Oil: What's Russia Really Sitting On?
As more oil becomes recoverable, reserve estimates are skyrocketing

With oil still hovering near $50 a barrel, the last thing people want to hear is that there's even less of the stuff out there than previously thought. This year investors in the oil industry have been shaken by the revelation that Royal Dutch/Shell Group (RD ) overstated its proven reserves by at least 23%, some 4.5 billion barrels, with more possible downgrades to come. There's growing disquiet that other major oil companies may also have inflated reserves.

But there's one place -- Russia -- where reserve estimates just seem to go up and up. In its annual statistical survey of world energy, BP PLC (BP ) has recently revised its estimates of Russia's total proven oil reserves to 69.1 billion barrels, 6% of the world's total, up from 45 billion bbl. in 2001. But according to auditors with a worm's-eye view of what's actually going on in the depths of Siberia, such estimates may just scratch the surface of Russia's real potential. According to a recent study by Dallas-based energy reserve auditors DeGolyer & MacNaughton, whose clients include leading Russian energy companies such as Gazprom and Yukos, Russia's true recoverable reserves are between 150 billion bbl. and 200 billion bbl. That's up from industry estimates of 100 billion bbl. a few years ago.

Why such a big gap in the estimates? Because it's one thing to be sitting on oil reserves, another to be able to exploit them commercially. In Russia's main oil-producing region in western Siberia, proven reserves represent just 18% to 24% of all oil in the ground, in contrast to about 45% in Western oil-producing regions such as Alaska and the North Sea. But as Russian oil companies adopt technologies, such as horizontal wells and computerized reservoir management systems, the estimated recovery rates are being revised. Thanks to new techniques, which make it possible to obtain oil even from apparently depleted fields, Russian oil companies already have managed to boost their output by 50% since 1998. "The biggest thing is the [new] technology being deployed in western Siberia. The results are beginning to show," says Martin Wiewiorowski, senior vice-president of DeGolyer & MacNaughton in Moscow.

This increasing recoverability, and not dramatic new discoveries of oil, explains why Russia's proven reserves keep shooting up. The leading Russian oil companies have all announced big increases this year, following independent international audits. Lukoil (LUKOY ), Russia's largest oil outfit, saw a boost of 4.7% in proven reserves both this year and last, according to Society of Petroleum Engineers SPE standards. No. 2 producer Yukos, meanwhile, jumped 13.2% this year, according to stringent standards set by the U.S. Securities & Exchange Commission.

The growth in Russia's proven reserves is mainly happening at existing fields in western Siberia, a supposedly "mature" region where production had been declining until recently. DeGolyer & MacNaughton predicts that western Siberia could boost its output to 10 million bbl. a day by 2012, up from less than 6 million at present, and keep production at that level for at least 10 years. The use of even newer technologies available by then means that western Siberian oil production may not decline for decades to come. Russia's reserve potential is vaster still when undeveloped regions, such as the Arctic, the Caspian, and in particular eastern Siberia, are factored in. And then there's Russia's plentiful supply of natural gas. It is already acknowledged as having the world's largest gas reserves, with 47 trillion cubic meters, or 26.7% of global reserves.

But tapping Russia's vast oil pool will require billions in investment, especially in export pipelines. Although on course for 8% growth this year, production gains could slow as export bottlenecks appear. But infrastructure investment is likely to go up in tandem with reserve estimates. If Russia finds a way to get all that lovely oil to needy international consumers, its days as a global energy powerhouse could be just beginning.