field discovered in 1968, has been in production since 1972, followed by Lam in 1978. At one time, the two fields had 63 platforms in service, but the number operating currently has been whittled down to 12 following the refurbishment/workover program of recent years.

This process has been slow and painstaking, and resulted in a further slowdown in production, although rates are now rising again. Since August 1996, the workover contractor has completed 13 well workovers, with up to two more to come.

On Zhdanov, the zones perforated by the initial workover on well Z50/50 revealed drilling damage and pressure depletion, rendering flow rates from this workover uneconomic. As for Lam, initial workovers achieved the expected improvements, but production was still constrained due to difficulties in disposing of the associated gas. This problem will be addressed in the short term through installation of an onshore gas flaring system, probably entering service in May.

Output from all the worked-over wells was also being affected by the choke settings (subsequently changed to suit the reservoir producing conditions), and by the buildup of wax in the wells and flowlines. That situation has since been controlled through chemical injection and regular hot oiling operations on selected wells. The outcome of all these measures has been a 60% increase since the production low of June 1996 to 7,200 b/d last fall.

Dragon believes that this extra crude would belong 100% to the joint venture, under terms negotiated according to the settlement agreement in October 1995. But the Turkmen authorities are claiming that ambiguities relating to the wording allow the oil to be classified as enhanced production, which would entitle them to 50%. No resolution has yet been reached.

Investment moves

Recent re-evaluation of remaining proven and probable reserves on Block II indicate potential to raise the reserve base and increase production tenfold to 75,000 b/d. In anticipation of the extra funds that would be needed, Dragon brought onto its own board Indonesian investor and current chairman Arifin Parigoro. In addition, it raised a further $107 million last year through a rights issue, much of this targeted at Block II, and increased its stake in LEA to 100%.

Dragon's project capability was augmented recently through recruiting key personnel in drilling, technical services, procurement and logistics. 1,800 km of 2D seismic was acquired over the block to identify infill drilling locations and possible exploration targets. Early last year, a sonar side scan survey and a shallow high intensity seismic survey were completed, identifying potential hazards and shallow gas formations.

Following on from this, seabed soil analysis was initiated to help assess engineering criteria for strengthening some of the platforms so that they could accommodate western and Russian drilling packages. Up to 12 new wells are planned from these platforms, the first of which may be a re-entry and deepening of a Russian-drilled well to a TD of 4,000 meters, testing an extension of producing horizons in the Zhdanov Field, and a series of wells on the Lam field. Further deviations are planned on future wells to pick up structures missed in the past as well as undrilled exploration targets.

Drilling was to have started last year, but got pushed back due to a combination of steep rig rates, limited rig availability, and silting-up of the local harbor used to service Block II operations, which has to be dredged.

However, a local Russian platform rig has now been procured, which will be refurbished on station in the block, and a second rig should also be signed up shortly. The joint venture plans two to three exploration and development wells this year, followed by 10 more in 1999.

New oil export storage tanks are to be built, and an onshore oil separator has just upgraded. Development of Block II's free gas reserves, allied to processing of the (shortly to be flared) associated gas, looks more realistic now following construction of the 250 km Iran-to-Western-Turkmenistan gas pipeline. This, in turns opens the possibility of an export route to Iran and Turkey for Turkmen Caspian gas, or north to Kazakhstan and elsewhere.

On the oil production front, positive developments nearby include proposed new pipelines from Baku and Kazakhstan's Tengiz Field to the Black Sea and a swap trade for oil production between Iran and Kazakhstan. These new Caspian export routes could lessen the discount for Urals crude which currently afflicts oil producers in the area.

Once the new wave of licenses in the Turkmen Caspian are taken up, the new infrastructure that should arise will help the joint venture expand production further. By then, a major new partner may have been brought in to co-finance the next stage of Block II's expansion.

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