Gazprom Neft Targets Middle East Expansion

Energy Intelligence

Gazprom Neft, one of the fastest growing oil and gas companies in Russia and the third-largest crude oil producer, has been forming partnerships in the Middle East and expanding its presence in the region. Gazprom Neft Deputy CEO Vadim Yakovlev told Energy Intelligence in an exclusive interview how he sees business prospects with new partners and why it is important for the company to be in the Middle East.

First deputy CEO Vadim Yakovlev

— In early September, Gazprom Neft, Mubadala Petroleum of the United Arab Emirates and the Russian Direct Investment Fund (RDIF) closed a deal to establish a joint venture based on Gazprom Neft-Vostok in Western Siberia. How did the idea of attracting a Middle Eastern partner come about and why did you choose a cooperation pattern with the participation of RDIF?

— We’ve known Mubadala Petroleum for a long time and we’ve been constantly looking for opportunities to join efforts. I think an additional factor that contributed to the expansion of relations with Middle Eastern partners is Russia’s participation in the Opec-Plus deal. The deal helped to balance the market, to provide greater price stability and predictability for suppliers and consumers. In addition, the deal emphasized the role of Russia as a responsible participant in the world market, which is integrated into all global processes. Russia fulfilled its obligations when it was necessary to reduce production and demonstrated its ability to satisfy additional demand when it appeared. If we talk about our long-standing partnership with Mubadala Petroleum, this background has contributed to the implementation of our plans for cooperation. We chose Gazprom Neft-Vostok. This is an asset with an already established production level, which is attractive for all the participants of the deal. Why do we collaborate with RDIF’s participation? For Mubadala Petroleum, co-investment is a standard cooperation pattern. For us, RDIF is an understandable partner, whose participation helped during the negotiations phase.

— What does each partner get from participating in a joint venture?

— Mubadala Petroleum, as an industrial partner, gets the ability to put reserves on its balance sheet. It also gets a share in production and a return on the investments made since the asset generates free cash flow and can pay dividends. In addition, the company has good potential for development. We, in turn, on the one hand, were able to accelerate the return on previously made investments and at the same time acquired an interested technology partner, which will participate in the further development of the asset alongside Gazprom Neft. RDIF will contribute to ensuring a high corporate level of management.

— Mubadala Petroleum gets the opportunity to put reserves on its balance sheet and get a share in production. But how will you market the crude produced?

— As far as the commercial chain is concerned, it is Gazprom Neft that markets the crude, while the asset pays out dividends to the shareholders.

— How will you develop the asset further? Will you need additional investment?

— At this stage, we don’t need third-party investments. The asset is self-sufficient. We unite our industry capabilities with Mubadala Petroleum to unlock the future potential of Gazprom Neft-Vostok, which is primarily connected to studying the pre-Jurassic complex. These are Paleozoic sediments lying on the company’s license areas. For now, those can be classified as unconventional reserves that are underdeveloped. And although we are producing from those deposits, in general, the problem of their accurate detection and localization is not fully resolved. Therefore, our efforts will be focused on the development of a reliable technological complex for the additional exploration of such reserves. Once we can put those reserves on our balance sheet, we will shall consider how to develop those in the most efficient way.

— Are you planning to expand your partnership with Mubadala Petroleum on other assets in Russia?

— We have a mutual desire to expand cooperation. We are considering specific assets in Russia, we are in discussions. At this stage, I would not want to name these assets.

— Are we talking about Gazprom Neft’s active assets?

— Yes, these are assets from our portfolio.

— Are you planning to jointly participate in auctions in Russia and abroad?

— We are ready to consider joint entry to new assets both in Russia and abroad. We are certainly talking about the Middle East and we are looking primarily at the United Arab Emirates, but mutual interest is not limited only to our home countries. At this stage, we are not talking about any specific projects or agreements, but we are tracking the opportunities that are opening up. These are both current licensing rounds, and assets that may be available on the market due to the current market situation.

— Let’s talk about other Middle East partnerships. Gazprom Neft and Saudi Aramco in 2017 signed a technology partnership memorandum. How is the relationship developing?

— ur cooperation develops in stages. We began with mutual visits of Saudi specialists to Russia, and our experts to the Kingdom of Saudi Arabia. First of all, there was an acquaintance with the capabilities of the two companies, the identification of topics and areas of mutual interest. Next, focus groups were formed that worked together on each topic. As a result, we decided to focus on three areas. This is the application of artificial intelligence technologies in geological and hydrodynamic modeling, modeling of thermal processes and drilling technology for depressions — the essence of the technology is pumping drilling fluid with the same or slightly lower pressure as in the reservoir, which helps avoid the absorption of the fluid. Working groups have been formed from both sides. Our task is to jointly set tasks for Russian scientific and educational centers, including the Moscow State University.

— Will you apply the results of your joint research to projects in Russia and Saudi Arabia?

— The directions chosen are those in which both parties want to advance technologically. But each side already has experience in these areas. Our joint work might result in new methods, know-hows, information products. And our interest is determined by the demand for these technologies for each company’s assets. In the future, we can share the experience of applying jointly developed solutions. And, of course, any experience of such a large company as Saudi Aramco, which they do not share with everyone, is extremely interesting for us.

— One of your successful projects in the Middle East is the Badra field in Iraq. Gazprom Neft and the Iraqi side discussed changes in the parameters of the Badra service contract. What did you manage to agree on?

— We reached an agreement on the current production plateau and on the mechanism that allows us to speed up the cost recovery. Decisions are put to paper, and we are awaiting the final formalization of these agreements.

— What is the field’s new production plateau?

— This year the average production level will reach 80,000 barrels per day. This is the plateau. There are options to continue drilling at the field using horizontal wells with sidetracking. We informed the Iraqi side of such options, but so far these issues are under consideration.

— Will the new wells become part the current contract?

— The terms for these additional activities that can be implemented are the subject of negotiations. We see that the Iraqi side is ready to reasonably and flexibly approach the model of sharing the new value created, taking into account the necessary investments. If there are additional options that will increase the production level or extend the plateau, I think both sides will reasonably come to setting commercial terms that will allow these opportunities to be realized.

— Why did you have to change production plans at the field? When signing the contract, you expected to achieve the plateau of 170,000 b/d. Today, an effective production plateau is only half of that.

— We have fulfilled all our contractual obligations, and it was the geology of the field that has determined the effective production level. However, as I said, we see additional opportunities for further drilling at the asset based on the analysis of the geological information obtained. And we must take a joint decision with the Iraqi side on our further strategy.

— Do you see opportunities for expanding your presence in federal Iraq?

— There are a number of license areas in the Wassit province, where we work at the Badra field, where seismic surveys were carried out, and we are interested in receiving this geological information. However, the volume of this information is rather limited. Nevertheless, based on this data, we will be able to assess the prospects and decide on whether we are ready to expand activities in the region. We see the region as a strategic one and will consider which of the existing options will be attractive for us. There is always someone who sells its shares, some agreements with participants of some consortia that are not fulfilled. There are new fields that Iraq plans to offer. We consider all these options.

— Is Gazprom Neft still interested in the Zurbatiya field in Iraq?

— We have studied the available geological information on the field, but we are not yet ready to make any decisions about further actions.

— At what stage of development is the Shakal Block in Iraqi Kurdistan? The company was supposed to announce a commercial discovery on the block before the end of 2017.

— Seismic interpretation results and decommissioning of the Shakal-1 well allowed us to see there is oil there and to clarify the structure of the deposits. Now we are performing a geological assessment. Once it is completed, we will be able to make further decisions, but so far certain geological and price uncertainties remain.

— What are the production plans for the Sarqala field, also in Iraqi Kurdistan? How do you see the production profile from the planned three wells at the field?

— We are commissioning drilling of the third well. Production from the other two wells reached 28,000 b/d. After drilling the third well and expanding the infrastructure for crude oil treatment and storage, we expect to reach a production level of 35,000 b/d. And we will then decide on further drilling.

— Gazprom Neft considered several other projects in Kurdistan. How relevant are those projects today and is there any progress in negotiations?

— We did consider several blocks in the region but did not reach any agreements. However, we continue to study prospects there and maintain our interest in expanding our presence.

— Gazprom Neft has shown interest in several projects in Iran. Is it possible for a company today to join projects in Iran?

— We always carefully consider the opportunities that exist in this country.

— Why is Gazprom Neft actively seeking to do business in the Middle East? Is it because the development of cheap Middle East reserves, even with all the risks, is more profitable than the development of more expensive projects in Russia?

— We want to be integrated into the global oil industry. This integration is achieved both through the participation of foreign partners in our Russian projects, and through our participation in foreign projects. The choice of the Middle East is obvious — it is a region with a rich resource base, with low production costs, a region that is becoming more open to investors. We evaluate not only the current situation, but we also think about the opportunities till 2030 and beyond. Our interest is a strategic one, although, of course, each of the new options that we are studying must be competitive in our portfolio from an economic point of view. Foreign projects also compete with our Russian opportunities.