Geological Challenges Shape Company's Future

Viktor SavelievInterview with Viktor Saveliev, Head of Gazprom Neft's Exploration and Resource Base Development Directorate

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Today, one of Gazprom Neft’s priorities is to push on with geological exploration programs in the new regions — the Eastern Siberia, the Yamal Peninsula and the Russian Arctic shelf — as well as to implement a number of ambitious overseas projects. With a goal to increase production to 100 million tons per year by 2020, the company is expanding its geographical footprint and is looking at the possibilities to partner with foreign companies who might share the risks of these complex and large-scale projects. On the eve of the professional holiday, the Day of Geologist, The Oil of Russia interviewed Viktor Saveliev, GPN’s head of the exploration and resource base development directorate. He told us about the prospects of oil and gas exploration in Russia and abroad.

— Viktor Alekseyevich, please tell us about GPN’s most notable successes in geological exploration in 2011. Are you drilling more exploration wells?

— 2011 was a good year for us. Apart from the acquisitions, we have been able to harvest over 60 million TOE of ABC1-category reserves exclusively through our exploration efforts (with the current production level being 57.3 million TOE). We keep up the pace of exploration drilling at the same high level as in 2010; e.g., last year we covered about 91 thousand linear meters. We continue working hard both in the old areas, with our traditional assets, where we run additional exploration programs in the mature fields, and in the new areas. The company makes extensive use of the seismic surveys for preparing and detailing geological models of potential pay zones, which helps us optimize prospecting, exploration and field development efforts. Last year, we shot primarily 3D seismics, as it is the most accurate and efficient method. All of our subsidiaries have completed seismic surveys in 11 areas, covering more than 3 thousand sq. km, which is 50% more than the 3D scope we did in 2010. These figures do not include work done by the joint ventures in their areas, where they also used 2D and 3D seismics very extensively.

Let me emphasize that we consistently focus on the replacement of reserves: we increment more than we produce. Speaking about last year, our geologists focused specifically on further exploration and proving the C2 category reserves in order to start production drilling as soon as possible. Besides, the company has discovered two new fields, Ignyalinskoe in Irkutsk region and Myginskoe in Tomsk region, as well as twenty new hydrocarbon deposits.

According to the recent PRMS audit conducted by DeGolyer and MacNaughton, Gazprom Neft Group has increased its 2P reserves (proved probable) by almost 9%, compared to 2010, which is 1.566 billion tons of oil and 445 billion m3 of gas, or 1.923 billion TOE. Taking into account the 2011 production level, the reserve replacement rate reached 383% (215 million TOE.). Such an impressive figure is a result of our geological exploration efforts and expansion into a new region, Orenburg, where GPN purchased three areas last year, the largest of them is the eastern part of Orenburg field.

— What is the GPN’s reserves structure? What percentage of hydrocarbon resources discovered by your geologists is still economically marginal to develop?

— Gazprom Neft has a large resource base. Our main focus is a continuous upgrading of our reserves. After the transition to PRMS international reporting system, the company takes into account only the effective reserves.

According to the Russian reserve classification, we have even more reserves in place, exceeding 2 billion TOE in residual recoverable reserves of ABC category, 1.4 billion TOE of C2 and 1.3 billion TOE of C3 reserves. However, our resources and reserves are hard to recover, with most of them occurring in low permeability reservoirs, in the old, more than 80% depleted fields, with a 90% water cut. The hard-to-recover reserves account for 72%, while actively producing and easy reserves, occurring in high permeability reservoirs, account for 19%.

What makes our company unique, is the fact that GPN has difficult resource base to deal with. We’ve learnt how to lift hard- to-recover reserves successfully. For example, at Priobskoye field (one of our key assets) we are producing from the horizons concentrated mainly in low-permeability reservoirs. The 72% of hard-to-recover reserves we’ve mentioned earlier is the biggest untapped potential we are focusing on here in Russia because it’s our future.

— What exploration programs are currently underway? And what are in the pipeline?

— I have to say that today exploration is an integral part of every stage of field development, and you stop it only when you are leaving the fully depleted field. Last year we ran aggressive exploration programs in the brown fields. Among the new projects running on old assets I can mention studying the deep-lying horizons within Vor-genskoye and Valyntoyskoye fields in Yamalo-Nenets area, where we looked at the Jurassic deposits. A large-scale Jurassic exploration program is now underway in Vynga -pur field. We have already opened the formations there and got commercial rates, and now our task is to delineate reserves and to enhance production. We took the line of least resistance: we used the existing depleted wells and drilled down to the upper Jurassic, thus giving old assets a new life. However, it takes a lot of time and effort to get economic rates from freshly drilled green fields. So, before we get started, we need to pick the right lifting method to enhance development, and we need tax breaks, because the Jurassic reserves are lower grade compared to higher-lying deposits.

— Gazprom Neft has recently expanded its presence into a number of new regions...

— As for the new projects, let me first of all mention a group of Chonsky projects. Gazpromneft-Angara, a license holder for the development of Tympuchikansky, Vakunaysky and Ignyalinsky blocks (bordering Irkutsk Region and Sakha Republic), booked about 100 million tons worth of C2 reserves last year. We have put together an extensive exploration program for the Chonsky group. We are putting our hopes on Tympuchikansky and Vakunaysky blocks which are a geological extention of Verkhnechonskoye field. TNK-BP and Rosneft are actively working on it, and they managed to get good results from the Upper Chon project. I think that re-activation of shut-in wells which began this year at Tympuchikansky and Vakunaysky areas, and the scheduled hydro frac will result in commercial rates, and this will give the green light for active development of Chonsky project. Prospecting an exploration program is pretty ambitious, it includes dozens of wildcats to be drilled, and about 7 thousand sq. km of 3D seismic coverage.

The Ignyalinsky project is also moving ahead, but a full-scale development will not be possible without sizable tax cuts similar to those we’ve seen in other East Siberian projects, otherwise we’ll continue to stay in the red.

The issue of oil transportation will be solved by connecting the fields to the ESPO pipeline, but there is no gas pipeline infrastructure in the region. Now gas reserves of all three blocks in Chonskoy group are estimated to be hundreds of billions of cubic meters, and they may be connected to the pipeline, built for the development of Chayanda field owned by Gazprom.

We understand that the East Siberian projects are economically and technically challenging and risky because of their geological complexity and insufficient data we have, that’s why we are seeking new partnerships to develop these fields. Some Japanese and Korean companies have showed interest, and we are currently negotiating with them.

Another major exploration project is Kuyumbinsky (Krasnoyarsk region), which belongs to Slavneft. We got heavily involved in it last year. We reached agreements with Transneft regarding the Kuyumba — Taishet pipeline: it is assumed that Transneft will pay the bill, and the construction costs will be subsequently included in the tariffs. This greatly facilitates the implementation of Kuyumbinsky project, which, until recently, was considered marginal, half dead, one might say. Now we have an opportunity to improve the economics of the project, and if we can get a preferential rate of export duty, we can make it economical. Today Gazprom Neft and TNK-BP are discussing ways of taking Kuyumbinsky project away from Slavneft and making it a joint venture (just like Messoyakhsky project), which will allow us to speed up the process. Kuyumba — Taishet pipeline may be launched in 2016-2017, therefore we must ensure that at least 50% of field reserves are explored by this time. At present, only 32% of reserves are seen as commercial, which brings us to intensify our exploration efforts. The annual plans we are currently discussing with TNK-BP include putting in five to seven exploration wells, and additional exploration of the already discovered C2 reserves, plus seismic coverage of up to 600-800 km.

It should be noted that the structure of reserves in this field is very difficult: it features Riphean complex, carbonate fractured reservoirs. The key to success in the developing of such deposits is the primary and secondary drilling, which involves the use of new, advanced drilling mud treatment systems and top driven rigs to open the formations in a balanced way, avoiding crushing it, or mudding the bottom hole zone. In an effort to improve drilling quality, we are currently looking at ways of revamping and upgrading our Russian drilling contractor’s capabilities, as well as considering the options for attracting foreign servicing companies. We have launched two pilot projects at Kuyumbinsky field. Next year we are planning to bring in two more projects, so that by the time the pipeline is launched we have a good understanding of the reserves structure. Our goal is to produce up to 10 million tons of oil in 2018-2020.

Messoyakhsky project in Yamal region is also at the exploration stage, ready to be piloted. One of the main challenges facing us is the evaluation of the reserves quality. We have good enough understanding of their structure in the upper layers (basically they consist of heavy viscous oil), whereas the lower layers, where the reserves of light crude oil occur, are yet to be explored, and we continue this work.

Gazprom Neft specialists have put together a long-term exploration program for Messoyakha which we are discussing now with our partner. It seems that the transition from one year planning to long-term planning will improve the quality of work, stimulate our contractors, and will help us come up with new technologies. This is the only way can we meet the 2016-2017 deadline and start production from this field .

Let me also mention that last year we obtained a license for the development of the West Chatylkinsky license area in Yamal-Nenets Area, whose reserves are estimated at about 100 million tons. This is a fairly big project, for which we are preparing a comprehensive exploration program. We’ve got until the end of this year to obtain all the approvals, develop investment plans, complete the exploration drilling and seismic survey SOW, so that in winter 2012-2013 we are able to hire contractors. We are planning to fully cover the license area with 3D -seismic survey. It will also require significant amounts of prospecting and exploration drilling.

We are preparing to launch an exploration program at Dolginskoye deposit located in the central part of the Pechora Sea, as Gazprom may decide to transfer that asset to us. We are examining the existing geological data and work is underway to prepare a feasibility study. Additional exploration of this field will take at least three more years, besides, as our rough estimates suggest, we may have to put in six or seven exploration wells, which will give us a better understanding of the field’s potential. Also, we are preparing a program to look at the surrounding areas in the Pechora and Kara Seas, with a focus on the unlicensed areas.

— In one of your recent interviews you mentioned the GPN conceptual resource base development program 2020. What stands behind this program?

— In May-June this year, we plan to finalize the new GPN resource base development strategy which will list the regions marked for large-scale exploration and production enhancement efforts. The program will include projects in the Russian Federation and abroad. Additional exploration plans will be addressed in a separate chapter of the strategy.

According to the strategy, Khanty-Mansiysk and Yamalo-Nenets will remain the main priority areas. Moreover, advancing to the north of Yamal Peninsula (Gydan and Arctic shelf) is one of our main goals. In addition, there are plans to start work in Eastern Siberia (Chonsky group).

Another priority area is Orenburg region, where GPN is stepping up its oil rim operations in the eastern part of Orenburg oil and gas condensate field, the license for which we obtained from Gazprom last year. We are looking at the possibility to join the development of the areas adjacent to this field, which are in Kazakhstan. According to our estimates, the deeper horizons (about 5 km deep) at Orenburg condensate field have a significant resource potential. If exploration drilling confirms the availability of resources there, it will give an impetus to the field development.

— How much is GPN planning to spend on prospecting and exploration, according to the new strategy? How much will be spent this year?

— By the end of this year we will have spent about 6 billion rubles of our own funds, and about the same amount will be provided by the joint ventures. Thus, in 2012 we plan to invest 12-12.5 billion in exploration and prospecting. The exploration and acquisitions budget is expected to grow by 15-20% each year over the next five years, and then, once we have hit the production target of 100 million tons, investments in exploration will flatten out.

— How much funds, do you think, will be needed to finance exploration programs at Kuyumba and Messoyakha fields?

— Our plan is to annually invest about 2.5-3 billion rubles in each of these projects (not including pilot production). Pilot production is, essentially, a preparation for commercial operation of the field, and thus the funding will dramatically increase during that stage. Also, we are prepared to spend significant amounts on Chonsky project. This year we will focus on re-activation of idle wells, hydro frac and seismic shooting, which will cost us about 1 billion rubles, however, next year, once an aggressive exploration drilling starts, CAPEX will rise to around 3.5-4 billion rubles.

— Please tell us about GPN’s exploration activities overseas.

— Last year we started two large-scale overseas projects on the shelf of Equatorial Guinea and Cuba. We are done with seismic shooting on the first one and are now completing data interpretation. It is already clear that some areas have good reservoirs, but only detailed engineering and economic analysis, which we’ll be doing over the next few months, will tell us what the next step should be.

In the summer of 2012 GPN and Equatorial Guinea Oil Ministry are expected to make the final decision regarding the first wildcat to be drilled. Active preparations are underway, and we are working hard on the feasibility study; after the completion of these steps we’ll know how much funding will be required.

As to the Cuban shelf, where GPN is authorized to prospect and explore 12 promising pay zones, drilling of the first well is scheduled for this April as part of our joint project with Petronas (Malaysia). If we get good results, we will continue the exploration program. It’s worth noting that, presently, this is one of the deepest offshore projects in the world (about 3 km deep). Besides, we are looking to buy a few more blocks on the Cuban shelf. However, the final decision will not be taken until we’ve got the first well test results.

— Are you considering any other future projects in Africa?

— We are looking, practically, at all oil and gas basins on the earth. Naturally, the areas where we already have some presence are regarded as priorities. An African country which is of particular interest to us, is Libya, where we are about to join the Elephant project. We are currently reviewing fields in the neighboring states of Northern and Central Africa, and we keep looking for promising projects in the Middle East.

We see great potential for production projects in the Balkans, where we have a subsidiary, Oil Industry of Serbia (NIS). However, Pannon oil and gas basin development projects extend beyond Serbian borders: they have already expanded into Hungary, Romania, Bosnia, Herzegovina, Montenegro and Croatia. For example, in Bosnia and Herzegovina we have partnered with Neftegazinkor (a subdivision of a Russian Zarubezh-Neft), in Hungary we are cooperating with Falcon Oil & Gas Ltd, USA, and RohoelAufsuchung AG, Austria; our partners in Romania are East West Petroleum Corp., a Canadian company, and Moesia Oil and Gas pic from Romania. We are keeping a close eye on all potential fields in the Balkans. We are waiting for the blocks in Montenegro and Croatia to be up for bidding. What makes the Balkan projects economically attractive is a favorable tax regime. Besides, the reserves there may not be as sizable as in other regions, but they are relatively easy to recover.

— What, do you think, the government must do to motivate GPN to go out into the new regions of Russia to conduct exploration activities? How can such support measures affect the resource base?

Developing new areas requires a well-planned, well-coordinated, long term approach, rather than quick wins. These regions have a huge untapped potential, but starting a new project in Eastern Siberia or Yamal will be absolutely impossible without a strong government backing. The first thing the state should do is relax taxes and export duty.

Regrettably, there is no research center in Russia today, capable of assessing the impact of such measures (or their lack) on the future hydrocarbon production in Russia. Gazprom Neft has set ambitious goals but they can be achieved only through governmental support. Without this we will not be able to produce the 30-40 million tons of oil per year, as we plan.

— What message would you like to convey to your colleagues on the eve of your professional holiday?

— For any geologist, the most important things are high professionalism, extensive knowledge and expertise gained over the years out in the field with fellow geologists and, of course, luck. So, on the eve of our professional holiday, let me wish the geologist’s luck to all geological organizations and institutions, and to all oil companies of the Russian Federation. I also wish you all to stay enthusiastic, energetic and romantic as ever!