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Oil Producer Gazprom Neft Sees Bright Future for Gas

Oil Producer Gazprom Neft Sees Bright Future for Gas
Anton Gladchenko

Gazprom Neft, the oil arm of gas giant Gazprom, has increased its gas production about 10-fold in the last five years. In an interview with Nefte Compass, Anton Gladchenko, the head of the company’s gas and power department, explains why Gazprom Neft is actively developing its gas business and why this doesn’t create competition for its state-controlled parent company.

Nefte Compass
Reproduced from Nefte Compass with permission from the publisher, Energy Intelligence for Gazprom Neft. Photocopying of Nefte Compass, even for internal distribution, is strictly prohibited.

— Q: Gazprom Neft is considered to be an oil company mainly involved in crude oil exploration and production. Does it have its own gas program?

— The oil and gas business cannot be fully separated. When we produce crude, we also extract huge amounts of associated gas. Historically, most of the gas was flared in Russia, but it became a big headache for oil companies when the state set limits for associated gas flaring of no more than 5% starting from Jan. 1, 2012 and increased the penalties for excess flaring. Moreover, our portfolio of recently launched or soon-to-be launched projects includes assets where crude extraction is inevitably linked to significant natural gas extraction because of the fields’ geological structure. Those are oil and gas condensate fields, where we extract not only gas, but also gas caps. Having analyzed possible gas volumes that could have been flared, it became apparent that there was a need to develop an integrated gas program that would unite both commercial and infrastructure decisions. The program was finalized in 2010 for approval by the board of directors a year later. In 2011-15, investments in the program totaled 50 billion rubles ($803 million), while planned investments in 2016-18 have been penciled in at 70 billion rubles.

— How much gas did Gazprom Neft produce in 2015 and what are the plans for 2016?

— Last year, gas production totaled 30 billion cubic meters. Half of that comes from our two joint ventures with Novatek — SeverEnergia and Nortgas — while the rest is both natural and associated gas we started to produce in the last five years. We have increased gas production more than 10-fold over that period from roughly 4.4 Bcm in 2010. In 2016, the company’s total gas production is envisaged at 32.5 Bcm.

— How much associated gas is utilized?

— The figure stood at 80% as of end-2015. The launch of the Novy Port and East Messoyakha fields will lead to higher associated gas extraction and flaring risks, thus the total utilization rate might go down in 2016-17. This is because of a gap between production start-up and the launch of a compressor station to inject the gas back into the reservoir in end-2016. The reason for such a gap is that uncertainties over crude reserves and production volumes is higher than those over associated gas. So crude oil infrastructure decisions are usually made ahead of gas ones. After we start gas injection in the reservoir at Novy Port field in the summer of 2017 and launch the gas infrastructure in the eastern part of the Orenburg gas and condensate field, the utilization rate should total 85% in the last quarter of 2017.

— There are penalties for flaring above the 5% limit. How severe are they?

— It would be better to say there are payments for harmful emissions rather than penalties. We surely pay those. But payments for flaring are reduced by the investments we make in gas utilization schemes. Over the last several years, such investments exceed payments for flaring. And if investments exceed payments through the year, this means we actually pay nothing. In 2015 our investments totaled 30 billion rubles.

— Can you give details of the company’s gas program?

— The program consists of two key directions. One is a higher associated gas utilization rate. The other is natural gas monetization. Key projects under the first direction should be completed in 2018. All future projects would automatically include commercial and technical decisions on gas usage. As far as natural gas monetization is concerned, decisions depend on each particular project and are agreed with our parent company.

— What are the key projects of the company’s gas program?

— Let’s start with associated gas utilization projects. Gazprom Neft produces half of its associated gas in the Noyabrsk region, where we have developed an integrated project. Under the plan, Gazprom Neft and the Sibur petrochemical complex simultaneously increased associated gas transport and utilization facilities, which allowed a 1.35 Bcm per year increase in the volumes sent for refining. Gazprom Neft built new gas pipelines and partly repaired the existing gas collecting facilities at the Vyngapur group of fields. Sibur expanded the capacities of the existing compressor station, which it used to build a new Vyngapur gas processing plant with a capacity of more than 2.5 Bcm/yr. Simultaneously, the the Ety-Pur compressor station with a capacity of 1.2 Bcm/yr is being built at our Ety-Pur field, from where the gas will be sent to the Vyngayakhinskaya complex gas pretreatment unit. The compressor station’s launch is scheduled for October. This should allow us to compress all the gas produced in the region and send it via Gazprom’s pipeline network. This gas will be mixed with dry gas and and will be supplied through the single gas system. The project is of tremendous importance for our two assets — Gazprom Neft Noyabrskneftegas and Gazprom Neft Muravlenko. We are establishing a flexible system that should allow us to reach a 95% gas utilization rate in the region. The system would allow us to use optimal gas usage schemes even if production forecasts change for a number of fields — Vyngapurovskoye, Novogodnee, Ety-Purovskoye. Investment decisions for gas usage are usually quite difficult and require time, while gas is flared.

— What are the associated gas utilization decisions for the remote fields of the Noyabrsk region?

— We still need to make a final investment decision on the whole group of fields. This can be done once exploration is completed in the region. Today there is an understanding that those fields harbor significant amounts of gas. There are several options for gas utilization, including shipments to Sibur’s Vyngapur gas processing plant or to our Ety-Pur compressor station or we can use the gas as fuel for power generation.

— What about other projects?

— On Aug. 4, Gazprom Neft launched the Shinginskaya gas turbine power station with a capacity of 24 MW. The station’s construction should boost associated gas utilization rates and the effectiveness of the development of the Shinginskoye and other fields in the region, where a gas power hub would be set up. By the end of the year, we should complete construction of a compressor station with a capacity of up to 300 Mcm/yr. Part of the remaining gas would be compressed and shipped to our partner Tomskgazprom for pretreatment and onward shipment via the Gazprom pipeline system. We are thus setting up a flexible scheme that would allow us to decide how much gas we should use for power generation and how much gas we can ship through Gazprom’s system. We are planning to later switch the Archinskoye and Urmanskoye fields — with expected output of 400 Mcm/yr — to the scheme.

Gazprom Neft is also steadily developing gas transport facilities in the Orenburg region for shipments of rising gas volumes in the region to the Orenburg gas processing plant. For the eastern part of the Orenburg oil and gas condensate field, we agreed with Gazprom on the expansion of the existing gas pipe to ship the gas from the field. In September, we should finish testing and launch the new pipeline. We are also building a compressor station. Those decisions should allow us to send all the gas — roughly 5 Bcm/yr — to the Orenburg plant. As far as our assets in the west of the Orenburg region are concerned, we have plans for both power generation and gas shipments to the Orenburg plant. Active exploration is being carried out on the project to better understand production volumes. We have a long-term contract with Gazprom that should allow us to make various decisions, so we are waiting for some clarifications from our oil colleagues.

— What decisions need to be made on associated gas for your greenfield projects?

— A whole set of projects on gas utilization should be completed once we launch the complex gas pretreatment unit at the Novy Port field. The unit is one of the company’s largest projects, where investments should total 25 billion rubles. The project is unique. The unit is destined for gas compression, sweetening, dehydration and utilization by injection back into the reservoir. The unit’s planned capacity is over 7 Bcm/yr, while the compressors’ total capacity, which can also be used to send gas via Gazprom’s system — is 256 MW. Once we start gas injection, we will look at how the reservoir performs, how we can handle the pressure in the reservoir and boost crude extraction rates. Based on the results, we will make a decision on gas shipments to the market. If we understand that some gas should be evacuated, we would use either one of the options already agreed with Gazprom. But we have yet to make a final investment decision.

— Why can’t you inject all the gas back into the reservoir?

— This is a subtle issue. In fact, there is not much experience in Russia on injecting significant gas volumes back into the reservoir. The need for such action appeared only recently with the development of such areas as Yamal, Gydan and Nadym-Pur-Taz, where oil and gas condensate fields are located. Liquids extraction from those fields is very sensitive to reservoir pressure changes. We hope that our experience is positive so we can transfer it to other projects as well.

— Gazprom Neft is simultaneously working on gas monetization schemes for some projects. Why is that necessary and for which projects?

— We are doing that for such projects as the Novy Port and Messoyakha fields. Gas produced at Novy Port will be injected back into the reservoir. We are also working on an alternative option to connect to Gazprom’s system by building a gas pipeline with a subsea part under the Ob Bay, that should allow some gas to be sent to the market in the future. The plan awaits an investment decision next year. Similar options are being discussed for Messoyakha, where we work together with Rosneft. The fields have a significant gas cap. We are currently discussing with Rosneft gas injection plans as a basic scenario. But the fields have very complex geological structure. Significant gas injection back into the reservoir might negatively impact crude production. Given those risks, we have to think over gas evacuation schemes. So we are planning future infrastructure to be flexible in order to have gas monetization options.

— Is Gazprom Neft using its gas for power generation?

— We do have such projects in our portfolio, which account for some 10% of our gas. The biggest three projects in 2016 include the Shinginskaya gas turbine station with a capacity of 24 MW, a gas turbine station at the Messoyakha group of fields with a capacity of 84 MW and the Novy Port station with a capacity of 96 MW. As a result, our facilities should add 225 MW, doubling the company’s total gas power facilities to 400 MW.

— What are the future projects for the company’s gas program?

— There is one project where we are far from any decision — the gas program for the Kuyumba field developed with Rosneft in East Siberia. The current concept involves construction of a temporary underground storage, but the investment decision will be taken only in 2019 after removing all the uncertainties. We are also currently considering projects on gas usage and monetization for oil caps at Gazprom’s fields where Gazprom Neft is operator.

— What is the status of gas project on the Chonskaya group of fields in East Siberia?

— The project is at the exploration stage, so there are a lot of uncertainties. However, preliminary analyses of neighboring fields shows that gas reserves of the Chonskaya group might be very significant. No investment decision has been taken on the project. There are both gas injection and gas monetization options on the table.

— How are your joint ventures with Novatek — SeverEnergia and Nortgas — working?

— We are managing both assets on a parity basis. The assets are being developed under an agreed plan. As far as our share of gas monetization is concerned, all the volumes are shipped under long-term contracts with Gazprom and Gazprom Mezhregiongaz.

— How have recent changes in the macro-environment and sanctions impacted the company’s gas program?

— We continue to implement all the projects even with limits on financing. The general thinking of Gazprom Neft is that if a project’s overall economics are positive, the gas part should be implemented. Oil plus gas is viable, so we continue. But we have had to delay the decision making process for those projects where the integral economics was negative.

— Is Gazprom Neft selling gas to final consumers?

— We have some final customers in the portfolio, including our Moscow and Omsk refineries, but we sell some 90% of the gas to Gazprom’s wholesale subsidiary Gazprom Mezhregiongaz.

— Is there any competition with Gazprom?

— One of the alternatives to gas monetization is increased gas flaring, which would negatively impact Gazprom Neft and thus Gazprom as well. We make all the decisions as a Gazprom group. We are not trying to substitute Gazprom’s volumes. But if Gazprom as a group benefits from a big oil project that has a significant gas part, which might add additional value, we can then substitute Gazprom’s volumes with our gas or even offset Gazprom’s declining production. So far we managed to find mutually acceptable decisions.

— Does the company sell gas on the exchange?

— We are not participants of exchange trading. But we are carefully looking at the trends.