In the spate of bad news that hit the shareholders in Yukos, Russia's embattled oil company, one important announcement by the group last month went almost unnoticed.
Following an external audit by DeGoyler & McNaughton, the US auditors, Yukos reported a significant increase in its proved reserves. Under the strict standards set by the Securities and Exchange Commission in the US, Yukos's hydrocarbon reserves increased from 11.2bn barrels of oil equivalent (boe) at the end of 2002 to 13bn boe at the end of 2003.
At the same time TNK-BP said its current reserves of 6.1bn boe could rise to 9bn boe in the short term and could go up to 30bn boe in the longer term.
Altogether, analysts' research suggests, Russia's oil reserves could prove to be three times higher than previously thought, making it one of the world's most attractive sources for reserves replacement.
According to the BP Statistical Review, Russia has 60bn barrels of proven oil reserves and natural gas reserves equivalent to 280bn barrels of oil. However, auditors and analysts say there is strong upward pressure on these figures.
Research by Brunswick UBS, the Moscow arm of the Swiss bank, shows that Russia's proved oil reserves alone could increase from 60bn barrels to 180bn barrels as companies revise their reserves. On current estimates, this would put Russia into second place in the world in terms of oil reserves after Saudi Arabia, which is estimated to have 300bn barrels of oil and oil equivalent.
So far Saudi Arabia has agreed to let international companies explore only for natural gas. The state oil company, Saudi Aramco, is unlikely to stand still in the coming years and western companies yearn for a crack at its oil, which means it is likely that the kingdom's reserves will also grow.
However, Russia and the Caspian are becoming important counterweights to the Middle East. European and US leaders are wooing the Kremlin for strategic supply deals to lessen their dependence on oil from the Middle East. Companies, including ExxonMobil and ChevronTexaco of the US and Total of France are lining up to strike deals with their Russian counterparts.
"I believe that by the end of the decade Russia will be proven to have 50 per cent more hydrocarbon reserves than what Saudi Arabia has today," said Paul Collison, global emerging markets oil and gas strategist at Brunswick UBS.
Lord Browne, chief executive of BP, agreed that reserves would increase. "It does seem likely that there will be more reserves. I'm not sure if anyone really knows what the ultimate recovery will be of new technology put to use in old fields."
Analysts say strict rules applied by the US Securities and Exchange Commission mean Russian companies book fewer barrels than they have potential for. Martin Wierwiorowski, a general director for Russia and the former Soviet Union at DeGoyler & McNaughton, said: "We find that both under SEC and SPE [Society of Petroleum Engineers] rules Russian companies are able to book a relatively low percentage of their reserves when compared to their western counterparts."
However, Mr Collison argued that not only were Russian companies starting to manage their reserves better, they were also doing more drilling and exploratory work which would allow them legitimately to book higher reserves with the SEC.
"The trend in Russia is opposite to the one in the western world where a number of companies have revised their reserves downwards," he said.
Mr Wierwiorowski said Russian companies at the end of 2002 had on average booked about 18 per cent of oil in place under the strict SEC rules and 24 per cent under SPE rules. This is significantly less than the amount companies generally book in western oilfields. However, anecdotal evidence from Russian companies says many of them are aiming to recover between 30 to 40 per cent of oil in place in the short term.
The Russian companies also have to cope with SEC rules preventing them from booking reserves which are beyond the area that can be captured by a producing oil well. Given the huge size of Russian oilfields, this means that companies are restricted from booking oil between wells that are widely spaced.
SEC rules also do not allow Russian companies to book reserves which are expected to be produced beyond the expiry date of their current licences. Most Russian companies incorporated in the middle of 1990s were given 25-year licences, which will expire in the next 14 to 16 years.
When the Russian government renews these licences, Russian companies will be able to book more barrels. But Adam Landes, an oil and gas analyst at Renaissance Capital, a Moscow-based brokerage, says that even now, by changing the wording of Russian laws to satisfy the SEC that these licences will be renewed, it will allow Russian companies immediately to book up to 70 per cent more reserves than they do currently.
However, Russian companies will ultimately need better technology and oil well management and more drilling and exploratory work to utilise their potential.
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