New Gazprom Neft projects to yield 40 mtpa.

Gennady LyubinInterview with Gennady Lyubin, Executive Director for “Gazpromneft-Razvitie”

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By 2020 Gazprom Neft intends to almost double production compared to current level — up to 100 mln tons of oil equivalent. The company expects the most significant growth in new projects implemented in its key areas in Russia — Yamal Nenets and Orenburg regions.

O&C has talked to Gennady Lyubin, Executive Director of Gazpromneft-Razvitiye, a company responsible for implementing new Gazprom Neft projects. We discussed the Company’s short-term and long-term plans for development of its flagship fields and launching of Zapolyarie-Purpe pipeline which is under construction now, possibility of new acquisitions in Russia and overseas production projects.

O&C: What is the role of the new projects in reaching strategic goal of Gazprom Neft — doubling production volumes?

— By 2020 new projects, including the overseas projects, should yield 40-42 mtpa of oil equivalent. I should emphasize that I am talking about production volumes of Gazprom Neft and its partners in these projects.

O&C: The Company recently made acquisitions in Orenburg Oblast, purchasing licenses to three fields (see Counting on Synergy Effect, O&C #11, 2011). What are the first priority steps planned in these areas?

— A pilot project has been initiated at the eastern part of Oreburgskoye field, where we are planning to drill six wells. We are planning to finish drilling and completion of the first three horizontal wells in March, and to finish the testing program in April. Tsarichanskoye field is under pilot development now, so this year we will focus on the field development plan for the area. At the same time we are continuing the exploration drilling program and construction of facilities for newly drilled wells.

O&C: How are you planning to ship oil from Tsarichanskoye field?

— This field is located not too far from our third asset in the region — Kapitonovskoye field, which has smooth logistics for oil transportation by railroad. We are not planning to change this scheme in the near future. Any other options including construction of oil pipeline through to Transneft trunk line will be discussed only after full field development plan of Tsarichanskoye field is in place.

By 2012 we are planning to produce about 1 mln tons of oil from the three fields and in five years we plan to be producing up to 5 mtpa of oil equivalent.

O&C: If you want to achieve these production levels, you will have to increase recoverable reserves...

— First of all, we count on further exploration of lower formations of the eastern site of Orenburgskoye field. We plan to put together an exploration program, drill two appraisal wells and shoot about 250 km of seismic surveys this year. Two more appraisal wells are planned for 2013 and 2014. Considering that the area is pretty small, we are facing a lot of work to do.

O&C: Let us get to major Gazprom Neft area of operation — Yamal Nenets Autonomous area. Why are West Messoyakha and East Messoyakha fields under joint development with TNK-BP are segregated from Slavneft and set up as a separate project?

— Funding a 20 bln dollar project is much easier for shareholders if funding goes directly, rather than through a subsidiary, since such a subsidiary is more limited in its fund raising options, including borrowed funds. Besides, it is not too convenient to manage Messoyakha project from Slavneft, since their major assets are located in Khanty Mansi Area.

We already said that similar pattern may be used for development of Kuyumbinskoye field in Krasnoyarsk Region.

O&C: In the mid-term, Messoyakha project should yield the majority of production increase for Gazprom Neft, and its production is very important from standpoint of Zapolyarie-Purpe oil pipeline. What part of Messoyakha production is planned to transport via that pipeline?

— In 2016 we plan to transport about 10 mtpa via Zapolyarie-Purpe pipeline, possibly more in future. Preliminary negotiations on oil transportation are currently under way with Transneft.

O&C: You will still need to construct a connection pipeline from Messoyakha fields to Transneft trunk line...

— Realistic estimation shows that a pipeline with such length (which is about 100 km) and such throughput capacity may be built in one year. Since Zapolyarie-Purpe pipeline will not be fully commissioned until the end of 2015, we do have some time.

O&C: But will you start producing form these fields earlier?

— Yes, pilot development scope of work will commence this year, like construction of pads and drilling wells, well testing is planned for the next year. Amounts of oil production to come during the first stage of development are essential, mostly for verification of production potential of wells. A part of produced crude may be used for own needs, the rest will undergo waste management process, possibly reinjection into formation. Peak production from Messoyakha fields is expected to be up to 34 mtpa of oil equivalent.

O&C: What do the project parties think about natural gas transportation issue? Will you build a pipeline to Yamburg or will the field be connected to gas pipeline system currently under construction by LUKOIL at Gydan peninsula?

— Current data of Messoyakha field do not confirm significant reserves of associated gas. It may be possible that no pipeline will be required at all; what we’ve got there, will be barely enough to cover own needs of the field facilities. Anyway, this is not a top priority right now: development of gas reserves will commence after 2020.

O&C: SeverEnergia is another promising project of Gazprom Neft in Yamal Nenets Area (other shareholders are NOVATEK, Eni and Enel — note by O&C). First gas production from Samburg, as the most developed field of the Company, was planned for the end of last year — early this year. Did you review those plans?

— Commissioning of the first start-up facility with capacity of 2.6 bcm of gas per year at Samburgskoye field is planned for the first half of 2012. From that time on we should begin commercial supply of gas from the field into Gazprom pipeline system. The second facility of similar capacity is planned to be launched in December of this year.

O&C: What are your plans with respect to other fields operated by SeverEnergia: Yevo-Yakhinskoe, Yaro-Yakhinskoe, and Severo-Chaselskoe?

— The SeverEnergia development strategy approved by the company’s shareholders says that three fields, namely, Samburgskoe, Yaro-Yakhinskoe and Severo-Chaselskoe, will produce both gas and oil; the others — gas only. Today, we are work hard in Yaro-Yakhinskoe field where we plan to drill and test the first oil well in Q4 2012; gas production will start one year later. We plan to start production from Severo-Chaselskoe field in 2015, and for Yevo-Yakhinskoe in 2017. We should take into consideration that while the external gas and condensate transportation infrastructure is already in place, our oil production plans will have to be coordinated with the construction of the Zapolyarie-Purpe main oil pipeline which is expected to reach Samburgskoe and Yaro-Yakhinskoe fields not earlier than by the end of 2014. Nevertheless, even before this transportation route becomes available we plan to drill sufficient number of production wells so that in 2013 and 2014 these two fields could produce a total of 170-180 K tons of oil.

O&C: What are you going to do with this oil before the Zapolyarie-Purpe pipeline is commissioned?

— This oil, just like our condensate, will go via NOVATEK’s pipeline system, to Purovsk condensate processing plant (see also “Radical Expansion” in O&C No. 11, 2011). But this volume is important for us mainly as an indicator of the fields’ potential so that we could adjust their development programs accordingly if needed. This year we will start engineering connection pipelines from our fields to Transneft’s trunk pipeline system; the construction work will start in 2014 and is expected to be completed in 2015.

O&C: There is another benchmark project that Gazprom Neft is implementing on the other side of the Ob Bay — on the Yamal Peninsula. When will your company finally obtain the license for Novoportovkoe field? Will not the long-lasting license transfer procedure affect the field commissioning deadline scheduled for 2013?

— As of now, the license is being reissued for our subsidiary Gazpromneft Novy Port. In 2012 we plan to invest about 8 bln rubles in the development of Novoportovskoe field. We are going to reactivate and work over the existing exploratory wells, define location for one production well cluster and start drilling. Contracts are already awarded, materials and equipment procurement and delivery process is under way. This year production plan for this field is 13 K tons.

O&C: By the end of last year Gazprom Neft was going to select an appropriate transportation scheme for Novoportovskoe field trying to assess whether it will be possible to transport its whole production by the Northern Sea Route. Has the final decision been taken?

— Our estimations indicate that this transportation scheme is quite reasonable and we are going to apply it during pilot production. Setting up infrastructure for the pilot production period will enable us to solve two tasks at once. Firstly, we will get a better knowledge of Novoportovskoe production potential, thus enabling us to improve the field development program; secondly, we will see whether the sea transportation route is cost effective. During the open water season which lasts up to three or four months in these latitudes, we do not foresee any problems with transportation at all. The biggest challenge is the winter period when tankers will need icebreakers to clear the way. By the end of 2013, we hope to export first oil from the Kamenny Cape.

O&C: When will construction of the export terminal on the Kamenny Cape begin?

— In Q1 2012 we will announce a tender and within one month the winning contractor will be selected. The key criteria for this selection will be expertise and experience in engineering, construction and operation of facilities of this kind and, of course the price. A number of specialized companies, namely, Murmanks Shipping Company, Sovcomflot, and some others have already expressed their interest to participate in the bid. The fact is that any construction work in this area is limited to the summer time when the Ob Bay is free of ice. The construction will begin, expectedly, next year.

O&C: In this case, will the terminal be ready by the end of 2013, when it is scheduled to ship the first oil?

— End of 2013 is an estimate that could be adjusted if necessary.

O&C: What will be the capacity of the terminal?

— As per the planned production volumes, it will be 0.5 mtpa. Once Novoportovskoe production potential has been confirmed, we may think about building more powerful transshipment infrastructure. One should bear in mind that there is a group of undistributed fields not far from Novoportovskoe field. In a longer run they could be connected to our transportation system, which will produce synergy effect and allow for cost reduction.

O&C: It was announced previously that foreign partners may join Novoportovskoe project...

— At the current stage of the project we do not think it makes sense to bring in foreign partners. The whole pilot operation project is evaluated as 22 bln rubles, Gazprom Neft is ready to pay the bill on its own. When full-scale field development starts, we might consider inviting other partners to join the project.

O&C: By 2020 10% of total Gazprom Neft production is expected to come from assets outside Russia. What is the progress with African and Cuban projects that you also look after?

— Early in 2011 the Company completed 3D seismic at block T in delta of the Niger in Equatorial Guinea, total area about 300 km2. By this summer we should be done with the interpretation of data and the results will determine when exploration wells will be drilled. We hold operatorship with 80% interest in both of the shelf blocks, which the company is developing in that country.

Apart from that, last summer Gazprom Neft completed joining PSA on four blocks in Cuban sector of Gulf of Mexico, getting a 30% share of the project (Malaysian Petronas holds the other 70%). Geologists believe these blocks to be the best prospects among all of Cuban shelf, which has still not been properly studied. First well is planned to be drilled in 2012.

O&C: What are your plans for developing Badra field in Iraq, where Gazprom Neft is also an operator and where first appraisal well was started last fall?

— This year’s investment into Badra project will be 18.6 bln rubles. We will continue drilling appraisal and production wells, interpretation of 3D seismic. In February we commenced design effort for the first train of central oil gathering facility. First commercial production of oil — at least 15K bpd is planned for August 2013.

O&C: What is the total spending Gazprom Neftis is planning for the new projects?

— About 44 bln rubles in 2012 including projects outside Russia

O&C: How rational can it be to invest such significant amounts under current taxation environment in Russia? As Gazprom Neft representatives said, Messoyakha project does not pay back even with 60% crude export duty together with MET exemption.

— Indeed, in terms of the lifting cost, Messoyakha project can be said to be a complicated field. Operations planned for Messoyakha field for the nearest two years will help us determine well productivity to subsequently take active effort to reduce project cost. All economic predictions show that development of Messoyakha group of fields under effective taxation and customs environments is not cost effective. One of the possible solutions here could be introduction of preferential customs duty for Messoyakha crude, similarly to large fields in East Siberia, since delivery of Messoyakha project will actually create a new oil producing region in Russia. But here we cannot do without government support.

O&C: Do you plan any acquisitions in the near future, first and foremost, in Yamal Nenets Area? It was announced that there are blocks north of Messoyakha that the Company may be interested in.

— Both Yamal and Gydan constitute our strategic interest; we are investigating all possibilities to expand our business in the region. We will base our expansion on two core projects in Yamal Nenets area — Messoyakha and Novoportovskoye.

O&C: How true is the assumption that Prirazlomnoye field can be among new Gazprom Neft projects at Timano-Pechora province shelf?

— As you know, Gazprom has made a decision to transfer all their oil assets to our company. It was also mentioned that Gazprom Neft may become operator of Prirazlomnoye. We are closely monitoring project progress, but the final decision will be made by the parent company.