Interview with Gazprom Neft CEO Alexander Dyukov for TV channel Russia 24

TV channel "Russia-24"

What impact low oil prices are having on oil companies’ operations, how the OPEC+ deal is likely to work out, and why Gazprom Neft is placing its bets on working with hard-to-recover reserves — Gazprom Neft CEO Alexander Dyukov explains all in this interview with Russia 24

How was 2018 for Gazpzrom Neft? What were the main outcomes last year?

You could say the most important outcome was the company’s good financial results. We were able to cover the groundwork for making sure the company develops consistently and sustainably, in the future.

As regards financial results, we were able to significantly increase operating and net profit for the eighteenth year, as well as cutting debt. What’s very important is that these improved financial results weren’t just the result of the favourable oil-price environment, but better business efficiency. Added to which, we were able to respond quickly to higher quotas under the OPEC+ deal. We were able to increase production fast, taking advantage of this opportunity — which, in turn, meant an additional contribution to our financial results. All of which meant we were able to increase dividend payments, and can look to the future with confidence.

In terms of the groundwork covered in 2018 — there’s quite a bit. We were able to add to our exploration portfolio, adding more than 20 new licence blocks in promising areas. That means the Orenburg Region and the south of the Yamal Peninsula, Gydan, and the Khanty-Mansi Autonomous Okrug. We also built up our reserves in 2018, making several new discoveries — including discovering the Triton oilfield offshore from Sakhalin, with almost 140 million tonnes’ reserves in place. If we add to that the discovery of the Neptune field in 2017, then we can claim to have established a fully-fledged production cluster offshore from Sakhalin, with reserves in excess of 550 million tonnes.

We continued the development of our projects in the Artic — that is to say, Prirazlomnoye and Messoyaka. Two cutting-edge icebreakers were built for the Novoportovskoye field this year. These aren’t just highly manoeuvrable icebreakers, they’re also the most powerful in their class, and will ensure uninterrupted shipments by sea from the Novoportovskoye field.

We also established a further new production cluster in the Nadym-Pur-Tazovsky district — that is, in the Yamalo-Nenets Autonomous Okrug, outlining a strategy and starting working on preparing for this new cluster to be commissioned and brought into full commercial development.

We continued working on the modernisation of our oil refineries. We made significant progress in the digital transformation of the business, and in implementing our technological development strategy. And, of course, in terms of this year’s results it’s only right to point to the Board of Directors approving a new development strategy for Gazprom Neft, to 2030.

About the development strategy — the Gazprom Neft Board of Directors approved this in November. What principles is this based on, what objectives have been set, and how will these be achieved?

Qualitative goals predominate in the 2030 strategy, which is where it differs from the previous document, which was based on quantitative indicators. For example, one of the main objectives in the 2020 strategy was increasing production volumes to 100 million tonnes of oil equivalent (mtoe) per year, in order to join the top-tier oil companies. We’ve met that objective. The new strategy though is more about qualitative goals, about the company’s positioning. The objectives under the new strategy are more about us wanting to be a role model, a guide — a benchmark in areas like industrial safety, efficiency, and technological performance. We want to be one of the leaders in terms of return on capital employed (ROCE).

If we’re talking about production volumes, then there are no absolutely specific figures — say, for example, 150 or 200 million tonnes per year. The point is, we’re living in a highly unpredictable market. In the medium or long term outlook it is difficult to forecast the demand, prices, which is why we are setting ourselves a goal to grow, but to grow faster than the market — staying ahead of the curve. In any case, it’ll be a strategy for growth, a strategy for development, and a strategy for qualitative change.

We have developed an investment programme in order to fulfil this strategy, and have key investment projects we plan to bring to fruition. Our technological development is one of the most important parts of that strategy. We’re placing our bets on developing new technologies, on developing new equipment and new software programmes, which will allow us, on the one hand, to improve efficiency in working at our mature, traditional fields and, on the other, to commission new classes of reserves and bring these into development.

Obviously, transforming our company — organisationally, operationally, culturally and digitally — will be a very important pre-condition in developing this new strategy.

The OPEC+ countries agreed a new deal recently, curtailing oil production volumes. In your view, how far was that decision the right one, and how does it affect Gazprom Neft’s activities?

Given the situation developing in the oil market towards the end of last year, there’s no question that some rebalancing is required. Balancing the market demands some reduction in production volumes, so this new deal is absolutely the right solution. As regards Gazprom Neft, this new agreement in no way impacts our strategic plans or our strategic objectives. We’ve no plans, either, to revise our investment programme for next year. There might be some adjustment to the production plan in 2019. But, nonetheless, we are still hoping to produce more oil than in 2018, in as much as we’re expecting some recovery, together with seasonally higher demand, in Q2.

Nonetheless, we’re seeing considerable oil-price volatility. Not that long ago it was 80 dollars per barrel, now it’s $50 — prices change very dramatically. What impact does this have on Gazprom Neft’s work, and what price are you basing next year’s business plan on?

Of course, we take this volatile market situation into account in our work. There’s nothing good about it — not for producers, nor for consumers. But, unfortunately, the market has grown accustomed to that sort of high volatility in recent years. And in that environment we’re pretty cautious and very conservative in our approach to taking investment decisions, and to business planning. We’ll be assuming an oil price of around $50 per barrel in taking decisions on investments in 2019. Although we test all investment projects, and the business plan, against far lower prices. We are committed to making sure our investment project portfolio is as flexible as possible so that we can make adjustments to our investment programme promptly. Generally though, our upstream investment projects are resistant to low prices.

Talking about import substitution — you’ve got a major project in developing oil-refining catalysts in Omsk. What sort of project is this, what stage is it at and, most importantly, what outcomes do you want to achieve, and when will it be launched?

Its status as a national project demonstrates how important this project is to domestic oil refining. This future enterprise is intended to ensure the Russian market has highly effective catalysts for domestic production.

As regards implementing this project, design documentation is now complete, and we have approval from Glavgosekspertiza. Key technological equipment for the future plant has also been procured, and the pre-construction phase is now at an end. We’ll start proactive construction and installation works next year. We’re planning for the plant to go into production as soon as 2021.

This year, as well as developing the Bazhen Formation, plans were added on establishing a test-site for developing the Achimovsky formation; a cluster is also being established on developing underlying deposits in the Orenburg Oblast. So we can see Gazprom Neft is placing its bets on hard-to-recover reserves. How important a role does government support play in projects like these?

Developing hard-to-recover reserves and non-traditional oil is a key area, and a priority. And we don’t think this is a job for Gazprom Neft alone. It’s an industry-wide task, and we need to develop new technologies and equipment to address it. It’s a complex challenge, but resolving it is extremely important given that hard-to-recover reserves are genuinely enormous.

If we’re talking about the approaches we’re taking in developing technologies and equipment, we’re pursuing a strategy of establishing technological test sites with the involvement of higher educational establishments, engineering centres, oil service companies, mechanical-engineering companies, equipment producers, and IT companies. As you know, two technological test-sites have already been established for working with Bazhen Formation and Jurassic deposits — which means Paleozoic and carbonate reservoirs. Logically, the next step will be setting up appropriate test-sites for developing technologies for working with Achimovisky and Domanic deposits.

Obviously, government — and governmental support — play a very important role here. For example, new kinds of licenses are needed in order to go into fully-fledged operations at test-sites, because existing licenses don’t allow experimentation and testing at these deposits. Governmental support is also vital to our partners — the sort of companies that don’t have financial resources or capacity. They, beyond any doubt, need government support by way of specialist investment contracts and agreements, grants and financing.

Your company is seriously focussed on digitising the business. What has Gazprom Neft been able to achieve in 2018 as a digitised oil company? What are your plans, going forward?

The business’s digital transformation is a key area, and one we’ve been actively developing for the last few years. Up until 2018 this meant experiments, really: implementing numerous digital projects, trying to use and apply new investments in digital technologies, in various areas of the business. The success of these experiments confirms the hypothesis that digital technologies have serious potential for improving the company’s efficiency.

In 2018 we moved from experimenting to developing a final and cohesive view on what the digital oil company we are building ought to be — what shape that digital transformation needs to take. We put a Digital Transformation Directorate in place in 2018. We’ll complete the development of our digital strategy in the near future. We’ve continued the development of our technology centres — the Production Control Centre, the Drilling Control Centre, and the Efficiency Control Centre. In addition to which, we’ve also established new ones including, for example, the “agile-centre”, where the development of digital solutions for our filling-station clients is being speeded up. We recently opened a project management centre. We’ve set up centres of excellence, which are already working with specific technologies — with virtual reality (VR), augmented reality (AR), blockchain, artificial intelligence (AI), machine learning, video analytics, and more. We continue to test and approve various technologies across the business. About 60 R&D projects have been completed this year, confirming the effectiveness of various technologies. We already have more than 500 projects in our digital portfolio, which we plan to bring to fruition in the next year, year and a half.