We Should not Limit Ourselves to Cosmetic Measures Gazprom Neft Expanding Geological Exploration in New Regions

 Viktor Savelyev We Should not Limit Ourselves to Cosmetic Measures Gazprom Neft Expanding Geological Exploration in New Regions

Interview with Gazprom Neft Director for Geology and Development Viktor Savelyev

April 2011, Oil of Russia Magazine

Gazprom Neft is successfully carrying out plans to replenish its mineral resource base. At present its priorities include expanding into new regions, such as eastern Siberia, Timano-Pechora, and the shelves of Arctic and southern seas, as well as developing a whole range of serious overseas projects. On the threshold of the professional holiday, Geologists’ Day, Gazprom Neft Director for Geology and Development Viktor Savelyev told the editors at Oil of Russia about the plans of the Company’s prospectors.

- Viktor Alekseevich, could you please tell us, what are the main results of Gazprom Neft’s work in 2010 in the field of geological exploration? In which Russian regions is the Company currently conducting exploration?

- In 2010 our Company succeeded at achieving a twofold replenishment of its reserves – 63.5 million tons of raw materials were extracted and used, while 129.3 million tons in category C1 were added, thanks to exploration and acquisition of new assets. In Russia we are now conducting geological exploration in Khanty-Mansiysk, Yamalo-Nenets, and Nenets Autonomous Districts, Tyumen, Tomsk, Omsk, and Irkutsk Regions, and Krasnoyarsk Territory. And overseas as well, in Serbia, Equatorial Guinea, Angola, and Iraq. The scope of regions where active exploration is being carried out will constantly expand on account of new start-up projects. Aside from the areas I mentioned previously, we have taken a definite interest in areas where large fields are situated: in Timan-Pechora province, the Yenisei-Khatanga trough, and the Kara, Chukchi, Caspian, and Laptev seas.

Like all large oil companies, we plan to carry out large-scale geological exploration on our licensed areas in eastern Siberia. It’s essential to accurately determine the fields’ production potential, as the cost for realization of projects in this region is much higher than in western Siberia, where the infrastructure is already developed. Nonetheless, there exist a number of plans for developing the Kuyumbin group of fields belonging to the company Slavneft, in which we are shareholders along with TNK-BP. We have the licenses for the Tympuchikan field, and the Vakunai and Ignyalin blocks of the Verkhnechonsk field, which are quite promising, in the opinion of our specialists. There are also a number of other projects in eastern Siberia.

But first and foremost, we are going to develop the territories that we can bring to active operation within the next year or two. So our main priority in the sphere of exploration remains western Siberia, and supplementary exploration of the Valintoy and Vorgensk fields. Their commissioning is planned for 2013. By that time, Gazprom Neft will expand to new sites, such as Messoyakha on the Yamal Peninsula and Kuyumba in eastern Siberia.

As part of a regional study, we are currently carrying out basin modeling of the Yamal and Gydan peninsulas, which will allow us to reliably identify new sites around Messoyakha. We want to organize integrated prospecting and exploration of Yamal and Gydan in the direction of the Kara Sea. We hope to expand our resource base here by no less than 1 billion tons. Movement to the north of the Yamal Peninsula is possible thanks to the powerful technical and human capabilities of our oil-producing companies Muravlenkovskneft and Noyabrskneftegaz. Our strategic goal is to bring the Company’s recoverable reserves up to 2.2 billion tons, which will allow us to produce about 100 million tons of equivalent fuel per year by 2020.

- What kinds of investments does the Company plan to make in geological exploration projects in Russia? Share your basic plans for 2011 with us.

- Geological exploration is the most reliable way for a large company to increase its resource base. The effectiveness of our exploration is extremely high – we invest approximately 120-130 rubles per ton of reserve growth, while the average for this figure in Russia is 180-220 rubles.

Last year the Company embarked on a new three-year geological exploration program. In 2010 investments in exploration totaled roughly 5.5 billion rubles, and in 2011 they will reach approximately 6 billion. And that is only counting the assets that we own 100 percent. There are also programs with the companies Slavneft and Tomskneft, and a separate program with the Messoyakha group of fields on the Yamal Peninsula, which is valued at roughly 1.5 to 2 billion rubles. Next year we are also launching a new project in Orenburg Region, where there will also be an exploration project. We also have an exploration plan with the company Magma. In addition, about 500 million rubles are set aside to carry out research work, including preparation of project documentation, study of new territories, such as the shelves of Arctic and southern seas, basin modeling, and so forth. This year, 326 million rubles have been directed to these purposes.

As for the structure of exploration, it is set up in the following manner: in 2011-2012 we plan to cover all active fields with three-dimensional seismic surveys. At present the bulk of the work has already been carried out; only about 10 percent remains. 2D studies are being minimized and will be carried out on only two new sites. For 2011 there are plans to drill 21 exploration wells. Five of them are planned for the Messoyakha project. We hope to expand the exploration program next year, and to drill 10 exploration wells and conduct seismic surveys over a territory of 600 square kilometers.

This year, Gazprom Neft is allocating 5.9 billion rubles to carry out geological exploration. And all in all, when we include the group of subsidiary companies, an amount on the order of 16.6 billion rubles will be invested for these purposes. In 2012 we plan to spend no less than 7 billion rubles, and in 2013, about 6 billion.

Gazprom Neft intends to carry out the following amount of exploration drilling: in 2011, 49.7 thousand meters (in total, the group of companies will drill 98 thousand meters in the current year); in 2012, 69.5 thousand meters; and in 2013, 62.3 thousand meters. This year, 3D seismic exploration will be carried out in the amount of 2.69 thousand square kilometers by Gazprom Neft alone, while the company group will carry out 1.49 thousand linear kilometers of 2D seismic exploration and 3.95 thousand square kilometers in 3D. In 2012, Gazprom Neft will carry out research in the amount of 1.6 thousand linear kilometers in 2D and 1.55 thousand square kilometers in 3D, and in 2013, 1 thousand kilometers and 1.5 thousand square kilometers respectively.

-Tell us about the Company’s plans for overseas geological exploration.

-Practically all of our overseas projects are connected with geological exploration. According to Gazprom Neft's long-term strategy, around 10% of its production will be conducted outside the Russian Federation by 2020. In the beginning of 2010, our Company became the operator of the Badra field development in Iraq. We plan to begin construction of facilities in the near future, and to begin drilling next year.

We are also considering the West African shelf as an overseas production center. In fact, we are already working in West Africa, more specifically in Angola, where production is conducted through the Serbian NIS, which is controlled by Gazprom Neft. And in 2010, our Company, the Ministry of Energy of Equatorial Guinea, and that country’s national oil corporation GEPetrol signed a Production Sharing Agreement for two sea exploration blocks. Gazprom Neft is the project operator, and already conducted 3D seismic surveys in January-February 2011.

In addition, five Russian oil companies and the Venezuelan PdVSA created a joint venture, PetroMiranda, for development of the Junin-6 field in Venezuela. The consortium members have launched the first phase of the project. Last year, Gazprom Neft was designated as the coordinator of the Russian side. And here we also plan to carry out exploration.

- What position does seismic exploration occupy in the Company? What measures are taken for protection of the environment during exploration?

Almost all oil companies operating in Russia include seismic surveying in the geological exploration process, in both the search and field development stages. As a rule, the field work is performed by contractor service organizations. For the analysis of geological and geophysical data (processing, interpretation, geological and hydrodynamic modeling), scientific and technical centers are created in the form of structural divisions or subsidiaries.

In the planning and conducting of exploration work, special attention is paid to environmental protection. For example, to reduce the impact on the environment, well sites are placed beyond the boundaries of water conservation zones of watercourse and shelterbelt forests (in strict accordance with the Law on Environmental Protection, the Forestry, Water, and Land Codes, and other laws and regulations).

Questions of environmental protection have particular importance for Eastern Siberia. For this reason, Gazprom Neft carried out a set of operations on the Srednetaimurinskiy, Vakunai and Ignyalin sites, including full-scale field surveying, testing of components of the natural environment (lithosphere, surface water, surface atmosphere, and vegetation), and chemical-analytical studies. We detected negative exogenous geological processes developing in the area, and gave recommendations for a long-term monitoring program.

- By what measures do you think the government can stimulate geological exploration?

- For example, by eliminating the mineral extraction tax for small and unprofitable fields. It is worth noting that the government has already made several changes in tax laws, which have allowed oil companies to obtain additional resources for investment. But these measures are “cosmetic”. We think that the system for taxation of the oil industry must become more flexible, and should be focused not only on obtaining maximum revenue for the budget, but also on stimulating the development of new fields and introducing leading technologies to enhance oil recovery in depleted areas.

A promising idea, in our opinion, is to introduce a tax on additional income (TAI) while simultaneously reducing export duties. TAI is the tool that will make it possible to collect tax not from accounting profits, but rather from free cash flow, which is fairer. This mechanism could be tried out on the new fields, and if it acquits itself well, it could be extended to the entire industry over the course of several years.