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“Hydrocarbon production will hit 150 million tonnes in the next five to six years”

“Hydrocarbon production will hit 150 million tonnes in the next five to six years”

Vadim Yakovlev, Deputy Chairman of the Management Board, Gazprom Neft, talks to TASS about how Gazprom Neft sees itself — and the market — after the crisis-ridden year of 2020, the company’s plans for intensive production growth, and foreign partners’ interest in Russian skills and competencies, technologies and digital solutions.

— Vadim Vladislavovich, I wanted to talk, first, about the general outlook. Last year was difficult for all of us, and for the oil industry — suffering from low prices — it’s particularly seared on the memory. Can you tell us whether the oil market has seen a considerable improvement in 2021, and whether the company’s CAPEX is likely to increase? How do you see production volumes — will these recover? Is everything in the garden rosy?

— We all remember, perfectly well, how agreement was reached on cutting production, following the collapse in demand on the oil markets, together with the collapse in prices. We had to cut production by almost 20% last year — so, consequently, we cut our investments, in order to manage cash flow — to maintain a positive cash flow. But that deal, itself, meant we could look to the future some confidence. We understood that there’s an agreed mechanism which means everyone can act in line with how the market situation evolves. Our expectations vis-à-vis demand are now quite favourable, overall. We are expecting consumption to reach pre-crisis levels by the seasonal peak — the summer season — of 2022. If we’re talking about current volumes, we’ve already made up almost two thirds of the cuts we were forced to make last year.

— You’ve reached plateau production at 100 million tonnes — and are planning to maintain this, going forward, if I understand correctly?

— We’re going to grow. We’ll produce about 99.6 million tonnes of oil and gas equivalent by the end of the year. Going forward, we’ll be increasingly growing through gas. To get an idea of the overall picture: we’ll be increasing our operations by almost 50% over the next five years. In other words — the past 10 years have seen us double production, adding 50 million tonnes. We can add the next 50 million tonnes in about five to six years.

— Am I right in thinking that you’ll mainly be growing through gas projects — condensate production, and so on? Can you give any figures here — what share did gas take last year, what is it now, and how will it increase, going forward, this year and next?

— Gas accounts for about 37–38% of our business. Following the commissioning of the Bovanenkoye, Kharasaveyskoye and Urengoyskoye fields, that figure will reach about 45%. Generally, the fact that gas’s role in the business is growing is a reflection of geology — it reflects the way we’re moving, geographically. We are going further and further into the north of Yamal, and this is reflected in geological trends. There’s more gas and gas condensate there.

At the same time, I should stress that these are reliable reserves. There’s no doubt as to the quality — and the volume — of these reserves. These are very well prepared and predictable projects. By our industry standards, they’re on pretty tight project lead-times. So the fact that we’ve been able to put together a portfolio of this kind is a colossal development opportunity for us, as a company — to have the opportunity of investing in such blue-chip, large-scale and near-term opportunities.

— But isn’t there a contradiction here, insofar as Gazprom Neft was, originally, established as an oil subsidiary of Gazprom? On which basis, Gazprom deals with gas projects, and Gazprom Neft ought to be dealing with oil projects. It turns out you’re also gradually moving towards gas projects too — what’s that to do with?

— As I say, this is a reflection of geological trends. Действительно, изначально объектами нашего внимания были нефтяные оторочки нефтегазоконденсатных месторождений. Then we came to realise that the task was pretty much complementary — working with oil-rim deposits, and working on deep strata with a high proportion of liquid hydrocarbons — these involve similar development technologies. That is — long horizontal wells, multilateral wells, wells we drill in a “fishbone” structure, and multi-outlet wells. That’s how our specialisation came to the fore. Our skills and competencies as an operator on multi-component deposits is now recognised within the Gazprom Group.

— So: it’s down to the specifics of your fields — in which both oil and gas are present.

— Yes.

— And the role of gas at these fields is gradually increasing ...

— And in order to bring these into development effectively we need a specific set of technologies: we need to put infrastructure in place for working with gas. Added to which, we’re feeding gas into the Gazprom Unified Gas Supply System, while developing infrastructure for working with liquid hydrocarbons. Monetising liquid hydrocarbons represents our value chain, our route to market.

— Regarding monetising gas: the role of gas is increasing, proportionally — are you only looking at feeding into the Unified Gas Supply System, or are you considering any other options? Gas-to-chemicals, LNG production?

— All gas is currently transported via the Unified Gas Supply System. Some of our gas is sold through the Gazprom Group, to Mezhregiongaz, some to Mosenergo, and there are some third-party customers. This is the agreed sales and distribution policy within the Gazprom Group: there are agreements in place, and we operate in line with these.

If we’re talking about the outlook for Bovanenkovo and Kharasavey — these reservoirs are marked by a high content of raw materials — feedstocks — subsequently used in the gas-to-chemicals industry. We see considerable added value to be realised if production here were to be integrated with gas-to-chemicals production. We see our job as integrating this kind of project — developing the resource base and, together with potential partners, taking timely decisions on infrastructure to allow projects aimed at bringing such raw materials (feedstocks) into gas-to-chemicals production to come to fruition.

— Gazprom Neft is gradually increasing the role of gas and there is, generally, a worldwide trend (I don’t know how long that’s going to last) of oil making an exit and being replaced with more environmentally-friendly hydrocarbons — or non-hydrocarbons. What’s your view on this process? Is it genuinely happening, or is it some kind of short-term, transient market trend?

— I’d like, first, to say something about the baseline scenario. Under the International Energy Agency’s baseline scenario, demand for oil — up to 2030 — is increasing. As far as we — as producers — are concerned, we’re feeling pretty confident. Concurrently with increasing demand, we’re also expecting some structural changes in terms of production. Producers’ market shares are going to change, mainly in line with how competitive they are.

— Market shares are going to change? So people are going to be leaving the market?

— Some will reduce their market share, others will increase theirs.

— And is that going to impact us? I mean, Russia’s oil industry?

— I see this as an opportunity for us. We’re already seeing shale oil production declining, and investors are now much more cautious about investing their money in shale-oil production, with a greater appreciation of the large amplitude of risks. We’re seeing major international companies investing in oil and gas projects far more cautiously as part of the “energy transition”: we’re already seeing a large investment deficit building up.

— Can you name any key promising regions where we can expect major new discoveries in the next five to 10 years?

— I can name a project we’re already working on: a project at the mouth of the Yenisei River, on the left bank, covering the Leskinsky and Pukhutsyayakhsky blocks, which we recently acquired for geological prospecting, and where drilling of the first prospecting—appraisal well is now ongoing. This project is being implemented in conjunction with Shell. There’s definitely promise of a major discovery there.

— Might there be some collaboration with foreign companies in such scenarios?

— That’s usually the way in this industry: joining forces, sharing risks, and sharing opportunities. It’s the standard industry model, given the magnitude of the uncertainties and the investment volumes.

— You saw a very strong increase in hydrocarbon reserves last year: can you explain this, given that last year was a year of crisis, with few contractors genuinely doing well during that time. What’s the outlook for this year — are you expecting the same sort of growth?

— We’ve added the Bovanenkovo and Kharasavey Neocomian—Jurassic deposits to our reserves balance. These are Gazprom licenses, but these projects are contractually structured in such a way as to be immediately comparable to direct subsoil usage contracts — exactly the same as if the license was held by us. Why so? Because the license covers — cuts across — all geological horizons. We work in deep horizons, and these can’t be divided or split, so we’ve created this contractual structure. Added to which, the nature of our business means our job is to invest in development. We’re bearing all the risks, and we’ll get all the profits — paybacks — from implementing this project. Accordingly, under international reserves classifications, these conditions mean we can treat such reserves as our own. So we’ve added them to our reserves balance and, on that basis, have added more than a billion tonnes of oil equivalent in reserves.

— So look: you say that, on major geological prospecting projects, you think it necessary to turn to foreign companies’ experience and implement projects in cooperation with them. Does that mean Russia lacks the skills and competencies to implement geological prospecting projects on its own? Maybe it hasn’t got enough specialists, competencies, know-how and technologies? How do you see this situation?

— The challenges we face on projects like, for example, bringing Achimovsky deposits (which are deeply-bedded strata, with complex structure, very low permeability and high reservoir pressure) into production are a unique challenge, for the global oil industry, as a whole. Problems of this kind haven’t been solved anywhere.

— So we’ve basically got enough of everything — the knowledge, the technology and the experience to implement complex geological prospecting projects?

— Russian companies have, largely, built up experience in Russia: Western companies and companies from the Asian region have built up experience in their own geographical areas. So the more extensively partners share experience, share knowledge — the greater the chances of success. A partner’s passport doesn’t matter that much to us. We like, in principle, to work under partnership structures. We see ourselves as part of the global industry.

As regards the industry’s level of development — that is, technology, equipment, the maturity of our oilfield services sector — Russia is one of the top-3 global markets, together with North America and the Middle East. Added to which we’re now seeing an increasing interest in the Russian market when talking to our Middle Eastern partners.

— You mean in oilfield services, engineering and so on? Are these the sort of areas coming to the fore?

— We’re literally presenting a number of our digital products in the Middle East in Abu Dhabi right now. Concurrently with this we’re also discussing — assuming these products are of interest — what our product offering might be. Either a digital product per se, providing a service involving the use of such a product, or providing a more comprehensive operator-type service. These are the sort of opportunities currently under discussion. They’re not immediately obvious — it’s a bit difficult for me to say what the outcome’s going to be. But what I am seeing is that there is interest on their part, a deep and considered interest in the Russian market — in technology suppliers on the Russian market. And that includes assessing us as a possible partner, as an integrator able to offer them these sorts of solutions.

— Going back to Russia, and offshore projects: you’ve got one project, Prirazlomnaya — and there were also plans for the Dolginsky project? Where do things stand with offshore projects now?

— Certainly, we’ve got a number of projects, at different stages. Prirazlomnaya is in operation, in production. We’re still drilling — we’re looking at 11 wells being drilled in the next three to four years: and these are getting ever more complex. We’re having to move further away from the drilling platform.

The next projects — the most certain, those most likely to be completed first — are the ongoing implementation of the Ayashsky license block project, offshore from Sakhalin, and an exploration project offshore in the Gulf of Ob — the Yuzhno-Obsky license block.

As regards the Ayashsky block we have, consistently, acquired quite a lot of geological information, interpreted it and taken this into account in our models. This is a project we want to implement with partners. We’re in discussions, including regarding the best infrastructure solutions. This is one of the key decisions on the project and any partners must, of course, be involved in that decision. So, that’s what we doing at Ayashsky.

We expect to take a decision on priority investment in Yuzhno-Obskoye in the very near future. We’ll finish seismic shooting in 2021–2022, interpret this, and will be able to make a start on drilling a well at Yuzhno-Obskoye in 2023. A key feature of this project is that it is located within access of infrastructure already in place at the Novoportovskoye field. And, if we make a discovery, regardless of the reservoir saturation — oil or gas — all infrastructure is already in place there, and physically accessible from the field.

— Is hard-to-recover oil still an important area for you, in terms of business development, or are you now starting to look elsewhere, slightly?

— Going back to where we’re placing our bets, in terms of opportunity — on the one hand, this is a bit ‘pie in the sky’ — that is, major uncertainty, deadlines, huge investments. On the other hand — this is oil that’s already there, under our feet, in close proximity to infrastructure. The key lies in selecting effective technologies. If these can be found, then — that’ll be a massive plus! Bazhen and Achimovka reserves are present in massive volumes throughout Western Siberia and the Yamalo-Nenets Autonomous Okrug. These are certainly the sort of opportunities that merit attention, that deserve investment. Investment volumes, by the way, if measured against the total portfolio, aren’t that much. It’s about five percent of our total upstream investment. We’re definitely focussed on that, we see it as a major prize, so this issue is always on the radar, but we’re addressing it very carefully.

— And if you’re placing different, multiple bets — are these more or less the same for you, or is one or other of them a higher priority? Hard-to-recover reserves, offshore, remote and pretty much undeveloped East Siberian fields? Overseas projects — or just existing projects?

— The main strategic bet for us at the moment is gas condensate fields. And this is practically risk-free in terms of geology. These involve fairly typical tasks and project implementation — which we know how to structure, and how to address. Certainly, there are a number of opportunities involving greater uncertainty — and you have to have several of these, because you never know which is going to take off.

— So they’re all equal, as far as you’re concerned?

— Pretty much equal, yes.

— You’ve said that you’ll grow 50% in the space of five years: does that mean we’re looking at production at 150 million tonnes a year?

— In terms of oil equivalent, yes.

— Right: that’s already a significant figure.

— And 100 million tonnes — that’s significant.

— One last question, about the St Petersburg International Economic Forum. You had a lot of signings last year vis-à-vis joint ventures. What can we expect at this year’s forum — what new agreements?

— It’s a very busy agenda — with foreign partners, Russian companies, and representatives from the key regions in which we operate. In almost every case there’s a development agenda, or some discussion on new projects for joint implementation. Or else it’s technological partnerships, regional development issues, or strategically aligning priorities.

It’s certainly going to be busy, and interesting. We’ll be able to make some announcements, once agreements are in place.

Vadim Yakovlev was talking to Alexei Bolshov.