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Gazprom Neft Drives Growth At Home and Overseas

Denis Sugaipov

Interview with Gazprom Neft Head of Major Project Management, Denis Sugaipov

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Gazprom Neft, Russia’s fifth-largest oil producer, is gearing up for frontier projects in Russia and abroad. At home, it has to find technical and infrastructure solutions to start production in the northern Yamal-Nenets autonomous region and the southern Orenburg region — which combined will drive the company’s future production growth. Overseas, work has started in Venezuela and Iraq. In an interview with Nefte Compass, the head of Gazprom Neft’s directorate for major projects, Denis Sugaipov, outlines the company’s strategy.

Q: Gazprom Neft is operator of the Messoyakha group of fields, which it is developing in partnership with TNK-BP. The partners came up with an ambitious exploration program for 2011 to get a better feel for the fields. What was actually done?

A: In 2011 we completed major exploration work at the Messoyakha group of fields: we finished the planned drilling and testing of the main layers at 11 wells, which will allow us to confirm an increase in reserves of 85 million metric tons under Russia’s C1+C2 classification [2P and 3P]. Some 320 square kilometers of 3-D seismic work have also been carried out this year. Results are now under interpretation.

Q: Did that work help to better understand what kind of crude lies in the Messoyakha fields?

A: This is a question for further research. Today, the understanding is that reserves are split 70-30 between heavy crude and light crude, respectively. We have to continue exploration and experimental work to understand how to better extract both types of crude.

Q: Have the Messoyakha business and investment plans for 2012 been approved?

A: Spending in 2012 should average 4.5 billion rubles ($141 million). We plan to drill four exploration wells both for heavy oil and light oil and continue seismic. We also plan to start experimental work in two areas, each including four wells, to test production technologies in the area, which has a complex structure. A similar program will be implemented in another three areas in 2013, but this should only be approved after we get first results in 2012.

Q: The Messoyakha group of fields is located in a remote area in the Yamal-Nenets region, where there is no infrastructure to evacuate crude. What solutions did you manage to find?

A: This year we plan to produce 58,000 tons at Messoyakha as part of the experimental production program. The volumes are not commercial and we are currently working out a concept with a foreign contractor on how to better handle the crude. There are currently three options: to pump it back into the reservoir, to flare it using special techniques, or evacuate it using motor transport. A final decision should be made at the beginning of 2012. As far as transport solutions for commercial production are concerned, Gazprom Neft, in cooperation with other companies working in the region, is currently holding talks with Russian pipeline operator Transneft on the construction of the Zapolyarye-Pur-Pe pipeline.

Q: Are there any other challenges Gazprom Neft faces at Messoyakha?

A: One of the key challenges is that the project is not profitable under the current tax regime: we need to develop the fields in a remote region with poor infrastructure, where reserves are very complicated. Even if we lower capex by 20% and operational expenses by another 15% and see a 20% increase in oil prices, the project won’t make a return on investment. We are in discussions with the government on providing tax breaks for Messoyakha.

Q: Gazprom Neft has another complicated project in Yamal — the Novy Port oil field. What is the outlook there?

A: Last year we brought into operation and tested four wells at the field. We have completed reserves calculations. The field harbors 220 million tons of recoverable crude and 260 billion cubic meters of gas. We have also managed to confirm the possibility of shipping crude from the field by the Vaygach icebreaker via the Northern Arctic Passage. This year, we should start implementing an experimental program at the field.

Q: Can you outline expected production volumes and the options for transporting the crude?

A: In 2012, crude output should average 13,000 tons. We have the same three options to handle this crude as for Messoyakha, but at the same time crude evacuation via the Northern Arctic Passage has already proved a success. We are currently holding tenders for an integrated transportation solution, including crude deliveries from the field via a pipeline that we plan to start building this year, to a yet-to-be-constructed oil terminal and then via the Northern Arctic Passage for exports. Currently, the development project envisages crude production and shipments up to 2.5 million tons per year (50,000 barrels per day).

Q: Has the 2012 investment plan for Novy Port been approved?

A: Yes, this year we plan to spend 7.6 billion rubles ($239 million).

Q: Is the project profitable under the current tax regime?

A: Novy Port is more profitable than Messoyakha — reserves here are better prepared, while we also have a clear idea of how to evacuate future crude production and we are not limited by any pipeline construction schedule. There are some technological risks in the region, but some adjacent fields could impact project profitability significantly due to synergy and the monetization of gas production. As far as tax breaks are concerned, we hope for the introduction of a special tax regime for the field.

Q: In 2010, Gazprom Neft and independent gas producer Novatek entered the SeverEnergia project with Italy’s Eni and Enel. Can you shed some light on short-term plans?

A: This year the partners plan to produce 2.2 Bcm of gas, 24,000 tons of crude and 0.4 million tons of gas condensate. The aim is to boost gas output to 6.2 Bcm/yr in 2013 and to 13.5 Bcm/yr in 2014. The joint venture’s operations will be mainly gas- and condensate-focused this year. It has almost finished construction of the first 2.6 Bcm/yr gas pretreatment unit for the Samburgskoye field, where the first phase of gas and condensate production should start in the first quarter followed by the second one in late 2012. Test crude production from the field should start next October. At the Yaro-Yakhinskoye field test crude production should also start next October. At the Urengoiskoye field, the plan is to start gas and condensate production in the fourth quarter of 2013.

Q: Who will be in charge of gas, condensate and crude marketing?

A: The assets are managed by the SeverEnergia joint venture, which makes all the key decisions. We already have agreements to sell gas to Gazprom and condensate to Novatek’s Purovsky processing plant. As far as crude is concerned, the parties are still discussing transportation options and necessary infrastructure. The plan is either to evacuate crude using trucks or ship it via condensate pipelines.

Q: What is the planned spending for 2012?

A: Investments have been penciled in at 35 billion rubles ($1.1 billion). The partners are currently holding talks to attract external financing to cover 100% of expenses in 2012. SeverEnergia will have positive Ebitda [earnings before interest, taxes, depreciation and amortization] in 2012, which means external financing is a good means not to have to divert shareholders’ cash flows.

Q: Last year, Gazprom Neft entered the Orenburg region, which is seen as a new future production cluster. Can you elaborate on the company’s plans there?

A: Last year we purchased the eastern part of the Orenburg field, the Kapitonovskoye field and the Tsarichanskoye field, which we are now actively integrating into our business portfolio.

At the Orenburg field, we have started a pilot drilling project, set for completion this year. The field is already in development and we need to decide on where we should focus our efforts to extract the remaining reserves and what technologies to implement. This year, we plan to continue experimental works at the field and drill 22 more wells. We also plan to implement a pilot pressure-maintaining project there. After that work is completed, we will prepare the field’s development scheme. Last year, output in the eastern part of the Orenburg field stood at 1.3 million tons of oil equivalent — 530,000 tons of crude and 900 Mcm of gas — while this year, hydrocarbon production should rise to 1.47 million toe/yr, including 647,000 tons of crude.

The Tsarichanskoye field is a green field, which needs a separate development plan to be prepared in 2012.

The Kapitonovskoye field is a well-developed asset, which already generates good cash flows. Our task is to keep those flat and implement exploration and technological techniques. In 2012, Gazprom Neft aims to spend 6.2 billion rubles ($194 million) on the eastern part of the Orenburg field.

Q: Outside Russia, Gazprom Neft has a leading role in the Russian National Oil Consortium (RNOC) developing the heavy oil Junin-6 project in the Orinoco River belt together with state Petroleos de Venezuela (PDV). How is the project advancing?

A: Junin-6 is one of the most challenging projects. This is our first cooperation experience with Venezuela, where the structure of partnership is very complicated in terms of the number of participants. In 2011, we planned to start drilling stratigraphic wells and test horizontal wells at the field to be able to make a final investment decision (FID) in 2013.

Work has started: we have prepared two areas for drilling, which hasn’t started yet. Venezuela also prepared several drilling rigs, which are now being tested and audited. During 2011 preparations, Caracas came up with the so-called “early oil” proposal, which we see more like an experimental production project. Under the plan, PetroMiranda, a joint venture between RNOC and PDV, will launch crude production from the most explored part of the field in the north. This should allow us to test drilling techniques and the crude pretreatment facilities by the time FID is made.

Q: What are the basic parameters of the plan?

A: Next year spending should total about $640 million. To start drilling in 2012, we need six working crews and six rigs. Early oil should be shipped by trucks to the nearby Petrocedeno upgrader. At the same time we should this year continue working on the design of our own upgrader, which we plan to start building in 2014.

Q: Gazprom Neft has started drilling at Iraq’s Badra oil field. Can you outline the key targets for 2012?

A: Total investment for Badra in 2012 has been penciled in at 18.6 billion rubles ($531 million). This year, we plan to continue drilling appraisal and production wells and to further interpret 3-D seismic to be able to make amendments to the initial trial development plan for the field. By February, we should finish work to prepare for the construction of the central collecting unit and start designing its first section. We have already chosen a contractor, which has yet to be approved by the Iraqi government.