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We have to move faster – just to stand still

We have to move faster – just to stand still
Sergei Vakulenko

Interview with Gazprom Neft Head of Strategic Planning, Sergei Vakulenko

Sibirskaya Neft magazine

— Quantitative indicators for “Strategy-2025” don’t, in fact, differ from plans to 2020. Which gives rise to the feeling that Gazprom Neft has just moved strategic deadlines by five years ...

— Obviously, no one moved the goalposts for Strategy-2020: reaching these is still on course for 2020. But at the same time, looking at things realistically we realize that, for the next few years at least, we’re going to have enough on our plates just maintaining that level.

If you’re talking about refining, for example, then in maintaining current total volumes we will sharply increase the proportional output of light petroleum products. On the other hand, all other domestic companies will be doing this, at about the same time. On that basis, by 2020 Russia will have one of the best re-tooled downstream sectors in the world — working, moreover, within a static (if not actually stagnating) domestic market. In which, accordingly, maintaining current refining volumes and market share will be far from straightforward. The world refining market is currently intensely competitive, so significant growth there isn’t worthwhile — although we are determined to play a major role in other specialist niches abroad.

If we’re talking about extraction, then by 2020 we’ll have implemented several major projects. But we’re expecting a pretty sharp drop in production at our traditional assets by that time, and after 2020 we’ll also see a leveling off at those new assets we’re currently bringing into development. So maintaining extraction at current levels isn’t a case of resting on our laurels but, rather, a serious and difficult job requiring the development of new reserves at a rate no slower than prior to 2020. It’s like Alice Through the Looking Glass —you have to run as fast as you can just to stay in the same place; and if you want to get anywhere then you have to run at least twice as fast!

—Then how will you find 100 million tons of production between 2020 and 2025?

— Partly through ensuring the full development of the current generation of major projects. A second, and very important, element concerns what we call the “technological arm”: extraction of tight reserves, and work with low-permeability reservoirs (specifically the Bazhenov, Abalaksk and Tyumen suites), bringing into production previously unrecoverable reserves in existing fields, and improving recovery efficiency through the use of high-technology extraction techniques. A third component concerns prospecting, geological exploration, and acquisition. Those areas we plan to go into have already been identified, but we don’t yet know what, exactly, this will mean in terms of projects — we’ll have to wait and see.

— So the risks, objectively, are pretty high?

— Not risks so much as uncertainty. Our industry is such that — we are always dealing with uncertainty. And the ability to deal with uncertainty — whether oil price fluctuations or geology — is, really, a key requirement for any oil company.

— But any strategy is built, predominantly, on forecasts — with changes in external conditions throughout the forecast period. What is the range of uncertainty here?

— We don’t make forecasts. Nonetheless, the development of the global econom (which of course dictates market prices), the level of demand, and its geographical distribution — these are all things that are difficult to predict with any degree of certainty. We developed four global macroeconomic scenarios, all reasonably different from each other, and considered how our portfolio (of current and future projects) might appear under each of these, allowing some contingency for unfavorable outcomes and, conversely, leaving scope to exploit any felicitous turn of events. First and foremost you have to work out how the balance of supply and demand might be affected, and by what.

Demand is driven by the rate of economic growth in various countries. For example, we took a view on whether the countries of South East Asia or South America would be able to develop into consumer societies on the basis of their own demand, or whether they would continue to serve the countries of the north. This means very constricted demand on the part of those countries with stabilizing or even reducing demand, vis-à-vis growth in consumption in new centers of demand, and so on. New technologies are extremely important in the context of changing demand. If the world is rich enough, it can afford high-economy engines, and new sources of energy. If it is poor, that won’t happen. In this context, the key thing is that living standards rise where growth is fastest. If developed economies grow faster — presumably, the transition to the next phase of technological development happens faster too (although of course this depends not just on the availability of technology and infrastructure, but also political and ideological factors) and developments in commercialized mass production become ever more accessible for the whole world, and become widely available. In terms of the economic development of relatively poor countries (with average per capita incomes of c. $3–5,000) catching up, and as car-usage becomes established for the first time, in all likelihood the greatest demand will be for simple solutions, simple engines — and that means the trajectory of demand will be different.

Similarly, we have evaluated options regarding changes in supply, where uncertainty is connected to technological breakthroughs — whether this concerns ultradeepwater drilling or the Arctic Shelf — insofar as these lead to (or, on the contrary, dampen) new perspectives in terms of new categories of reserves, and so on.

If you take into account all available combinations, you could end up with myriad viewpoints. So it’s more logical to develop several scenarios, sufficiently varied and sufficiently viable to yield several bases for analysis.

— You haven’t said anything about the impact of oil prices ...

— Prices per se, disregarding other parameters, are not that important, but we have based our calculations of a range of $60–120 per barrel, with a base scenario of around $90–95 per barrel.

— In terms of production strategy, considerable importance is given to work with non-traditional reserves, such as those in the Bazhenov suite: shale oil has, to some extent, similarly significantly altered the USA’s standing in the global oil map. Are we, too, relying on these as a strategic reserve?

— We by no means view shale oil as a cipher, it is something very real, but it does seem to represent a refutation of Hubbert Peak Theory and serves as yet further evidence that there are still abundant reserves of oil. But we don’t believe that shale oil production will completely change the world, and work with these kinds of reserves would disrupt entirely what we are doing today — not least because it is still a very expensive technology. But one which, nonetheless, opens up many opportunities for our company — for which reason we are at the forefront of its exploitation — or, at least, are faster than European and Asian companies in reaching these kinds of reserves in Western Siberia. How successful this will be in the future will become apparent in the next two to three years. In the event that it is successful, Gazprom Neft must be among those making this technology a reality.

— By what means do you plan to reach 10 million tons of foreign production?

—We have high hopes of Iraq, and of Kurdistan in particular. If all current projects in the Middle East and Venezuela deliver as planned, we’ll already be on course to achieve the strategic 10 million tons. But this is without allowing for potential risks, so we definitely need to investigate alternative options.

—Regarding international refining, plans are pretty ambitious — but, thus far, you only have assets in Serbia and Belarus. What are your key areas for investigation here?

— Development abroad is driven, in part, by financial factors. We are already making major investments in large-scale reconstruction and modernization projects in refining, and in the development of the production base: but, at the same time, we do have to take a responsible and well-targeted approach to borrowing. Moreover — and this, if anything, is the main point — the capacity of our refining assets must be commensurate with our production capacity: therefore, any increase in refining capacity abroad must be consistent with growth in production. It probably makes sense to construct some facilities in the long term — i.e., in those regions where a marked increase in demand is anticipated. Clearly, this would be pointless in Europe, with its excess capacity, whereas growth in Asia is obvious. But there are refineries in Europe with reasonably good synergies with our own pipeline supplies, and with our business — and these are the main focus of our interest.

— But plans for 2020–2025 envisage foreign production in the order of 10 million tons ...

— Refining abroad is entirely possible with Russian oil. That proportion of oil that we plan to export, we want to refine at those facilities to which we will have access. Apart from which, it doesn’t, physically, have to be our oil — swaps are possible. Although, of course, this should be more or less the same market — the eastern Pacific, let’s say.

— Where do we plan to get to in retail — again, bearing in mind the fact that no major growth in refining is anticipated between 2020 and 2025?

— But, at the same time, we do plan to increase fuel sales volumes. Indeed, every refinery reconstruction means that, from the same volume of refined oil, we produce a greater volume of light oil products. The same applies to the retail network: it’s possible the number of filling stations won’t increase as fast as hitherto, but their effectiveness should show reasonable growth. We can, on our existing sites, modernize stations or build new ones from scratch, significantly increasing pumping volumes and, on that basis, increase sales volumes. There are certain mechanisms that are interesting to us — chief among which is consolidating our network into a single territorial presence, establishing a presence on all federal highways — even in those regions in which we don’t yet have our own filling stations, for example through franchising.

We might have slowed down in comparison with the rapid growth of recent years, but it remains our goal to maintain momentum in terms of sales growth. The main strategic goal for our retail business units is to get practically the same volume of the company’s petroleum products to market, by ensuring high channel-margins and return on capital.

Sergei Vakulenko

Sergei Vakulenko is a graduate of the Moscow Institute of Physics and Technology, the Fletcher School of Law and Diplomacy, Tufts University, and Harvard University. During a ten-year career at Royal Dutch Shell he held the positions of project economist; business development manager, gas; commercial manager, production; and shareholders’ representative in a joint venture, working on projects throughout Russia, Kazakhstan, Japan, Brazil and Europe, as well as leading the planning group for Exploration and Production.

Prior to joining Gazprom Neft he was Managing Director of a subsidiary at management consulting group IHS CERA. He has been actively involved in the development of a general scheme for the development of the oil industry in the Russian Federation to 2020, and the basis for changes to taxation in the Russian oil sector, under the Ministry of Energy of the Russian Federation. He has also been involved in the fulfilment of strategic consulting projects for Russian and international oil companies. He has been Head of Strategic Planning at Gazprom Neft since September 2011.