Strategic Goal – 2.2bn Tons

Виктор Савельев

Interview with head of Gazprom Neft’s Geology and Exploration Directorate, Viktor Saveliev

March 2011. GAZPROM magazine.

– Viktor Alekseevich, what are the results of Gazprom Neft’s exploration and appraisal work over the past year?

– Our attention was first of all concentrated on our traditional region, Western Siberia. We conducted work in 17 areas in Khanty-Mansijsk (KMAD) and Yamalo-Nenets (YNAD) Autonomous Districts, and also in two more in Tomsk Region.

Adjustment

– In Eastern Siberia – in the Tympuchikansky and Ignyalinsky areas, located in Yakutia and Irkutsk Region respectively – our company’s investment in geological exploration increased by almost a third last year and totaled 4.7 bn rubles. As for Gazprom Neft Group, that is including our stakes in Slavneft, Tomskneft and other enterprises, this indicator stood at around 6.4 bn rubles. In comparison with the previous year, we saw an increase of about 28 %.

In 2010, we carried out 2D seismic surveys on 3,100 line kilometers (4,300 across the Group), and 3D seismic surveys on 1,700 square kilometers (2,300 across the Group). Gazprom Neft’s headway in prospect drilling amounted to 60,500 meters, and for the Group as a whole – to 92,300 meters. Thanks to this, we managed to open up one small field and 44 new hydrocarbon deposits. The increase in the Group’s oil reserves totaled 129.3 mln tons, including 48.9 mln tons through geological exploration and 80.4 mln tons through the recalculation of reserves and the acquisition of new assets. Consequently, the indicator for oil reserve replacement was twice its production level. I will remind you that, as a result of extraction and writing off, the Group’s reserves decreased by 63.5 mln tons. So as of the start of 2011, our oil reserves had increased to 1.604 bn tons.

– Did the global financial and economic crisis have any influence on geological exploration? Did you have to make adjustments to the company’s plans?

– If we’re talking about the industry as a whole, first of all there has been a substantial reduction in the scope of geological exploration works, particularly with new fields located at a considerable distance from the existing oil production centers, pipeline systems and consumers. In regions with well-developed infrastructure, the pace at which studies were carried out on deep horizons and deposits with reserves of hydrocarbons that were difficult to access decreased considerably. There was a sharp decrease in interest in promising scientific developments and the introduction of new technologies. As for Gazprom Neft, we tried to overcome these trends, but at the same time we could not ignore the changing conditions of the oil and gas business. That is why we made certain adjustments to the geological exploration program. The main changes were probably connected with concentrating our efforts on the most economically efficient areas of geological exploration. Naturally, this was done by postponing the implementation of more difficult and expensive projects in Western Siberia, the Nenets Autonomous District and southern Russian regions. For example, increasing the pace of work on the Messoyakh group led to reduced activity in Yakutia and Irkutsk Region.

These were, however, tactical changes that do not have any drastic influence on Gazprom Neft’s development strategy, the main aim of which is to increase hydrocarbon production to 100 mln tons of oil equivalent by 2020. Obviously, this can be achieved provided that we are correct and consistent in our implementation of new projects that provide high levels of return on the capital invested.

– What geological survey plans does Gazprom Neft have for 2011 and subsequent years?

– Our strategy envisages the active development of the raw materials base, which should slow down the decrease in the production rate and increase the economic efficiency of existing assets.

Investment and return

– So investments in geological exploration will increase. This year, they will grow to 5.9 bn rubles across the company and 16.65 bn rubles across the Group. The planned volume of Gazprom Neft’s annual investment for the next few years has been set at 6-7 bn rubles.

We plan to focus 2D seismic survey at Gazprom Neft’s fields on new licensed areas. We plan to reduce them to a minimum in 2011, and then in the next two years they will amount to about 1,000-1,600 line kilometers. On the other hand, we are going to increase the scope of 3D works to 2,700 square kilometers. Then they will fall to 1,500 square kilometers. The point is that, in the near future, we will almost entirely complete 3D seismic surveys at our existing fields: at present we have no more than 10 % of the total area left to cover. Across the whole of the Gazprom Neft Group, around 1,500 line kilometers will be covered with the help of the 2D method this year, and 3,950 square kilometers by the 3D method. At the same time, we are planning to increase the scope of prospect drilling: this year it will reach about 50,000 meters, next year 70,000 meters and in 2013 more than 62,000 meters. This year, across the whole Group, this indicator will come to 98,000 meters.

– What are the expected results?

– As a result of prospect drilling at the existing licensed areas, in 2011-2013 we are planning to replace about 59 mln tons of C1 oil reserves in total. For the same period, that figure has been set for the Group at 121 mln tons.

– What will you focus on in the near future?

– This year we will speed up work in the KMAD and the YNAD – at the Yety-Purovskoe, Vyngapurovskoe and Kholmistoe fields, and also in the Vorgenskie licensed areas. Later on, these will become major regions for us in terms of geological exploration. At the same time, we are planning to increase the scope of work in Tomsk Region and in Eastern Siberia, especially at the Vakunaysky licensed area, where the Severo-Vakunayskoe field was opened up in 2010. In 2011, as things stand, we plan to drill 21 wells. A considerable share of our investment will focus on the Messoyakhsky project. Here we hope to agree with our partner, TNK-VR, to expand the geological exploration program from five to ten exploration wells and conduct a seismic survey within 600 square kilometers.

New areas

– In addition, Gazprom Neft plans to participate in tenders and auctions for new areas of subsurface resources which are of interest to the company. By the way, this applies not just to dry land but also offshore areas.

– How likely is it that Gazprom Neft will start working on the shelf?

– Actually, our company started working on the Russian shelf quite some time ago. We worked in the least studied sector, the Bering Sea, in the Russian part of the Pacific Ocean, where we drilled the first well back in 2002. We also studied the Vostochno-Shmidtovskaya structure on the northern shelf of Sakhalin. And it is important to note that our scientific and technical center has never stopped studying the most promising offshore sites which are subject to licensing. We prepared applications for blocks on the Pechorsky, Karsky and Chukotsky shelves. Now, offshore field exploration is one of Gazprom Neft’s strategic priorities. However, our company will implement its first shelf project abroad. I will remind you that in 2010, we signed a production-sharing agreement at two offshore exploration blocks with the Ministry of Energy of the Republic of Equatorial Guinea and that country’s national oil company, GEPetrol. Under this agreement Gazprom Neft is the project operator. The predicted oil reserves that can be extracted from the two blocks may reach about 110 mln tons.

Our plans in the short term include the start of geological exploration on the Cuban shelf. In this instance, we will work jointly with Malaysia’s Petronas. There, the estimated resources amount to about 400 mln tons. This project is very attractive from the point of view of sales and logistics organization, as the huge American market is not far away. We are also interested in the Caspian shelf. As for oil and gas projects in the Black Sea, they will only be relevant for us if we are provided with tax breaks, as is the case with the northern seas. So for the moment, we are trying not to lose sight of the Tuapsinsky mountain trench and other water areas of the Black Sea basin.

– Besides the shelf projects mentioned above, is there anywhere else abroad where the company is planning to carry out geological exploration work?

– Our development strategy envisages that, by 2020, at least 10 % of all Gazprom Neft’s hydrocarbon extraction must come from foreign projects. That is, about 10 mln tons of fuel equivalent a year. The first step in implementing this plan was the purchase of a controlling stake in Serbia’s Naftna Industrija Srbije. Then Gazprom Neft signed a contract to develop the Badra field in Iraq. We are also operating as part of the National Oil Consortium in Venezuela. We are actively striving to move into the African continent, and we are considering the options for implementation of land and offshore projects on Cuba. The CIS countries remain an area that we follow meticulously, for example Kazakhstan and Turkmenistan. And naturally, each project will start with geological exploration.

– What other regions are you planning to move into and what result do you expect to obtain?

– The company plans to become a leader of extraction in YNAD, and possibly on the Barents Sea shelf. Besides, there are options to develop projects in Eastern Siberia and the Nenets Autonomous District. Taking foreign projects into account, this, according to our estimates, will deliver an increase in the share of deposits at the initial exploration stages from the current 38 % to 55 %, as well as securing a reserves-to-extraction ratio of at least 20 years.

System flexibility

– Our strategic goal is to increase the company’s recoverable reserves to 2.2 bn tons, which will allow us to produce about 100 mln tons of fuel equivalent by 2020.

– What difficulties may arise with geological exploration in the future, what will they be connected with and how will they be solved?

– The main difficulty in geological exploration is to do with the current economic conditions. As a result, practically all the projects in our area, even with a very reliable raw materials base, are economically risky, sometimes even loss-making. This applies both to large deposits in the north of the YNAD and to our Eastern Siberian assets. The second major problem is the fall in the prestige of the geological exploration specialization, which has resulted in a shortage of staff. Companies have to work independently to address the issue of training highly-qualified specialists, also given the fact that there has been very considerable technological progress in geophysical survey methods and “intellectual” drilling. We cannot lag behind foreign energy companies, so we have to invest substantial resources in the development of science.

Of course, we cannot say that the state does not see our problems. For example, a number of changes have already been introduced into tax legislation so that oil companies can obtain additional resources for investments in geological exploration. But these measures are no more than cosmetic, and, unfortunately, they have not brought about any drastic positive changes. To deal with this situation, the system of taxation in the oil industry must, first of all, be more flexible, oriented not only at generating the maximum revenue for the budget but also towards stimulating the development of new fields and the introduction of cutting-edge reservoir engineering technologies for areas that have already been worked out. In our opinion, a promising idea is the introduction of excess profits tax (EPT) with the simultaneous lowering of export duties. EPT is precisely the instrument that would mean taxes would be levied not on accounting profit but on free cash flow, which is more just. This mechanism could be tested with new fields and, if it works well, over a number of years it could be extended to the whole industry.

Interviewer: Denis Kirillov