The Opec/non-Opec production cutting agreement has forced Russian companies to reduce output from low-margin assets, but growth continues at those entities that remain efficient despite the unfavorable global environment. In an interview with Nefte Compass, the CEO of Salym Petroleum Development, Alexey Govzich, explains why the shareholders in the 50-50 joint venture, Gazprom Neft and Royal Dutch Shell, consider the company a high-margin asset and support its growth.

Q: 2016 was not an easy year for oil and gas companies because of the collapse of oil prices and increased uncertainty on global markets. How do you evaluate the performance of Salym Petroleum Development (SPD) over the last year?
A: In general, 2016 was a tough year. But for SPD, it became quite successful. You can even say it was a kind of year of records. We made the basis for the company's future development. Let me highlight three aspects. First, we significantly increased the resource base. We received a new exploration license; we enlarged the territory of the West Salym field thanks to an area acquired from Russia's undistributed fund of fields. We drilled exploration wells at the Upper Salym field, conducted quite a successful geological survey and got a good oil inflow. Eventually, we initiated a new project, the "South Hub." We started work on a pilot project on Achimov deposits. At Achimov formation, we drilled two wells, received a good inflow of oil of about 1015 metric tons per day, thereby confirming the economic efficiency of these works.

The second fundamental moment in 2016 was our labor safety successes. We always make an emphasis on the issue. In 2016, we worked 274 days without lost time injuries. This became an absolute record through the history of SPD.

The third point is production. Last year, I said that we could reverse the trend of falling production. In 2016 we went into growth and produced nearly 6.17 million tons (123,700 barrels per day) of oil, surpassing the business plan.

Q: What is the production plan for 2017?
The production plan for 2017 is slightly lower than the actual production in 2016. However, today we see that the actual production might exceed the business plan. A decrease in production is just a slight one, within the margin of error. Our strategy envisages production growth to 7 million tons/yr by 2020. We are following this plan closely and expect a slight production increase annually, at a plateau plus level.

Q: Tell us about your new project, South Hub.
A: This project is the result of successful exploration in the southern part of the Upper Salym field. We had seismic data for this part of the field. We reinterpreted them, and geologists saw the potential, and constructed an exploration well. As a result, we received an inflow of oil of 300 tons/day. This is a great success in our fields, which are in the third and fourth development phases. This year we drilled another well, thus confirming a good potential to develop this area.

Q: When do you plan to start the project?
A: Now we are preparing the infrastructure. The existing infrastructure is on one side of the Salym group of fields. The part that we are going develop is behind the highway, Tyumen - Khanty-Mansiysk. There is no infrastructure there no pipelines, no pumping stations, no overground capacities. We need to build those from scratch. Everything needs to be built. We have prepared a concept and next year we are planning to start constructing infrastructure facilities. Under the optimistic scenario, we will probably start drilling there by 2020.

Q: What does this project mean for your strategy?
A: This is practically a 100% guarantee for the implementation of our strategy until 2020. We should reach annual output of 7 million tons.

Q: Another project is the development of the Achimov formations. You have successfully proved that these deposits are not shale oil. How is work progressing on this project?
We drilled two wells, we carried out a multistage hydraulic fracturing. As I said, we received an inflow of crude of 10-15 tons/day. We are currently carrying out additional research. With the help of our shareholders, mainly Gazprom Neft Scientific and Research Center, we are preparing geological models.

Q: Do you today feel the impact of sanctions? A: We don't. We have already found a certain balance to work. We do not feel any restrictions or pressure, but keep monitoring.

Q: And in terms of finance?
SPD remains a company with stable financial parameters. We generate stable positive cash flow. We finance all projects independently, we pay dividends on time, even slightly more than planned. On the financial side, we feel rather comfortable. In addition, we have launched a massive cost optimization program and correctly manage the company’s cash. We made a focus on efficiency and in this aspect we feel really comfortable.

Q: Last year you launched the so called ASP project envisaging injection of a three-component mixture alkali, surfactant and polymer (ASP) into the wells to boost oil recovery rates. What are the first results?
We are still at the pilot project stage. We inject the components into the reservoir one by one and have already achieved impressive results. The watercut rate decreased from 98% to 90%. We see the effect of technology. Today we can confidently say that it works. The pilot project will come to an end when we have water cuts back to their upper level.

Q: You have repeatedly said that the project requires tax breaks, and if they are not approved before the end of 2016, the project will have to be frozen, as it will not pay off.
Unfortunately, our discussion with state bodies is at the same level. Now we are collecting data. At the end of the pilot project, we will prepare a complete data package on the technology. That is, we should say that we used the technology, and it brought that much profitability. We can bring so much money to the budget, if we receive tax breaks and if we scale this technology. Everything will be proven by real figures.

Q: Is there already an understanding of how much additional crude can be extracted using the technology?
We should have a more complete understanding by the end of the year. Now we would not want to hurry with the estimations. We are going a bit slower than we thought we would under the production plan, because of some technological difficulties. But in general, we are quite optimistic; we have already produced 2,500 tons from the pilot area. Don't forget that this is a fully depleted well pattern. That is, nothing but water is produced at this well pattern. The water cut was 98%, only the remaining 2% is oil. And we wanted to produce this oil. Now the minimal water cut is 86%, that is, we already produce 10%-14% of crude. Crude production rose five to seven-fold.

Q: How can you reduce costs with tax breaks?
When I say that oil production using ASP costs some $20$-25/bbl and that it is inefficient, then we are saying that we don't make any money or even work at a loss. How far we can go with optimizing costs? Probably 10$-15/bbl would be optimal.

Q: Are other oil companies not interested in your ASP technology?
It is mostly interesting for our shareholders, Shell and Gazprom Neft. The latter's great interest is explained by the fact that the company has many assets in West Siberia, where production is also in its third and fourth stages. As a very progressive and technological company, Gazprom Neft sticks to a sustainable approach when developing its reserves and using cutting-edge technology. Its top management closely watches our pilot project and is interested in scaling up this technology in Russia.

I will remind you that one can scale up the technology for the West Siberian oil and gas province. Its potential is huge. There is over 2.4 billion tons of additional crude within the Khanty-Mansiysk Autonomous Region alone. So it is reasonable that the ASP technology is interesting for specialists from other oil companies working in the region, especially after our presentation last year at the oil and gas forum. Some companies got acquainted with it, visited our fields. However, we don't talk about consortia now.

Q: Does the company have plans to expand its resource base through acquisitions?
We generally drill two exploration wells a year under our strategy. In 2016, for the first time in our history, the resource base grew through the acquisition of a new license for the Yuzhno-Yamskoye field. We plan to drill the first well there. Further development will depend on the drilling results. We also expanded the resource base in the Vostochno-Shapshinsky area from the undistributed fund of fields. All these sites are located near our fields. We do not look at other regions. SPD strategy envisages that we consider only the nearby areas.

Q: Do you expect capital expenditure to grow because of the new projects?
Yes, but this is absolutely justified. In addition to new exploration and production projects, we launched in 2016 a large-scale infrastructure modernization program. We upgraded our multi-phase pumping station, putting in a fourth pump, which is as powerful as the other three. Our pipeline system also requires modernization so that the company can develop in the long term. In particular, we are building a dehydration plant, which will allow us to relieve the system of internal oil pipelines. In addition, we have successfully completed the implementation of a large-scale program in the field of energy supply for our fields, increasing the power supply capacity of production facilities to a capacity of 150 MW.

Q: Over the past two years, the company managed to reverse the trend of falling production and started growing, despite the unfavorable external environment. What is your secret?
I see three key issues to our success. First is the technology that we use, including those for drilling, well completion and production management. Horizontal drilling, construction of lateral trunks, smart fields all those and other technologies allow us to constantly boost efficiency. The second element for the success is people the professionals that stand behind all the software and hardware. The third element is what me and my team brought to SPD. I'm talking about changing the approach to work and forming a winning mindset. We gave people a new vision of the future, encouraging an enthusiasm in their eyes and a willingness to work. Thanks to this atmosphere our people more often take the initiative, take responsibility, immerse themselves in the process, search for new solutions. They believe that the company's future depends on them. And in my opinion we can get bright results with such a team, which is already proven by last year's results.

Q: Is gradual growth the desire of the shareholders? What are the company's perspectives?
This is our strategy that coincides with the desire of shareholders. Over the last few years, SPD accumulated unique expertise in different areas. So it is logical that our shareholders want to develop the company, which is a good example of mutual cooperation between Russian and foreign majors.

Today our shareholders see SPD as a growing asset and an example for their other entities. We didn't just start growing and boosting the reserves base, but we did it safely and efficiently. I'm sure that we will successfully reach the targets set in the strategy and that SPD might again become one of the leaders in the industry and the leader in our region.

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