Gazprom Neft Sees Good Prospects in Kurdistan

NEFTE COMPASS

Interview with general director of Gazprom Neft Middle East Sergei Petrov

NEFTE COMPASS

Gazprom Neft is the only Russian company that is currently producing crude oil in the volatile Iraqi region of Kurdistan. In an interview with Nefte Compass, Sergei Petrov, general director of Gazprom Neft Middle East, explains why the company aims to expand its presence in the region and outlines how existing projects are progressing.

— Gazprom Neft entered Kurdistan alongside other major global companies. However, many of them later left the region. Why does Gazprom Neft continue its work there, and what prospects do you see in the Iraqi region of Kurdistan?

— When oil prices were high, companies invested in all regions, expanded their presence at very different markets. After the oil price collapse and disappointment in initial geological expectations, companies reconsidered efficiency indexes and reduced the least efficient projects. Gazprom Neft considers its assets portfolio in terms of its long-term economic efficiency. I believe that we have good prospects in the Iraqi region of Kurdistan, and we can get good results on these projects.

— How much did the company produce in the Iraqi regionof Kurdistan in 2016, and what is the production plan for 2017?

— Gazprom Neft is active at three blocks. At present, production is carried out on the Garmian Block from the Sarqala-1 well. In February 2016, Gazprom Neft took over operation of the block from its partner, Canadian WesternZagros. Since Mar. 1, 2016, we are the full-fledged project operator. Last year production at Sarqala-1 stood at 3,863 barrels per day. We started 2017 with daily output of some 5,500 b/d. During this year we managed to significantly increase production to 9,600 b/d.

— How did you manage to almost double production?

— At the Sarqala-1 well we intensified crude inflow by using large-volume acid treatment for the bottom-hole zone. In order to use this method, we used Gazprom Neft’s experience while developing complex collectors in different regions of Eurasia. We considered all the possible risks and succeeded. This is the first time this enhanced recovery method was used in the Iraqi region of Kurdistan. The Sarqala production plan for 2017 stood at 4,418 b/d. However, after using the acid treatment method, we expect that production will rise to 7,631 b/d. Next year, production could reach 13,455 b/d.

— What oil do you produce in terms of quality?

— This is good light oil without water and sulfur, with an API of 39°.

— Is the plan for the development of the Garmian Block already approved?

— Last May we completed preparation of the development plan for the field initiated by our partner during its operatorship, had it agreed, and received approval from the oil ministry. The plan provides for drilling one well a year until 2022.

— Is there already an understanding of what level of production you can achieve after drilling all the wells?

— We are not limited to the production figure because it is difficult to make forecasts based on data from just one well. We continue evaluating the block’s reserves.

— What are the reserves of Gar-mian today?

— About 8 million tons of recoverable crude reserves. We are currently drilling the second well, which should help us get extra geological data and clarify the reserves figure.

— What about gas?

— We are also digitalizing gas reserves. After we finish that, we will be able to evaluate whether it is reasonable to build the gas infrastructure.

— Do you plan to build a gas plant?

— Our production-sharing agreement (PSA) involves no obligation to build gas infrastructure, but the Iraqi Kurdistan region’s Ministry of Natural Resources has those plans. But in order to prepare a proper gas plant project, the regional government has to understand what amount of gas will flow from different fields. In any case, we plan to transfer the gas to the ministry so as not to flare it in the field. In addition, we are now considering the possibility diesel generators at our production sites.

— How is the work on the development of the Shakal and Halabja Blocks going?

— Based on the results of last year’s seismic of the Halabja Block, we decided to relinquish this block.

— Why was this decision made?

— The exploration works we conducted on the block showed that there are prospects to discover a gas field. Halabja is is located in the highlands at altitudes of up to 2,000 meters, where there is absolutely no infrastructure, but where there are minefields left from the war period. You need significant investments in order to remove existing geological uncertainties. All this imposes very high risks that we are not ready to take on.

— Have you agreed on relinquishing the block with the government?

— Yes, we signed the necessary documents. Our arguments to reject drilling on the Halabja Block were well justified. This is the opinion shared by the Kurdistan Regional Government (KRG). That is why our negotiations ended up with an agreement to re-invest the money freed up into the continuation of drilling at Sarqala.

At Shakal, we finished the search period this year. Due to close cooperation with the government and similar views on the development of the block, geological and exploration period works there were prolonged for one year on two conditions. The first condition is that we must start overhauling the canned Shakal-1 well by Jul. 15. The second is to announce a commercial discovery by Dec. 31, 2017.

We fulfilled the first obligation. Now we are completing the cutting of the sidetrack at the Shakal-1 well. We do not exclude that after interpreting the new data we will be able to put Shakal hydrocarbon reserves on our balance sheets. In case of successful exploration drilling, we will prepare a field development plan and define the drilling site for the next well.

— What level of production do you expect to get from the Garmian and Shakal Blocks?

— It is too early to make output forecasts for Shakal before completing exploration works there. At Garmian, we expect that in the period from 2019-22, production might rise to 1 million tons/yr.

— Who is drilling on your blocks?

— Drilling is currently being carried out by a Chinese contractor — DQE International, that won two tenders — for Garmian and Shakal. They have about 12 years of experience in the Iraqi region of Kurdistan. They are also more attractive in terms of costs for their services than other service companies.

— Is Gazprom Neft considering other blocks in Kurdistan?

— We are ready to expand, to look at new blocks. Gazprom Neft is in constant negotiations on the issue with the regional natural resources ministry, which offered us some 10 blocks for consideration. Having studied the available geological data, we chose the most promising license areas and are currently holding negotiations.

— On what terms are you ready to enter the projects?

— We are interested in entering the project as an operator. However, we understand all the hurdles, and we will discuss the terms in details with other participants.

— How do you sell crude oil produced in Kurdistan today?

— The Kurdistan regional government uses the option envisaged by the PSA terms and buys out all the crude oil produced for further marketing.The government immediately becomes owner of the crude once it leaves the territory of the field. All the crude produced is currently transported by trucks to the Bazian refinery.

— At what price do you sell the crude?

— Crude oil is sold using the formula based on the Brent indicator and considering the discounts. The discount is influenced by several factors: transport, crude oil quality, road taxes. Today we are discussing with the regional government options to improve terms. Our main argument is that PSAs were signed at high oil prices, and when prices dropped new investments in the region turned out to be on the verge of economic viability.

— How urgent is the security issue in the region today?

— All Gazprom Neft Middle East units are working under a regime of high industrial security. We are prepared for any situation. For example, in 2014 we carried out the full stuff evacuation given the increased terroristic danger. For us, people remain the most valuable asset, so security issues come first.

— Is it difficult to find specialists to work in the region?

— Yes, it is not easy sometimes given the specifics of the Middle East region. However, we managed to find a wonderful multinational team that successfully solves all the tasks.

Special Reprint from Nefte Compass for Gazprom Neft. Copyright © 2017 Energy Intelligence Group. Unauthorized copying, reproducing or disseminating in any manner, in whole or in part, including through intranet or internet posting, or electronic forwarding even for internal use, is prohibited.