Gazprom Neft Steps Up Exploration Drive, Investments

Gazprom Neft is among the world’s top 10 listed companies in terms of proven hydrocarbon reserves and one of the leaders in replenishing them. Alexei Vashkevich, director for exploration and development of the company’s resource base, told Energy Intelligence in an interview how the company aims to hit key targets in line with the recently approved strategy until 2030.

Alexei Vashkevich, Head of the Gazprom Neft directorate of geological exploration and resource base development.

Q: Last year, Gazprom Neft’s board of directors approved the company’s updated development strategy to 2030. Where does the development of the resource base stand in the strategy?

A: In 2018 the board approved the company’s renewed development strategy and simultaneously an updated resource base development strategy. We did not make major changes to the 2016 strategy, we updated it, but kept the key priorities.

Q: Can you tell us about the main directions of the resource base development strategy?

A: Under the strategy, we should continue with the development of the existing assets in our traditional regions and will enter new areas for exploration. We keep our plans to further study unconventional reserves and to further implement our offshore program. One of the key directions of the strategy is the development of exploration and production technologies as well as the digitalization of production and business processes, which are an efficient tool for creating additional value for the company in the long term. When updating our three-year strategy in 2018, the high quality of the previous strategy implementation over the past two years was noted. The company annually increases volumes both in terms of investments and in terms of results.

Q: Tell us about 2018 results.

A: Last year was a record year for Gazprom Neft in all respects — both quantitatively and qualitatively. As for figures, exploration investments totaled some 20 billion rubles ($310 million). We drilled 50 exploratory wells, covered some 4,500 sq km with seismic, including some 1,500 sq km offshore. We successfully completed the year in terms of new reserves. The reserves replacement ratio in 2018 was 163%, our proved and probable (2P) reserves increased by 2.2%. Gazprom Neft’s reserves life in terms of proved hydrocarbon reserves (PRMS) currently stands at 17 years, while the strategy sets this target at no less than 15 years.

2018 was also a landmark in terms of entering new search zones. We received 20 new license areas in our portfolio, including those for exploration. We entered new regions, including the southern part of Yamal-Nenets autonomous district, which will become part of a large-scale cluster for the company on the Yamal Peninsula; and the Gydan Peninsula (Leskinsky and Pukhutsyayakhsky areas), where we can possibly form another huge crude production cluster. In addition, we expanded in our traditional regions, including in the Karabashsky area, where we are developing assets together with our partner, Spain’s Repsol.

Q: In 2018 there were also structural changes in your exploration business.

A: In 2018 we set up a new subsidiary, Gazpromneft-Geo, which became a competence center for managing big exploration projects. The new business model is a move from managing one asset to forming a portfolio of projects, where each project is evaluated in terms of geology, investment attractiveness and in terms of its logistic, infrastructure and technological complexity. This should allow us to choose only the best options leaving behind unpromising projects at the very early evaluation stage. Such an approach is a kind of a benchmark in the industry today in terms of exploration business organization, which envisage a combination on one platform of managing, technological and financial resources.

Q: What are your plans for exploration for 2019?

A: Exploration investments will grow further. One of Gazprom Neft’s key targets is reaching annual production of 100 million metric tons of oil equivalent with further growth not lower than that of the industry, which requires consistent replenishment of the company’s resource base. Our strategy envisages that in the mid-term exploration investments should range between 30 billion to 45 billion rubles annually. In 2019, investments should stand at some 52 billion rubles. This is quite serious growth in comparison with 2018, but you need to look at it within the framework of at least a three-year horizon. In 2019, we conduct a large amount of seismic at the newly acquired license areas. Next, we need to process and interpret the data in order to plan the drilling program, which will slightly lower investments. In 2019, we also increase drilling of exploratory and search wells to 70, up by 40% on the year. We also launch 10 new technological projects, which will require setting up new project teams and potential technological partnerships. One of the key directions we develop within our technological strategy is “non-seismic methods” that include the integrated use of gravity, electrical, magnetic exploration and field geochemical survey.

Q: Will those replace seismic in the future?

A: No, but they can help significantly reduce costs when exploring big territories. Last year we carried out a pilot aerial geochemical survey at the Vorgensky area in Yamal-Nenets region. Non-seismic methods usage allowed us to save 650 million rubles ($10 million) because we cut the initially planned 3D seismic area by 30%. We are already expanding the usage of those methods, which allows us to lower costs and speed up exploration. But the most important thing is that this approach permits us to take another look at the essence of exploration and focus not on big data, but on the quality of information that we get. Now we need to get the exact amount of data that will be sufficient to make a decision at different stages of the project. We are now more careful with collecting the data and set high requirements for their interpretation mechanisms. With such an approach, Gazprom Neft creates a completely new digital instrument, whose main task is to help decide how much information exactly we need to make an investment decision and decide on the minimal necessary exploration works. There are no analogues for such software in the world.

Q: What projects will the company focus on in 2019?

A: We have several. First, we will continue studying the new license areas in Orenburg, on the Yamal and Gydan peninsulas. Gazprom Neft also aims to further develop the Karabashsky cluster in West Siberia, the Zima (Winter) project developed by Gazprom Neft Khantos, the Chonskaya group of fields in East Siberia, and to further expand in the Balkans.

Q: You mentioned the “Winter” project. What is it?

A: We expanded the Zapadno-Zimny project, which includes the recently discovered Zhagrina field. We reconsidered the project’s organization, added the recently acquired fields and named it “Zima” (Winter). In 2019, the “early oil” phase will be launched, which includes drilling of the first production cluster of wells and the launch of infrastructure for crude delivery to the facilities of Gazprom Neft Khantos.

Q: Gazprom Neft actively cooperates with Repsol within the Eurotek-Yugra joint venture. At the end of last year, a new JV was set up to develop the Karabashsky-10 area. In addition, Gazprom Neft owns licenses for another six sites in this area. Do you consider combining all your assets for joint development with Repsol?

A: We are currently conducting seismic of all Karabashsky assets. Eurotek-Yugra will be the operator for the exploration program for all areas. We are now negotiating the transfer of these areas to the JV.

Q: What successes have you achieved with the Bazhen project over the past year?

A: In 2017, the energy ministry gave national status to the Bazhen development project. In 2018, Gazprom Neft set up a subsidiary, Technological Center Bazhen, as operator for the project. Today the center is a platform uniting resources from the state, scientific, industry and business societies in order to create breakthrough exploration and production technologies for unconventional and hard-to-recover hydrocarbon reserves. When developing the Bazhen formation, Gazprom Neft focuses on such target indicators as cumulative production per well and costs. In 2018, cumulative production at single wells reached 21,000 tons, while the target is 35,000 tons. In terms of unit costs, we aim to reach 8,500 rubles per ton by 2025. In 2018 alone, the figure dropped from 30,000 rubles to 18,000 rubles per ton. This is a huge step reached mainly thanks to the successful implementation of new technologies for completing high technological horizontal wells. More than 70 stages of hydraulic fracturing were carried out with density of up to 15 stages per 1,000 meters of a horizontal area. We constantly varied with speed and volumes of the hydraulic fracturing, density and other parameters. Each stage and all technological operations were accompanied by building digital models on our own unique software that Gazprom Neft developed together with Moscow Physics and Technical Institute.

Having achieved significant results, we continue testing new technologies and improving those decisions that should form the basis of a future technological platform for the development of unconventional reserves. We are currently talking to partners in order to move away from manufacturing single copies of the equipment to the creation of production facilities that would be able to produce this equipment commercially. Thus, Technological Center Bazhen last year inked some 20 accords for this purpose.

Q: Are those mostly technology partnerships?

A: Right. The industry today doesn’t have a proper technology for unconventional collectors. There is still huge work to be done to create economically efficient instruments for unconventional crude production and to make those cheaper. Someone has to take the first step and find a key for Bazhen. With US shale, this technological path took from 700 to — according to the latest data — 300 wells for a new play. That is, US companies had to drill 300 wells in order to develop the optimal technology, and then simplify it and reduce the cost. Our task is to shorten this path and go through it with 111 wells. As part of the move, we drilled 21 wells. In 2019, we plan to drill 15 more horizontal wells with a length of over 1,000 meters. By 2025, the Bazhen project envisages construction of 75 more wells. Each technological operation at a play allows us to get new experience, knowledge and competence making us closer to creating economically profitable solutions for crude production from Bazhen.

Q: Have your targets for Bazhen changed?

A: The figures are the same. By 2025 we aim to produce 2.5 million tons of oil from Bazhen formations.

Q: Another large project in Gazprom Neft’s portfolio is the Big Achimovka project. Will you please tell us about your success with the project.

A: Achimovka is a huge resource potential. We see that in the future Achimovka might account for up to 40% of the company’s entire resource base, provided that all the existing options are realized. Those include our existing assets, Gazprom’s assets, and access to new zones. Over the past two years we have been engaged in regional study of Achimovka and built its first regional digital model. Then we divided this model into three regional clusters and already launched some zonal projects within each of them. In addition, we structured the technological challenges of Achimovka in terms of technology. Achimov deposits are extremely complex in terms of geology as they are somewhere between traditional and unconventional reserves, which requires innovative technologies. The task of conventional exploration is to find a deposit, while for unconventional deposits you have to find proper development instruments. For Achimovka you need both — to properly find and profitably extract the reserves by applying the proper technologies given the numerous challenges. For example, Achimovka on Yamal means abnormal depths, high pressure and at the same time an unsealed reservoir.

Q: Do you need additional stimulus to develop Achimov formations?

A: It is necessary to create proper legislation base before talking about target stimulus for Achimov formations. During the State Duma’s spring session, a law should be considered, which among other things introduces such a notion as Achimov formations. I hope it will pass. After that we should study with the ministry in charge whether the existing stimulus are enough.

Q: How is the work on the South Hub project going along within the Salym Petroleum Development joint venture with Shell?

A: The South Hub project over the past few years passed the stages of evaluation, search, selection. Over that time we built six exploration and appraisal exploratory wells, confirmed the resource base. At present, a development concept has been formed, including the construction of ground infrastructure, pilot works are underway to select the optimal well completion pattern. Drilling of the first production cluster of wells is also underway. In July 2019, the project will move to the implementation phase.

Q: Where does the Chona project in Eastern Siberia stand now?

A: For the last two years, work was carried out on one of the three fields of the Chonskaya group — Ignyalinsky. We built an updated seismic model of this field, conducted exploration drilling. Last year, after we carried out multistage fracturing, we received a crude flow from the first well of over 120 tons/day. In 2019, we launched a similar second well with daily output of over 300 tons. The results show that there are good commercial prospects. We currently continue testing of the wells drilled in terms of various production intensification methods. We aim to start test development of the assets in the next two years. At the same time, we are working to create a seismic-geological model for the Tympuchikansky and Vakunaysky areas.

Q: What are you doing in Serbia today?

A: NIS today pays great attention to exploration. We are actively working in Romania, Bosnia and Herzegovina. This year we should drill about 20 wells in the Balkans. In addition, we are considering new opportunities for the development in the region.

Q: Are exploration investments justified today, given the uncertainties over future oil demand?

A: Let’s divide this question into two parts. The first is the question of whether oil will be needed in, let’s say, 50 years? My opinion is that oil will be in high demand. The second question is whether exploration will be in demand in its current format. Today exploration is radically transforming. Today we have already significantly speeded up the pace of exploration of new areas and their transfer for development from eight-10 years to three-four years. Therefore, those projects that we get now will produce hydrocarbons in 2025. We see more rapid and high-quality involvement of new reserves, which also help compensate for the growing production. Gazprom Neft’s portfolio today consists of 90 exploration options and we need to always have at least that amount. We constantly update options in terms of the quality of the resource base, technology, and create a certain safety portfolio, which can always be monetized by creating joint ventures or selling to partners. We try to proceed from the principle that reserves should continue creating the basic value. Gazprom Neft is developing a business model, when we add several exploration blocks to the minimum required portfolio. Those additional blocks go through the initial exploration stage using new technology products or non-seismic methods. After we remove uncertainties, we attract a partner, thus monetizing some of the investments and creating potential for extra profits. Exploration becomes a business, where at each stage we can and should create additional value.

Q: What is the role of digital transformation for exploration?

A: Last year we went through a big reboot. We updated our technology strategy and approved a digital strategy for exploration. We changed the approach and the key thing is that each element of the strategy now comes from a business challenge. This is a fundamental difference from how many others do it, and how we did initially. We are now not acting on principle — saying, what a cool idea, let’s implement it. We analyze what particular challenge or hurdle stands for a particular project or business direction and how we can lift those. Our second step in the evolution process is a link between technological, digital transformation and organizational and process development. Digital platforms allow us, in fact, to combine all the competencies of the company almost online. All this sets new trends that will soon be reflected in the organizational structure. We understand that transformation is the new stability in which we have to live.

The world is changing so quickly that, acting in the structure of functional, organizational wells, we will lose. Therefore, Gazprom Neft enters a new, livelier format when adaptation actually takes place online. Moreover, we strive to anticipate changes and react proactively in order to be faster than competitors.