Gazprom Neft Puts Its Money On Exploration

Interview with the head of Gazprom Neft’s directorate for exploration and resource base development Alexei Vashkevich

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Anton Gladchenko

GazpromNeft, Russia’s fifth-largest crude oil producer, is heavily focused on exploration. The company’s key priorities include frontier regions such as East Siberia and the Yamal Peninsula. It is also gearing up to expand its presence in the Russian Arctic and to study new opportunities abroad. In an interview with Nefte Compass, the head of GazpromNeft’s directorate for exploration and resource base development, Alexei Vashkevich, outlines the company’s plans in Russia and overseas.

— GazpromNeft recently reported a 10.43%increase in its total proven and probable (2P) reserves under PRMS international standards in 2012. Do you expect reserves to rise further in 2013?

— 2012 was one of themost successful years in terms of exploration drilling, with a success rate of 83%. This year we are targeting areserves increase of some 62 million (metric) tons of oil equivalent (454 million barrels of oil equivalent) largely as theresult of intensegeological surveys, exploratory drilling and re-evaluation of reserves, rather than fromacquisitions.

— Has the 2013 explorationprogrambeen approved?

— Exploration activities will be stepped up. The plan includes drilling 50 wells, almost 30%more than last year. GazpromNeft aims to carry out seismic work over 5,500 sq km. The area could rise to 6,000 sq kmif we decide on additional seismic at the Orenburg group of fields.

— What are the 2013 investment plans? How will investment be split between key projects?

— Total investment has been penciled in at 24.4 billion rubles ($809.9 million), up 25%on the year, which further underlines how seriously we take exploration. The increased investment is largely due to go on NIS’ active exploration plans in Serbia and in neighboring Bosniaand Herzegovina,Romania and Hungary. Investments of our subsidiaries in traditional regions should remain almost flat on theyear at 6 billion rubles. Other investments will be equally split between our key projects in Russia and abroad. Extra expenses will include drilling at theDolginskoye field in the Pechora Sea.

— Will you please detail the Dolginskoye plans for 2013?

— This year we will drill one exploration well at thefield, which will be the third well at the site, but thefirst to be spudded by our subsidiary, GazpromNeft Sakhalin, which operates the project. Next year another well will be drilled.

— Are you planning to invite partners to develop the field?

—Weare talking to at least two potential partners.

— Who are they?

— I would prefer not to name themand can only say that they include both European and Asian firms.

— Last year GazpromNeft agreed with Japanese state Japan Oil, Gas and Metals National Corp. (Jogmec) to jointly explore the Ignyalinskoye field, one of the three fields of the Chonskaya group in East Siberia. How is work going?What re the plans for the other two fields — Vakunaisky and Tympuchikansky?

— Joint exploration of theIgnyalinskoye field is a good example of how aforeign partner can smoothly enter theproject. This year we plan 3D seismic at thefield and the drilling of two exploration wells. Jogmec covers major investments in thefirst phase of exploration. Unlike in the south, exploration of the northern Chonskaya group — theVakunaisky and Tympuchikansky fields — is fully financed by GazpromNeft. At the Vakunaisky field we are going to apply theinnovative UniQtechnology developed by Schlumberger, which should allow us to boost the efficiency of exploration drilling by 15%-20%. In 2013 we also plan to drill one well at each of the two northern fields of theChonskaya group and are also considering the start-up of test production from them.

— Why has the company decided to goit alone with the Vakunaisky and Tympuchikanskyfields?

—When we decided to attract apartner for the Ignyalinskoye field, we were simultaneously talking with partners for the two northern fields. At that time we measured theexploration risks and the terms offered by potential partners.Wedecided that the company will carry out the first phaseof exploration itself, remove those risks and come back to talks with foreigners with a clearer project in mind in terms of its viability, probably after 2014.

— Who are the potential partners? South Korea’s Kogas was one of the likeliest candidates.

—Weare currently implementing the project on our own and we have enough financial and technological resources for theproject’s successful implementation. However, we are open to discuss partnership opportunities with interested companies.

— The Kuyumbinskoye field is another project GazpromNeft is developing inEast Siberia, within its 50-50 Slavneft joint venture with TNK-BP. How is the project going?

— Last year, we re-evaluated thefield’s reserves, increasing themby 3 million tons and 16 million tons under Russia’s C1+C2 classification respectively. This year’s programincludes 550 sq kmof 3D seismic and drilling of three exploration wells.We expecta reserves increase of 3 million tons and 26 million tons under C1+C2 classification respectively this year.Weshould also continue test production fromthe field, where we plan to drill sixproduction wells in 2013. Test output is expected at 45,000 tons this year.

— How will the crude be evacuated?

— Crude transportation options fromthe field are currently limited. Last year we made a preliminary agreement with pipeline operator Transneft to ship up to 7.5 million tons/yr (150,000 b/d) via thenow-constructed Kuyumba-Taishet pipeline.We have the right to deviate from those volumes by 10%under the ship-or-pay deal with Transneft.

— Do you expect major changes inthe Kuyumba development planas a result of TNK-BP coming under the new ownership of state-controlled Rosneft?

— The 2013 exploration plan has been approved and is currently being implemented. I believe the risks are very low. The viability of the project is of little doubt and I’msure the new partner will support this project.

— GazpromNeft and TNK-BP are also jointly developing the Messoyakha group of fields on Yamal, where one of the issues is the quality of the reserves. How is work going?

— This year we aimto continue exploration at the fields. The programincludes 400 sq kmof 3D seismic and drilling of fiveexploration wells. In 2012 we carried out test production from sixwells and results were rather promising.We also re-evaluated the reserves and how we see themand prepared a report for Russia’s state commission on reserves. There were no major changes, but there is one question that needs to be clarified — thecrude extraction ratio at the Messoyakhagroup.

— Did you manage to get a better understanding of the proportion of heavy and light crudes at the Messoyakha group of fields?

— This year, we should continue data interpretation and build asingle model that should help us to take a complex look at the field.

— GazpromNeft was earlier planning to study the possibilityof applying for licenses onthe Yamal and Gydan Peninsulas.Was this work completed?

—Wehave prepared a programfor theGydan peninsula. Last year, we studied three fields in the region that are of interest for GazpromNeft in terms of exploration — Uglovoe, Karkasnoye and Severo-Yamburgskoye.We are currently carrying out atechnical and economic evaluation of those fields and will decide on further steps to apply for thelicenses.

The economic viability of theYamal fields depends largely on hydrocarbon transportation options. Our task is to study all transportation options available in the first half of this year, including the pipeline option, the Northern Arctic Passage and acombined route. There are currently lots of options on the table. Weshould first evaluatethe economics of each of themand decide on whether any of the fields can add valueto our Novy Port field. However, our general target is to expand GazpromNeft’s presence on theYamal Peninsula.

— GazpromNeft currently operates two offshore projects inthe Pechora Sea — the Dolginskoye field and the Prirazlomnoye field, where commercial production should start this year. Are you planning to expand your offshore presence?

— GazpromNeft sees the Arctic as one of theregions for thecompany’s future development. Our interests include three offshoreareas — Severo-Vrangelevsky in the Chukchi Sea, Severo-Zapadny in the Pechora Sea and Beloostrovsky in theKara Sea.

— Will you need partners to develop those fields?

— Arctic projects require significant resources, both financial and scientific, and require international experience and modern technology, which means attracting aforeign partner is a reasonablemove. Discussing possible partnership, we want to simultaneously share financial and technological risks on theone hand, and to establish the necessary scientific base and infrastructure to implement those projects. The key aspect of partnerships for Gazprom Neft will, however, remain GazpromNeft’s active role and expansion in theArctic.

— GazpromNeft actively works offshore other countries. The company partners Petronas and Cuba’s Cupet offshore Cuba, where a dry well was drilled last year. Are you planning to quit the project?

—Wefailed to get commercial crude flows from thewell, but we did get exploration data that allowed us to review theregional model. GazpromNeft and its partners have singled out new prospective structures at theblock. Having studied theresults, we decided to extend thefirst exploration phasefor nine months up to September.Weneed this timeto consider thedata received. By September we should decide on our participation in the project and on the next phase that includes 3D seismic.

— Last year GazpromNeft completed work within the T andU blocks which the company operates offshore Equatorial Guinea.What are the next steps on the project?

— GazpromNeft sees theWest African shelf in general as one of thekey regions in its strategy for resource base development and expansion outside Russia. Turning to Equatorial Guinea, we fulfilled all our commitments within thetwo blocks in mid-2012.We have defined prospective structures at both theT andU blocks using thedata obtained and re-interpreted.Wehave measured therisks and decided that those projects are currently not economically viable for the company. But we see great exploration potential in the region. That is why we asked the Equatorial Guinean authorities to expand our presence in the region.We met top managers of state GePetrol in late January and discussed futurecooperation. As aresult, GazpromNeft has been offered potential partnership beyond our current projects. GazpromNeft is currently reviewing its future in the country taking into consideration our two blocks, the data obtained and new offers from thestate.

— Last year GazpromNeft entered two projects in the semiautonomous Iraqi regionof Kurdistan.Will you please tell us what your plans are there for this year?

—Weentered two projects in Kurdistan — the Shakal Block, where we act as operators, and theGarmian Block, where we partner Canada’s WesternZagros.Weare planning intenseexploration at both blocks since we are committed to complete all works by end-2014. This year plans for the Shakal Block include seismic work as well as drilling the Shakal-2 well. If we manage to find the technical solutions, we should bring back to life and re-test theexisting Shakal-1 well. The third well, Shakal-3, is scheduled for 2014. In 2013 we should carry out 350 sq kmof seismic work in the south and another 200 sq kmin the north of the Garmian Block. The plan also includes drilling of three shallow wells in one of the oil-bearing prospective horizons, which is not well studied, but which is believed to be ripe for development using modern technology. The programalso envisages drilling two deep exploration wells at theblock. Depending on theresults, we should drill from one to three wells in 2014.

— Iraq considers agreements forged withthe Kurdistan Regional Government as illegal. Are there anypolitical risks that can have an impact onyour presence inthe region, where you are also part of the Iraqi Badra field consortium?

— The exploration plan for Kurdistan has been approved.We are moving forward within theplan and fully implement all our commitments in the region.

— This year, GazpromNeft aims to launchcommercial production at the Badra field.What are the explorationplans at the site?

— 2013 is asignificant year for Badra since we aimto start production from thefield. Currently there is one exploration well BD4 drilled, whose tests should be completed in early June. The other BD5 well is nearing completion. Drilling results should help better understand thereservoir’s structureand clarify exploration models, evaluate reserves and prepare the field’s development with ahigh level of reliability. Exploration plans for 2014-15 includes drilling of one deep well of 6,000 meters to study deeper, unexplored but perspective layers, which can significantly boost the field’s reserves.

— Are there anyother regions inthe worldGazpromNeft is interested in for future international expansion?

— Croatia is one of the regions we are looking at.We have recently registered our subsidiary in thecountry, where we are looking at both on- and offshore options. In the first half of 2013 Croatia aims to auction several onshore blocks and by the end of theyear offshore blocks in thesouth.

— Will you participate?

—Weshould decide on our interest by theend of June.