xInterview with Yuri Lyovin, Head of the project for Gazprom Neft
December 2010. Nefte Compass, Energy Intelligence Group, Inc
Gazprom Neft has a huge amount of work ahead of it in Venezuela after being chosen as the operator of the first phase of the Junin-6 Block project in the heavy oil Orinoco River belt. It has to ensure that a final investment decision is taken by 2013 and that the most efficient schemes are selected for the field's development. In an interview with Nefte Compass, the head of the project for Gazprom Neft, Yuri Lyovin, describes the task ahead in Venezuela faced by Russia's National Oil Consortium (RNOC), which unites Gazprom Neft with its compatriots Rosneft, Lukoil, TNK-BP and Surgutneftegas. PetroMiranda, a joint venture set up by RNOC and Petroleos de Venezuela (PDV) to develop Junin-6, held its first board of directors meeting in September, signifying the start of operations.
-- Why has Gazprom Neft been chosen to lead the project and what responsibilities do you have?
-- We got this role as the result of an agreement on the distribution of functions inside RNOC. Rosneft has the lead role in RNOC in terms of political work, preparing intergovernmental documents, studying other projects, etc., while we received the role of technical manager of Junin-6. We deal with purely technical, economic and geological matters. Operational issues are taken care of by PetroMiranda, but since there are only 12 people there right now, we help there as well, solving problems of accommodation, communication, work permits, etc. PetroMiranda will have a total of 130 people, with only 30 in the managing office. The Russian side is to nominate 14 members, with 12 already having been approved, including five from Lukoil, five from TNK-BP and two from Gazprom Neft. The general director has also been approved. He comes from PDV. We also agreed on the location of our office, which will be in Puerto La Cruz.
-- What work will be carried out at Junin-6 during the first phase and what will happen after that?
-- We have to get a better idea of the size and nature of the reserves of the field, which are now registered at 53 billion barrels. We believe they could be bigger, but their extraction could be done traditionally -- that is just pumping the crude out -- or by heating the oil first. We need to understand which way would be the most economically efficient. That is why we plan to drill about 50 stratigraphic and horizontal wells until 2013 and to build economic and geological models, which would allow us to take the final investment decision (FID). If the FID is positive, production would begin in 2013 at some 40,000 barrels per day, rising to a peak of 450,000 b/d in 2017. In fact, we can produce more but the level is regulated by the government of Venezuela based on the needs of the country. Besides, Venezuela is a member of Opec.
-- Has the budget for next year been approved? How big is it? What is the total cost of the project expected to be? How will financing be divided among the partners?
-- We don't reveal the budget for next year. I can only say it will be several tens of millions of dollars. The two sides will provide financing in accordance with their shares, meaning 60% will come from PDV and 40% from RNOC. The issue of credit financing hasn't been raised so far as we will have enough from our own means as RNOC for the first phase. Credits will be needed when we move to the second stage when tens of billions of dollars would be needed. Right now the total cost of the project looks to be in the area of $24 billion.
-- Does this figure include construction of the upgrading facilities, export pipeline and other infrastructure? And who will build all that?
-- Yes, it includes all infrastructure, except for sea terminals. It's not clear now who will build the export pipeline, whether it will be a build-and-operate consortium or PDV, which will recover costs through tariffs. One of the options is that [Russian state pipeline monopoly] Transneft would build the pipeline but this is still at the negotiating stage. As for the upgrader, on the Junin acreage, which consists of 12 blocks, each operator will not build an individual upgrader. In its project concept PDV has ordered there shall be a unified approach for infrastructure development, which enables choices to be made that have the best synergies for all the companies working in the area. Besides, PDV has developed a general project for the whole Orinoco oil belt, which includes construction of the highway, airport, electricity supply system and a common crude collection unit. This makes thing easier for us as we understand what will be built and can make long-term plans, and if we find a more economic option, corresponding changes could be made.
-- Will members of RNOC be able to book the Junin-6 reserves and how much will each company get?
-- We have asked Ernst & Young to give us conclusions on whether it would be possible to do it in accordance with international accounting standards. We have yet to receive the final answer, but according to the preliminary conclusions, this could be done. Each Russian company will get 8% of the reserves.
-- For that, you need to have a marketing strategy. Who will deal with crude sales from the project?
-- This is a topic for 2017. Now, we just have agreed that each participant has the right for its share of production. We will fine-tune the system when it is up and running. There could be options -- two have been written down: One is that everything will be sold by PetroMiranda at prices not lower than world market levels and RNOC will receive its share of proceeds; or, RNOC will get its share of production and sell it independently. It's not clear who will be responsible for this inside RNOC.
-- What kind of crude is it going to be in terms of quality?
-- It will be close to 42° API [after upgrading]. Now the average API of crude exported from Venezuela is about 32°.
-- Is it going to be an economically efficient project or is it more politically driven?
-- The government of Venezuela wants to use the oil projects to help raise living standards. So, we will also have to invest in social programs in the region. For example, we will have to build housing not only for our staff, but also for the Venezuelans living in the region. We still need to understand how much additional costs these social programs would result in. Our documents say that the Venezuelan side will try to provide an effective level for an internal rate of return through tax breaks and other allowances. But in any case, show me any other place in the world with reserves of 53 billion bbl? So, we just must find an efficient way to develop them. As for politics, it's good that we have the support of the governments.
-- Do you not foresee political risks that American companies faced there?
-- Risks are always there -- political, economical, environmental, etc. But it is important to be able to manage them. We have carried out risk analysis and understand what should be done. Our documents have been approved by Venezuela's parliament or National Assembly. And by the way, American companies have been replaced by French, British and other international majors.
-- What oil price do you base your models on?
-- There are several options, with oil prices varying from $60 to $75 per barrel.
-- How important is this project for Gazprom Neft? What will the company gain from it?
-- Gazprom Neft started an international expansion drive this year. By the end of the year we will have six overseas projects. Each of them is unique and important to the company. As for Junin-6, this is an additional 40,000 b/d of production, which is 4% of our current output of 1 million b/d. Plus, the sales margins are much higher there. Then, we will be able to book huge reserves, and what is most important is that we are getting the valuable experience of entering a new country, holding talks with governments and partners, of bringing up professional staff.
-- Does RNOC consider projects outside Venezuela?
-- RNOC was set up as a vehicle for Russian oil companies to expand overseas. We are looking at Cuba, Nicaragua, Brazil and Argentina. The strategy is just being formed and is still to be approved by the board of directors. Then, we will be able to say something more concrete.