Sanctions against Russia introduced in 2014 forced the country's oil majors to review their partnerships with foreign majors. In an interview with Nefte Compass, Alexey Govzich, Chief Executive Officer of Salym Petroleum Development (SPD), a 50-50 joint venture between Gazprom Neft, the oil arm of Russia's state-controlled gas giant Gazprom, and Royal Dutch Shell, explains how the company managed not only to find an optimal way of working under sanctions, but also to reverse the trend towards declining crude oil production.

Q: In April last year, you took the post of SPD CEO. It was a difficult year for the whole industry, largely because of the sharp decline in crude oil prices. How do you evaluate your work as SPD CEO and the company's performance over the period?

A: SPD was not a totally new company for me as I had been taking the position in SPD Supervisory Board for number of years. However, lots of unexpected things were discovered during the year. The whole year was devoted to detecting the company's weak points, including infrastructure, energy consumption and field management. When I took the position, special programs were developed to tackle those issues. Now we are fulfilling those programs. In particular, we are working intensively under our production infrastructure modernization. SPD has completed new pipeline looping lines and performed a multi-phase pumping station upgrade in Upper Salym field. We are fully in line with our waterflood management program, adding a third pumping station and more high-pressure water source wells. Thanks to the high competence of the staff, SPD is already reaping the benefits of the implementation of those programs. Thus, SPD has five times been named the best company in Shell's international portfolio in relation to well, reservoir and facilities management. One of the tasks I set was to ensure the continuity of the implementation of those programs as the existing management rotation system doesn't help with that.

Q: In 2015 the shareholders approved the company's renewed five-year development strategy to 2020. Can you reveal more details?

A: The renewed strategy sets four priorities for the company – safety, production, efficiency and project execution. As far as safety issues are concerned, we managed to reach planned levels for lost time injury frequency (LTIF) in 2015-early 2016. The latest LTIF figures are the best that SPD has recorded in the last five years. We are introducing a new safety culture, where the key focus is on personal engagement.

Q: Were there any changes in upstream strategy?

A: In 2015 SPD outperformed the planned production figures. Output totaled 6.109 million metric tons (122,700 barrels per day). In 2016 the plan is to produce 6.145 million tons. The increase might seem insignificant, but we managed to fully turn around the trend of declining production. Starting from 2016, output should start rising, which is not typical for mature fields. By 2020, the plan is to produce 7 million tons/yr, but under certain favorable conditions.

As far as efficiency is concerned, we are constantly working on the issue, especially in terms of cost cutting. We are optimizing drilling costs, we drill fast and efficiently. In 2015, some 94 wells were drilled as opposed to 75 planned. Of the total, some 80% of wells were drilled with best practices in the industry. SPD also managed to cut wells' construction time by 5% as compared to its own figures.

As far as the projects' implementation is concerned, the key focus now is to implement those safely and on time

Q: What are the conditions you need to help meet the planned 7 million tons/yr output figure by 2020?

A: The target should be achieved if both the sanctions and tax regimes are amended.

Q: What impact have sanctions had on the company?

A: We had to temporarily halt the pilot project to develop the unconventional Bazhen formations. We have carried out a detailed analysis of the data we received from drilling in the first half of 2014. We have prepared a set of optimization measures to make the project more attractive when the sanctions are off. At the same time, we continue the development of hard-to-recover reserves that are not subject to sanctions. We have a model to develop the low-permeability Achimov formations. We are drilling a horizontal well at the West Salym field and will then study whether it is efficient to use flooding for those layers. We are also carrying out additional exploration activities at the Upper Salym field.

Q: Why are Achimov formations not subject to sanctions?

A: Each formation has its own characteristics, such as permeability and porosity, that define whether it is unconventional or not. Bazhen formations are 100% unconventional, while Achimov formations are somewhere in-between in terms of their characteristics. We are grateful to Shell, where specialists have been actively working with the Netherlands regulators and managed to prove that Achimov and Tyumen formations are not unconventional ones, which means we can continue working with those.

Q: Did sanctions have any impact on oil field services (OFS) for SPD?

A: We felt no difficulties in attracting high-technology services. There might have been some short-term difficulties until OFS companies defined ways on how to work under sanctions. We are also actively working with Russian OFS companies.

Q: Have you had any financial difficulties?

A: No. SPD is not attracting foreign loans. All our projects are financed using the cash generated by the company.

Q: How did the oil price collapse impact the company?

A: Crude production has never been an easy task. The crude oil price collapse hasn't changed much in the complexity of the fields' development, but we had to focus on efficiency, cost-cutting and the optimization of day-to-day operations. SPD takes a careful look at its projects. We are selecting activities for the next month on a monthly basis. All the activities are being closely monitored in terms of how to carry those out and how they work afterwards. SPD aims to produce only economically viable crude. Apart from capex, energy consumption is another spending issue. We are currently implementing a large-scale project on the insertion of new pumps that should allow us to cut energy consumption for crude lifting by almost 30%. Stating from 2016, we are purchasing electricity on the wholesale market. We are working with the whole system of energy consumption; we have established a special service for energy consumption within the company.

In general, we can state that even under the current price realities, SPD is a company with a stable financial performance. Despite the uneasy market situation, we manage to keep our capex within the targets set. We finance our projects using our own money and continue paying dividends.

Q: Was SPD forced to delay projects as a result of the oil price fall?

A: We have certainly optimized our project portfolio. We are currently working under an optimal business plan, although we had more ambitious plans on the optimization of infrastructure, construction. But when we looked at the current environment, we decided that it is not the best time to move those forward. We are now living in the new reality where $40/bbl is a long-term perspective.

Q: The company has recently launched the ASP enhanced oil recovery project at the Salym group of fields. The project is crucial for SPD. Can you tell us a bit more about it?

A: We've launched a pilot project with the injection of a three-component mixture -- alkali, surfactant and polymer (so called ASP) -- into the limited site of wells in order to evaluate the efficiency of the technology for boosting oil recovery rates and lift all possible technological, technical and geophysical risks to further implement it. The new technology, which is being actively used in China, Oman and North America, might give a new lease of life for mature fields in West Siberia. Additional production at the West Salym field using this technology could reach 30 million tons in 10 years’ time. Our key focus now is to localize the Russian chemicals’ suppliers. We have suppliers for the pilot project, contracts are signed - Shell Chemicals is our key supplier at the moment, but we are looking for alternatives to Western chemicals, which are quite expensive. The key issue is the necessity to have an ASP market of up to 50,000 tons, which requires the expansion of Russia-based manufacturers. We launched the RusPAV project and are holding negotiations with Russian suppliers to cut the project's costs, make the ASP project more feasible not only for SPD but for other oil companies in Western Siberal. We are in the final negotiations phase. I hope the decision on the key chemical supplier will be made in the third quarter, 2016. Unfortunately, under current prices and tax regime the project has a zero viability.

Q: What is the cost of one barrel produced using the ASP technology?

A: Combined costs stand at $20-25/bbl.

Q: Can you outline lifting costs in the figure to compare those with frontier regions of East Siberia and Arctic?

A: It would be incorrect to compare the figures. One of SPD's tasks is to ensure unit operating costs at $4/bbl by 2020 in case of 7-mln-tons-of-oil level. Lifting costs depend on the level of watercut. Lifting costs at the wells where we are using ASP technology are higher because they contain 98% of water, while we aim to cut this to 50%-60% in order to cut costs and make production more efficient. Moreover, crude production in the Arctic and East Siberia is subject to tax breaks, while the ASP project is not economically viable under the current tax regime.

Q: Are you talking to the government on tax breaks?

A: The dialogue has been going on for quite some time. SPD is offering two options. The first one would exclude technology costs from the mineral extraction tax and the second one would introduce the tax on financial results. In both cases, we take all the risks, while the state loses little. We even offer that we first show production growth and then get tax breaks. The outlook looks rather bright, but the key stumbling block is the measuring issue. How can we measure what amount of crude we produced using the ASP technology? The state wants transparency; we are ready to provide that by extra measuring, building new crude control points.

Q: Is there any progress on the issue?

A: There certainly is. But 2016 should be the critical year. If we fail to find a compromise, we will very likely have to temporarily halt the ASP project.

Q: Are you counting on extra production using the ASP technology till 2020?

A: The 7 million tons/yr figure includes extra production using ASP and also includes production of Bazhen if the sanctions are off.

Q: So what happens if the ASP project is frozen and sanctions are not lifted?

A: We have a clear understanding on how we can achieve the targets set. Apart from ASP and the Bazhen projects, we are closely watching the undistributed fund of fields. Over the last years SPD was not active in boosting reserves, acquiring new fields. In 2015 we started actively working on the issue and see some progress today.

Q: What are other areas of interest?

A: We are interested in areas nearby our fields, where the necessary infrastructure is in place to quickly bring new fields on stream.

Q: Does the company have active exploration plans?

A: In 2015 a new exploration strategy was approved taking into consideration the current macroeconomics. We have detected 23 areas for exploration works, harboring potentially some 20 million tons of crude. Under the strategy, we are planning to drill two exploration wells a year. In 2015 two wells were drilled. At one of them we've discovered an oil-bearing area, where we should start drilling in 2017.

Q: How can the possible production freeze that might be agreed in Doha impact the company's growth plans?

A: Salym Petroleum is a commercial company, our main task is to generate cash for our shareholders. If production is economically viable and effective, we will continue it. There were no other conditions so far.

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