SALYM PETROLEUM DEVELOPMENT N.V. (SPD), a joint venture between GAZPROM NEFT and SHELL with late stage fields in its portfolio, has recently reversed the multiyear declining production trend and is planning to grow production. And ehnaced oil recovery project, unique for Russia, implemented at the Salym group of oil fields demonstrated the oil revocery factor that is two times higher than the international average. SPD CEO Michael Collins talks to O&C correspondent Viktor Prusakov about the new objectives of the company.

O&C: Mr. Collins, you came to SPD in summer of 2018 having worked in Shell for many years. How do you plan to use your experience in a new position?

— I was fortunate to work in different countries both on and offshore, including projects with significant risks, running a team of several thousand people. Now that I've had a closer look at SPD and its team, I can say it with confidence that this is a unique company that has been able to implement best practices of both shareholders. My current objective is to accumulate the world's best practice for maximum efficiency in every area: technical, operational, commercial and, by all means, human capital.

SALYM PETROLEUM DEVELOPMENT FIELDS

Year of discovery Area km² Reserves*, mln t

West Salym

1987

828,7

96

Upper Salym

1966

952,3

25

Vadelyp

1989

433,5

18

Recovery reserves of C1+C2 grade oil: Source SPD.

O&C: You joined the Salym project right before the completion of tests of a technology which is new for Russia. It appears this technology can expect a great future?

— We are talking about ASP - injection of alkali, surfactant, and polymer (ASP) into the formation. Such "cocktail” significantly improves the displacement capacity of the injected liquid, besides it mobilizes the oil left after flooding by reducing surface tension between oil and water. Shell was one of the first to start using this chemical method at its fields. Today the company works on its most known project in this area in Oman where the method is applied on a commercial scale.

In 2009 SPD started a project using this technology at the West Salym field. Today the project is completed and its technical results are rather promising. The oil recovery factor at the pilot site is 69% out of which ASP effect accounts for 17%. For comparison, the average ORF in the global oil industry varies between 20 and 50%.

The test showed that the technology can be of great value not only for our company but the entire West Siberia where the share of mature and depleted fields is high. Calculations show that ASP can help extract additional 3.8 billion ton of oil in KhMAO alone.

SALYM PETROLEUM

LICENSE AREAS AND SALYM PETROLEUM FACILITIES

Salym Petroleum Development N.V, a joint venture between Gazprom Neft and Shell, has been developing Upper Salym, West Salym and Vadelyp fields (KhMAO) with reserves of 140 mln ton of C1+C2 grade of oil. In 2011 Company's production peaked at 8.5 mln ton. To date the total amount of investments into the Salym project reached 45 bln rubles and its accumulated production exceeded 70 mln ton.

O&C: What practical steps are needed for this to happen?

— The main objective is to transfer technical success of the pilot project on to the commercial basis. This expensive technology is not profitable without tax benefits. The Company and the shareholders are discussing possible tax incentives for implementation of similar technologies with the relevant ministries. This is a comprehensive work since any changes in this sphere should be considered taking into account the interests of all oil companies and the impact on the industry in general.

O&C: So whether to replicate this technology on other fields will depend on the decision of the tax issue?

— Not only that. In any case ASP will have to compete with other projects we have. So it’s too soon to say when this technology can be included into our business-plan. It is important for us in the long term. Moreover the work is far from being over technically. In order to integrate the technology into the existing production processes and test them for possible risks a number of studies are required.

ASP flooding at the West Salym field gave 69% ORF with global average varying between 20% and 50%

O&C: And what about chemical supplies? ASP for the pilot project was reportedly purchased abroad. Have you considered localizing the production in Russia?

— This is another objective that we need to address to implement the technology into the oil producing industry. Attracting local manufacturers would be optimal since in case of full-scale implementation of ASP, shipments from abroad will be rather expensive. But for now it is not clear whether Russian suppliers will be able to supply chemicals in required volumes. This is an issue for the industry in general. The most probable option is mixed logistics scheme involving foreign and Russian suppliers. On the one hand it will reduce transportation costs and on the other ensure reliability and continuity of supplies

O&C: SPD fields have been developed for fifteen years. The year before last the Company was able to stop production decline that started in 2012. What made it possible?

Our license areas are relatively small, so it is particularly important for us to make them as efficient as possible. The Company has accumulated a lot of experience in this respect with shareholders playing an important role. This included overall optimization of operational processes and various measures to intensify production: "smart” wells, horizontal drilling, side tracking, fraccing, including multistage fraccing. Moreover, thanks to successful survey the Company increased its resource base. SPD’s reserves replacement ratio has been higher than one in recent years. It also helped to grow production.

O&C: Previously the Company talked about the goal of 7 million ton by 2020. Are these plans still relevant?

— We expect production growth in the coming years. That includes implementation of the fraccing program, which I mentioned previously. This factor in combination with continuous optimization of operations and proper distribution of investments makes our goals quite realistic.

Dossier Michael Collins

Michael Collins was born in Australia. He graduated the University of New South Wales, cum laude in mining engineering. His working experience in exploration and oil production is more than 20 years. Since 1998 Michael has worked in Shell in various positions in well engineering in Norway, Brunei and Australia. Before his appointment to Russia he was vice president of well engineering in joint ventures of the Shell group of companies.

Since June 2018 — CEO in Salym Petroleum Development N.V.

O&C: Will toughening sanctions be an obstacle? Before they were the reason for SPD to stop Bazhenov development.

— It is true that we had to shut down certain segments of our business because of the sanctions. However SPD's portfolio still has a number of other interesting projects untouched by sanctions. We are carefully monitoring the changes in the law on sanctions to make sure that the existing limitations and prohibitions do not impede the full-fledged operation of the company.

O&C: In 2016 SPD started two wells drilled in the Achimov formation yielding good oil inflow. What steps will be made in this direction in the nearest future?

— In future this project will be an important component of our growth that is why we made it a focus of our attention. Achimov deposits are difficult to develop due to big depth and low permeability. Producing oil from such formations is expensive. We are studying the information we received from the drilled wells. In the short-term we are planning a more profound study to assess the possibility to increase project profitability and assess potential losses.

O&C: What about the South part of the Upper Salym field where the company implements its South Hub project?

— Several pads are being built at this site and the existing infrastructure is used for production. The shareholders are approving the plan to build additional infrastructural facilities including expansion of DHP, power network and pipelines to put South Hub reserves into full-fledged development in the next several years. This will offset the decline of production at the West Salym where water cut of many wells is 90%. So the importance of South Hub will grow in future.

O&C: Drilling in SPD has traditionally been the domain of two contractors: Sibir Service Company and KCA Deutag from Germany. What is the reason for the choice?

— They are not the only traditional partners we have. We prefer building long term relations with the contractors and along with the qualification we make safe operations, reliability and integrity our corner stone. By all means there is competition between the drilling companies which motivates the companies to be even more efficient.

O&C: You mentioned that SPD’s licensed territory is limited. Do you plan to expand it by purchasing new areas?

— The objective of any company is to look for ways to develop its business in line with its capabilities. We work together with the shareholders in this direction.

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