Wells and the super-computer

Gazprom magazine

Neftyanaya Industriya Serbia (NIS) CEO Kirill Tyurdenev answers our questions.

— Kirill Vladimirovich: 2017 proved a year of stabilisation in Russia’s economy and, perhaps, the beginning of the end of the crisis. This was demonstrated in manufacturing volumes, electricity generation, and demand for motor fuels. How was the year for NIS?

— NIS, as you know, is one of the most important vertically integrated energy companies in south—east Europe. Our activities reflect the processes taking place in the European economy. Last year turned out to be extremely dynamic and successful. Compared with 2016, net profit was up 80 percent, to RSD27 billion (about EUR222.1 million on average 2017 rates) and EBITDA up 18 percent, to RSD47 billion.

Investment levels reached about RSD26.5 billion, two percent more than in 2016. This was mainly in oil and gas exploration and production as well as in modernising the Pančevo refinery, our main refining asset.

Our tax and other obligations reached RSD171 billion in 2017. Which is five percent more than in 2016.

NIS — the most important taxpayer in Serbia

— Your company is the most important taxpayer in Serbia.

— Yes. At the start of this decade payments for tax and other obligations accounted for 10 percent of the Republic of Serbia’s budget: it’s now almost 15 percent. NIS paid RSD81.7 billion in tax and other payments to Serbia’s budget in the first half year. The tax burden on our company increased, moreover.

— And what’s going to happen to profits in 2018?

— The figure was RSD11.5 billion for 1H 2018 (EUR97 million). This is a little down on last year. The profit figure is impacted by several factors, over which we have no control. The oil price, for example. This plays a double-edged role. On the one hand, high prices are profitable for us, since we produce more than one million tonnes of oil. But, on the other hand, we import two thirds of the black gold we refine. Added to which, we’re impacted by currency fluctuations. Last year this was in the black — this year, in the red.

Our company’s role in the Serbian economy, from the moment Gazprom Neft bought NIS, has grown exponentially. To give you an example — thanks to NIS’ contribution, Serbia’s GDP increased by 0.3 percent last year.

— The company exceeded its business plan last year; what was behind that?

— Indeed: we set a historical record in terms of refining volumes, at 3.6 million tonnes (a year-on-year increase of nine percent in 2017). This performance was made possible thanks to investments in modernising production capacity made by Gazprom Neft in recent years. We also increased sales of oil products by five percent in 2017, to 3.5 million tonnes.

Zero “dry” wells

— And what were production figures in 1H 2018?

— We’re also going to exceed the business plan in terms of production levels this year. We have to work, mainly, with small, depleted fields. Of the EUR1.8 billion that NIS plans to invest from 2018 to 2025, EUR1 billion will be invested in production, which we plan to maintain in the order of 1.1 million tonnes. Thanks to investments already made, the painstaking work of our specialists, and new technologies, we have, so far, been able to hold back any collapse in production.

— And what’s behind these investments? Intergovernmental agreements or plain economics? Would it be more profitable to invest not in restraining falling production at existing fields, but in buying interests in certain younger and more promising locations?

— It’s basically pure economics. Modern technologies mean fields can be developed more effectively. Digitising production, for us, isn’t just the latest saying, but a selection of resources and tools used in the company’s operations. For example, the company’s Science and Technology Centre operates as part of NIS, whose armoury includes the second largest super computer in the region. We run 3D field models on this, allowing us to improve drilling efficiency. With its help we have reduced the proportion of “dry” exploratory wells from 50 percent to zero. Added to which, drilling volumes have doubled since the start of the decade, to 60 wells a year.

This isn’t happening because the company’s been lucky. Efficiency improvements are the result of many years’ effort. As well as the 50 Serbian specialists working in our Science and Technology Centre. We now intend to take the NIS STC to the external market. Its employees are, already, undertaking various individual jobs for our parent company.

Ours is a somewhat complex region — complex geography, small fields — which are, moreover, somewhat remote from one another. Our company plans to continue exploration in Serbia and Romania, as well as in Bosnia and Herzegovina.

We drilled our first successful well in Romania in 2017 — discovering oil and gas. We’ll be drilling several wells here in 2018. This project is very promising.

More light products

— What’s the story with refining?

— Almost 1.7 million tonnes of oil were refined at the Pančevo refinery in the first half of the year. We expect to beat last year’s record in 2018. In line with the strategy adopted, we should be hitting refining volumes of 4.1 million tonnes by 2025. It’s worth pointing out here that that installed capacity at the Pančevo refinery is 4.8 million tonnes a year. But refining that volume isn’t viable at the moment, because a significant proportion of the resulting products are low-margin. There isn’t that level of demand in Serbia and neighbouring countries, and long-distance exporting makes no economic sense. So expanding refining is being done gradually — in line with modernising production facilities.

We’re currently building a delayed coking unit at Pančevo. This should be commissioned in 3Q 2019. Thanks to which, refining depth at the refinery will reach 99.2 percent. That’s a record refining depth. The company will be able to produce 500,000 tonnes more light oil products, which will lead to an improvement in margins. Fuel oil output will be significantly reduced as a result, but we’ll be getting a completely new product for us — cokes, in active use in the metallurgy and construction industries. Cokes have to be imported into Serbia at the moment.

—Which suppliers do you buy oil from, for the refinery?

— The plant’s configuration is such that it’s more profitable for us to work with a specific range of crude. We hold an annual tender and, where necessary, buy some of our feedstock on spot-trading sites. Our Pančevo refinery works with oil from the Kirkuk field in Iraq — it’s sold at a discount. The combination of its price and composition means we get an excellent outcome in terms of products and economics. We’ve now introduced oil from Gazprom Neft’s Novoportovskoye field. Combining these oil blends delivers excellent results.

— What’s going to happen to your business in Novy Sad?

— We’ve got a small amount of lubricant production there, and storage capacity. Unfortunately, most of the projects that, in theory, we could implement to develop that business can be more profitably implemented in Pančevo. Of course, we’re not refusing to develop this asset. But, for now, it awaits its own time, and its own projects. And at the moment our refining activities are focussed on the Pančevo refinery.

More than 300 MW

— Some time ago your company tested the possibility of going into energy generation. What’s been done here?

— We selected an EPC contractor to build a power station in Pančevo last year. We’re implementing this project together with Gazprom Energoholding. We hold a 49-percent interest, and Gazprom Energoholding 51 percent. Total investment stands at EUR180 million. Target capacity is planned at 200 MW. Commissioning is set for 2020.

— Is this electricity station intended for a wide customer base?

— The power station is being built to improve energy efficiency at our plant, which will be using steam. Energy produced at this combined heat and power (CHP) plant will be supplied to the market. Combined-cycle production of heat and power guarantees the high efficiency of the plant.

—European legislation, which Serbian legislation follows as an example, is extremely demanding with regard to generation capacity. Among other things, it includes specific requirements regarding the minimum proportion of generation from renewables. Some years ago NIS launched a project in line with this. What stage is that at now?

—This project has now moved into active development, with the planned construction of 34 wind turbines, and total installed capacity of about 100 MW. An agreement has been signed with our partner, Hungary’s MET. They’ll be investing in the project with us, on a 50:50 basis, and will be securing project financing.

— When do you plan to implement it?

— By 2Q 2020. A special tariff applies to renewable generation in Serbia. A “traditional” megawatt costs about EUR45—50. The state will buy “renewable” electricity, generated from wind, at EUR92 per megawatt hour (MWh), for a period of 12 years.

— So, by that time, you’ll have installed generation capacity of about 300 MW?

— Us and our partners, more precisely. But more than that, actually, since we own 14 associated petroleum gas (APG) utilisation stations. They’re installed at the fields. Implementing all of these generation projects will give us about a three-percent share in Serbia’s generation market.

We would argue that our efforts are having a positive impact on the country’s ecology. After all, a significant proportion of the electricity generated in Serbia is produced at pretty old coal-fired power stations. We’ll be producing energy using more environmentally friendly gas and wind.

Gazprom — a premium brand

— The last two years on Europe’s motor fuels market have been very turbulent, with “Dieselgate” and speculation around the possible renunciation of diesel fuels. Have you found this reflected in the Serbian retail market? And what, generally, has happened as a result?

— Consumption of diesel fuels has grown. We would argue that this trend will continue. “Dieselgate” notwithstanding. This is particularly important for us because, with the commissioning of the delayed coking unit, NIS will be increasingly producing high-performance gasoline and diesel fuels.

— Is it only Serbia that’s seeing increasing demand, or is this happening throughout the Balkans?

— Throughout the Balkans. Apart from traditional motor fuels, we are also strengthening the gas sector — both in terms of propane and butane, and compressed gases.

— How many stations does the company have now?

— NIS currently has 423 filling stations, of which about 330 are located in Serbia, where our company enjoys a 43-percent share of the retail market. Even by Russian standards, ours is a pretty major network. Our stations are operated under two brands — NIS Petrol and Gazprom. Gazprom is the premium brand.

The Serbian market is highly saturated. We’re competing with MOL, LUKOIL, OMV and others. There’s no barriers to market entry, and anyone who wants to can import fuel. And there’s some serious refineries within a 500-kilometre radius. So our task, in terms of retail, is not extensive growth, but establishing and developing a high-quality network, through which we can sell high-quality branded fuel, as well as our own products and services.

Our network added 15 stations between 2013 and 2017, of which three were newly built and one an acquisition, last year. We also rebuilt 11 filling stations last year. Average daily pumping volumes during that time increased from 5.2 to 6.1 tonnes.

We try to attract customers through marketing promotions and by developing various loyalty programmes, as well as earning money on complementary products — which are generating an increasing proportion of retail business income, and currently stand at 15 percent.

— A highly commendable share! And what are the best-selling products?

— Coffee, water, energy drinks. It’s important to us that our own brands make up most sales of supplementary products — for example, DriveCafe, the G-Drive energy drink, chewing gum under the same brand, and Jazak water. I would like to remind you that the company produces its own mineral water, Jazak. This is, of course, a non-core asset, but we would like to make a success story out of it. To which end we’ve changed the management structure and undertaken a rebranding of the bottles it’s sold in.

The “Energy of Knowledge”

— What projects are you implementing in terms of cultural ties?

— Together with Gazprom Neft our company supports the Serbian Orthodox Church, as well as theatrical and musical festivals — including, for example, both festivals (the Bolshoy Festival of Russian Music and the theatrical festival) organised by Emir Kusturica. We support sport — the Red Star Belgrade (Crevna Zvezda) football club and the KK Partizan basketball club — as well as sports events for children.

NIS has also been working with 11 local communities in Serbia as part of its “Together for the Community” programme, jointly implementing projects in education, sport, ecology, and culture — all areas supporting the development of the local community. NIS has invested more than RSD1 billion in this programme. A further local community joined the programme this year, the 12th, meaning a further increase in the number of friends and partners.

We have a programme — “Energy of Knowledge”, where we donate to schools and universities, buy equipment for classes and laboratories, and award scholarships to talented students. We’ve invested about EUR5 million in this programme to date. As well as a positive image for the company, we also get scholarship students — potential employees for NIS. We send these scholarship students to Russia — to specialist higher educational institutions, before hiring them to work.

You can find a connection in everything we do in production. Many projects are years in preparation, and take years to develop. You can’t be afraid of challenges, or be afraid of diving head first into new areas. New technologies come into our lives, and you have to keep a close eye on these, and find ways of utilising them. And train the necessary specialists.

— Do major companies approach you, offering solutions in innovation?

— All of the biggest companies come to us. The most important thing is to understand the economic nitty-gritty of one technology or platform, or another. There are platforms that have previously been offered to us by extremely respectable firms, but whose prospects for development, so far, remain seriously under question. It’s obvious that NIS would have incurred major losses if it had integrated these platforms.

About 70 projects in digital technologies are currently being developed in various parts of the company, of which 17 have moved into active development. We’re now looking for professionals within the company who can concentrate forces in digitisation so that the process develops in a single direction. So that efficiency improves.