Gazprom Neft shareholders can expect dividends totalling 50% of net profits as soon as 2H 2019. Alexander Dyukov, CEO and Chairman of the Management Board, Gazprom Neft, discusses this, key projects in various business sectors, and the company’s technological development in this interview with the Rossiya 24 TV channel.
— What’s your view of the company’s 2019 results?
— The oil market faced a difficult situation in 2019. On the one hand, we were seeing a decline in oil prices compared with 2018: and, on the other hand, our actions were restricted by the OPEC+ deal. Despite this, we managed to increase oil and gas production by 3.5% last year. We produced more than 96 million tonnes of oil equivalent (mtoe), and came close to the strategic goal we set ourselves 10 years ago: of doubling hydrocarbon production, to 100 million tonnes. We have capacity to reach that strategic target in 2020, but much will depend, of course, on what happens with the OPEC+ deal. If we’re talking about financial performance, then I would, firstly, point to the company’s low debt burden. Our net-debt-to-EBITDA ratio is just 0.7: which is generally seen as good. And, obviously, we can’t not talk about our record net profit: we’ve crossed the all-important threshold of RUB400 billion.
— How confident can Gazprom Neft shareholders be in terms of dividends, going forward?
— It’s already been decided that, with effect from 2020 we’ll be allocating 50% of net profits to dividend payments. And that also applies to dividends for 2H 2019, to be paid in 2020.
— You’ve talked about the difficult market last year. How do you view the current market environment — specifically in terms of the impact of COVID-19, and also the possibility of further quota reductions under OPEC+?
— Even from initial reports its quite clear that oil consumption in China has seen quite considerable decline. Which means the COVID-19 situation is reflected in the oil price. But you have to understand that the price isn’t just tied to today’s realities, but also to market expectations.
There’s a lot of uncertainty at the moment, and the information we’re getting is too contradictory. On the one hand, we’re seeing the COVID-19 situation worsening in countries such as South Korea and Italy, while, on the other — we’re getting data from China as to the epidemic slowing down.
So it seems to me there’s no need to rush any decisions with regard to OPEC+. Something or other is always happening in the oil market, every month, and if OPEC+ were to react to any changes every time they happened it would only lead to the situation becoming more unstable. Right now it’s better to just watch and wait.
— What are the highest priorities in terms of Gazprom Neft’s upstream portfolio?
— We have a large and well-balanced portfolio of upstream projects, which means we can look to the future with confidence and say that we will continue to increase production — and, moreover, will be doing so effectively. I would divide our portfolio into several groups.
The first of these is brownfield sites — mature fields where we’ve been working for some time. These are located in the Khanty-Mansi Autonomous Okrug, the Yamalo-Nenets Autonomous Okrug, and the Tomsk and Orenburg Oblasts. In working at these kinds of fields, the key objective is increasing the proportion of recoverable reserves — something we’re pretty good at.
The second group of assets comprises major projects: Messoyakha, Novy Port, Prirazlomnoye. We’re reaching peak production at these assets but, despite this, can look to the future with confidence, knowing that these assets have good potential for further development.
The third group is new projects — new areas for growth. That means, predominantly, assets in the Nadym-Pur-Tazovskoye district in the Yamalo-Nenets Autonomous Okrug: the En-Yakhinskoye, Tazovskoye, Pestsovoye and Zapadno-Tarkosalinskoye fields. We’re bringing oil-rim deposits, and the Achimovsky Formation, into development. At the Yamburgskoye field alone we’re expecting to achieve liquid hydrocarbon production of 20 million tonnes per year.
Another important growth area is Eastern Siberia. We’ve already started production at the Chayandinskoye oil-rim deposit. As regards offshore, we’re continuing to develop the Prirazlomnoye field successfully: added to which, we have a number of new offshore assets.
— Gazprom Neft and Gazprom have some joint projects at the Urengoyskoye, Bovanenkovskoye and Kharasaveiskoye fields. Do you see these projects as areas for growth?
— As far as Kharasaveiskoye and Bovanenkovskoye fields are concerned, responsibilities are divided across both companies, as follows: we are working at Neocomian-Jurassic deposits, while Gazprom is developing Cenomanian. We’re working under long-term risk operatorship contracts with our parent company at these fields, meaning we can include both reserves and production volumes in our balance sheet. In terms of gas production, we’re aiming to reach plateau production of 40 billion cubic metres per year in the near future, with condensate production, moreover, potentially reaching five million tonnes.
— How is your exploration portfolio looking now? Is there any likelihood of major discoveries?
— It would be more accurate to talk about the portfolio in terms of exploration and prospecting assets. And we made a major addition to that portfolio last year, by the way, acquiring exploration and prospecting rights to a further 32 license blocks, through auctions. These include assets where we have no doubts that we will, as a result of geological prospecting, add further reserves, as well as assets in undeveloped, poorly explored areas. On the one hand, the risks of failure are considerable higher there, but, on the other — the potential for finding really large deposits is considerable. One such area is on the Gydan Peninsula, where we plan to start building our first prospecting well as early as this year.
— Developing the Bazhenov Formation is one of the key projects in your portfolio. What stage is that project at, currently?
— Bazhenov oil is hard-to-recover oil, and production costs are pretty high. Accordingly, we are faced with having to develop and select technologies that will make developing these reserves economically viable. To which end, the company is developing a “partnership ecosystem”. There are, already, 20 partners working at the Palyanovskaya test site, at the Krasnoleninskoye field — a technological test facility under the federal Bazhenov project. These include service and engineering companies which, together with us, are developing technologies for the full-scale development of the Bazhenov Formation. A major milestone in 2019 was the introduction of amendments to the Subsoil Law, bringing in a new category of licenses, not for exploration or production, but for developing new technologies. It’s our plan that our Bazhenov project will be one of the first to receive such a license.
How important are hard-to-recover reserves, as a proportion of the company’s total production volumes?
— In terms of oil for which we have certain tax concessions,
— Let’s move on to refining. Gazprom Neft’s refineries are being proactively modernised: what projects can we expect to be completed in the near future?
— We’re already nearing completion in modernising facilities, actually. Several facilities will be commissioned at both the Moscow and Omsk Refineries in 2020 and 2021, which will mean we can increase refining depth (the “conversion rate”) to
— Given the impact the tax manoeuvre has had on the industry, do you regret having spent such an enormous amount on modernising refining?
— We’re confident we made absolutely the right decision. The tax manoeuvre, of course, is going to have an effect on refining’s economic viability, but those companies that have implemented refinery-modernisation projects will, in any event, stand to gain. The ones that are going to suffer under the tax manoeuvre, actually, will mainly be those that haven’t done so.
— Gazprom Neft has offered independent filling stations a new basis for engagement since last year. What’s unique about that model? Am I right in thinking it’s not a franchise, exactly?
— It’s not so much a franchise as a form of partnership that helps small and medium-sized filling-station owners to significantly improve their operational efficiency.
Under that kind of partnership we offer an IT platform for filling-station management, provide a readymade identity and brand, as well as high-quality fuel, deploy specific service standards, and provide marketing support. We also help improve training standards for filling-station personnel, and have set up a special training centre in the Tver Oblast, to that end.
— The market has supported this concept. Seventy-two companies — managing 120 filling stations throughout 27 regions — have taken up this partnership model, in a pretty short space of time. The stats show that moving over to a new brand under this business model means our partners can increase average daily fuel sales by
— Last year you launched an app that can be used to pay for services at filling stations. Has it proved popular?
— We’ve been seeing a 20% increase in fuel purchases using the AZC.GO app, every month. Partnering with the Mir payment system has played no small role in the increasing popularity of our digital product. According to our estimates, Mir cardholders using the app got more than RUB90 million in cashbacks last year.
— Continuing on technological development, how did you, Yandex, Mail.ru and Sberbank end up as members of the AI Russia Alliance? Sberbank CEO Herman Gref has even made jokes about this.
— Yes, there is this stereotype that oil companies shouldn’t, in principle, use new digital technologies in their operations. And we’re actively fighting that stereotype. One of our latest initiatives is creating a scientific and educational centre, together with leading universities, in St Petersburg. The objective of this partnership is to develop, among other things, digital solutions and AI technologies not just for the oil industry, but for industry as a whole.
— Am I right in thinking that all of the technological and digital solutions you’re talking about will be developed in St Petersburg’s “Silicon Valley”?
— We’re not just developing digital technologies. Working with those hard-to-recover reserves means we’re on an ongoing search for technologies. In order to make this process faster and more efficient, we need a “partnership ecosystem”, similar to a technological “Silicon Valley”. Concentrating universities, engineering, service and new-technology companies here is extremely important. And St Petersburg is ideally suited to playing that role — as a city where that sort of technological “Silicon Valley” can be created.