Although Western Siberia continues being the wealthiest region in terms of overall oil production and oil and gas reserve growth, production has stopped growing there a couple of years ago, and has even entered a declining trend. There is no exception for Salym Petroleum Development (SPD), a joint venture of Shell and Gazprom Neft operating in the Khanty-Mansi Autonomous Okrug - Yugra.

At the end of March SPD launched a pilot EOR project in its West Salym field. If the technology proves successful and is applied on a full-field scale, it may bring Salym Petroleum 25 to 30 million tons of incremental oil in the coming ten years. SPD CEO ALEXEY GOVZICH told Kommersant about the pilot project and the first milestones the company achieved in implementing its new strategy.

— Mr. Govzich, it is about a year since you were appointed the CEO of SPD and gave your first interview to our magazine (the article People: Our Main Asset devoted to Salym Petroleum Development was published in the June 2015 edition of our supplement Oil and Gas). What has been achieved during the year?

— Last year, Salym Petroleum’s strategy was revised and updated. We are now focused on four main areas: safety, production, efficiency and project management. We are now a different company from what we were a few years ago. We are changing in our operations, with such changes affecting many areas of our development activity, infrastructure, and the process of decision-making.

We continue to be focused on process and personal safety, although we are now placing more emphasis on the creation of a safety culture. The approach relies more on personal commitment towards safety and personal responsibility. We are trying to reach out to the emotional side of the people and have already achieved good results. The Lost Time Incident Frequency in our company is now the record lowest for the past 5 years.

Despite the challenging global pricing pressures and sanctions against Russia, we have a quite ambitious target of growing production to 7 million tons by 2020. To achieve it, we have to concentrate on a number of areas. First, integrated production management, where we optimize the operation of wells and surface infrastructure. SPD has revised its approach to the use of chemicals, improved its formation pressure build-up system, and optimized the electrical submersible pump change-out process. For the first time in the company’s history, we have started using sidetrack wells and horizontal wells on a mass scale. Despite infrastructure constraints, we have managed to maintain a very high availability ratio of more than 97%. We have reversed the declining production trend. In 2015, we outperformed our production target and managed to reduce the base production decline rate by 33%. This year, we are planning to grow production against the previous year, which is quite unusual for a field in the third or fourth stage of its development. Second, we are looking for new reserves within the area of the Salym group of fields. Salym Petroleum has recently finalized its five-year exploration strategy, with 23 potential areas identified for exploration. Together with our shareholders, we have created an economic model for the development of tight reservoirs in the Achimov formation. Finally, we are also looking for opportunities outside the traditional geographic territory of the company’s operation and trying to increase the portfolio of our assets.

The new strategy of Salym Petroleum requires that we manage the company in a new way. We have conducted a thorough technical assessment of all our field infrastructure facilities and worked out a plan to upgrade them to a better level in terms of safety and asset integrity. Specific projects within the plan were identified in the second half of 2015. To debottleneck our field infrastructure, SPD has built new looping lines and modernized the multi-phase pumping station in Upper Salym. The company has completed all the projects in its waterflood management program, adding a third unit to its modular pumping station and building additional high-pressure water-source wells. Salym Petroleum has also completed its Tourmaline waste incineration plant.

In 2015 the company performed a lot of preparatory work to remove water from produced oil at early stages of the process. Now, we are building a water dehydration plant in Upper Salym, which would reduce the load on our infrastructure by removing water early in the system. We are implementing a similar solution to separate water from oil in West Salym as well.

SPD has accelerated the Snezhnaya project to upgrade its power supply system. We have started reconstruction of our two substations, Evikhon and Zapadno-Salymskaya. On a parallel track, we have completed a process to get access to the wholesale market of electricity. Since 2016, we have been buying electrical power and capacity from the open market, which has considerably reduced our power costs.

In SPD we have special focus on best practices in project management, with control of each stage in project execution, and strict implementation schedules. We no longer shift schedules, like we did in the past, and the decision-making process has become more transparent and clear for the team. I want our people to have the mentality that they own their particular area of responsibility, and always deliver on their promises. There is more personal responsibility now in SPD, which makes people take bigger pride in what they do.

We had a scheduled shutdown of all our operations last October, which was done very efficiently, lasting 36 hours rather than 48 as had been planned. Through this efficiency gain, we managed to reduce oil deferment by 40%. More than 1000 people were involved in the effort to repair and upgrade various equipment units during the shutdown, each assigned their work station, and complying with their individual work schedules by the minute, and even second. Again, Salym Petroleum today is a company that can take decisions quickly. We never stop in our performance improvement journey. SPD continues to implement its continuous improvement system, where each individual in Salym Petroleum can submit a proposal on how to improve a process in the company to achieve better efficiency, performance and safety.

— What are the objectives of Salym Petroleum Development in its EOR project in West Salym, which is a new one for Russia?

— Our project involves the use of the ASP technology to enhance oil production in Salym. This is a unique experiment for Russia, and something that can be expected to open a whole new page in the history of the Russian oil industry. We are the first in this country to use this EOR method, which can produce up to 30% of the oil left in the formation after a waterflood. I am confident that this technology may improve the development efficiency for dozens of fields in Western Siberia. This would also stimulate the social and economic development of the region and the country as a whole, generate additional budget revenue, create new jobs, and give a powerful impulse to the development of businesses, especially in petrochemistry, petroleum services, and machine-building.

This technology will give a new lease of life to fields in Western Siberia. With today’s conventional production methods, about 60% of the oil remains in the formation, and the new technology may nearly double the recovery. Essentially, the technology is about the injection of a special mix into the formation, rather than water. The mix will be specially designed for each particular field, and it will include alkali, surfactant, and polymer. It changes the physical and chemical properties of oil, breaking down trapped drops of oil into smaller units and washing them to the surface.

We have started a pilot project in our West Salym field, and have already completed the ASP mixing plant, the key facility of the project. The project involves the injection of the ASP solution into a small well cell pattern to evaluate the effect of using the technology by measuring the amount of incremental oil and completing a comprehensive research program. The purpose of the pilot project is to remove the main technological and geological risks, before the technology is applied on a large scale to cover the main production formations in West Salym and potentially produce up to 30 million tons of incremental oil. In expert estimates, the technology may help recover 2.4 billion tons of incremental oil over 15 years, if applied on the scale of the whole Khanty-Mansi Autonomous Okrug.

We’ve been studying this technology together with both our shareholders since 2008. Shell has experience of using this technology in its fields in China, Oman, and Canada. In Russia, we are pioneers, with no comparable projects yet implemented in terms of scale and potential effect from this method.

The biggest obstacle for the spread of this technology in Russia is the existing tax regime. The ASP technology is more expensive than conventional production methods, with 5 to 9 thousand rubles in additional costs required to produce 1 ton of oil. The costs may be brought down with improved sweep efficiency, availability of local production for the chemicals, and optimized infrastructures solutions.

The company is doing its best to reduce these costs and is evaluating options to optimize the existing field infrastructure for this project. We are also in discussions with potential Russian suppliers of the chemicals for the technology, which account for most of the incremental costs. We have started a special Russian Surfactant program to source Russian producers of surfactant to reduce ASP costs and replace imports with local supply. We will need up to 50,000 tons of the material, if the project scales up to full-field development. This is a huge amount, with only a limited number of players in the Russian market capable of supplying. Our international shareholder Shell has promised to share their expertise in producing this material.

We are also looking for government assistance. If this innovative technology is to be implemented, it should have special tax treatment. Unless the authorities give a helping hand, the technology may never get to commercial use. We do our best to optimize the costs of the project, but without the government reciprocating with tax breaks, the project will not be profitable.

— What kind of special tax treatment of the ASP project can there be, if the government budget is not to lose any of its revenue?

— With the price of oil at $40 per barrel, we are left with $15 per barrel after the payment of the export duty, minerals tax, and transportation tax. The unit cost of producing one barrel with this technology is $25. This means that in the current tax environment the technology will lose money.

Conversely, if the tax is applied to the profit base, that may give a boost to the technology. Both parties, us and the government, will then have to agree on how to share the added value of the project, to make sure that the distribution of value is fair for each of the parties.

As I already said, in the current situation the government will get all the profit from such a project, and the company will lose money. One possibility of improving the situation is applying the tax on the financial result, or profit. If this change of the tax base is implemented, that would also help other projects to produce other categories of reserves, which are unprofitable in the current tax environment. Moreover, the way the tax on profit model is presented right now, it will not stimulate producers to go for ASP projects, as these will generate only half the income margins of those accepted in the industry. Therefore, the profit tax agenda needs additional discussions and work, to make sure we arrive at an option that would be acceptable to both the state, and the operators.

There could be an even better way of distributing added value, if the additional costs of such projects, both CAPEX and OPEX, are deducted from the minerals tax. The deduction would apply to incremental oil only. Transparency needed to help administering such deductions may be assured if the special tax treatment is applied to depleted fields beyond definite threshold watercut levels. Also, companies will get deductions only if the technology generates incremental volumes of oil, which means that the risks of the technology not producing sufficient results will be borne by the company. This deduction structure would minimize the risk to the state budget and will stimulate the use of the EOR technologies that will produce the best results.

We feel that the government is ready to help us out on this matter, and we have been able to start a constructive dialog with the ministries involved. However, we would have liked the process to have a quicker pace. I do hope, however, that by the end of this year we would be able to arrive at a solution that will both make it possible to implement the new methods, and produce additional revenue from such projects to the state budget. But in the current tax system the project will not have much of a chance, something which is not good for either us or the government. It is evident that the project is the future for Western Siberia and the Russian oil industry as a whole.

Olivier Lazare, Shell Country Chair in Russia:

— The launch of the ASP plant is a great achievement for Salym Petroleum Development, the operator of the Salym group of fields. The use of this technology opens up a new page in the history of enhanced oil recovery methods in Russia. It would improve the efficiency of the reserve recovery process. Back in the years of the Soviet Union, the country first started using progressive oil recovery methods. However, many modern technologies in the area have not been fully utilized in Russia. I hope that the situation will change with the implementation of the ASP technology. It is no secret that new methods require government support. World practice has shown that technical innovation needs special tax treatment. One option for this project would be to exact tax on profit rather than revenue. I am sure that such an option would be beneficial not only to the companies who aim to improve the efficiency of field development, but the country as well.

Vadim Yakovlev, Deputy Chairman of the Board, First Deputy CEO of Gazprom Neft:

— The launch of the ASP project is a small step for a field, but a great leap for the whole industry. The idea to treat the formation with a mix of chemicals is not new, but this is the case where a major journey has been taken from an idea to a commercial use of the technology. The project has been prepared by a large group of international experts from Shell, Gazprom Neft, and Salym Petroleum. There is huge work behind the project, with thousands of laboratory tests on various cores with alternative chemicals. All this work has now enabled the launch of the ASP pilot production unit. The shareholders supported this innovative project in the current market environment, and that has been a challenging decision, since the project will not be profitable under today’s tax regime. But we believe in the ultimate economic and technical effect of the project and continue supporting it in a hope that there will be tax support as well. We feel the interest and support on the part of the Ministry of Energy and regional authorities. If the project is supported by our regulators, this would make it possible to start using the method on a commercial scale. The project is important for the whole of Western Siberia, our main oil-bearing region, which has infrastructure in place, but where the production is declining. Such projects to enhance oil recovery are the only way to sustain production in the area and retain thousands of jobs there. We continue looking for the right chemicals that may be used in other fields as well. We also keep an eye on other enhanced oil recovery methods and discuss using them with our other technology partners.

Kirill Molodtsov, Deputy Minister of Energy of the Russian Federation

— The launch of the ASP plant, the first one in the country, is an important milestone for the industry. Its purpose is to increase oil recovery from fields with declining production, which constitute the majority of the assets in Western Siberia. The efficiency of the new technology has been proven by tertiary production methods in other countries developing hard-to-recover reserves. The injection of the three-component mix into the formation allows increasing oil recovery by up to 30%. This and similar enhanced oil recovery projects in existing fields have nation-wide significance and will be supported by the Ministry of Energy of Russia. We will continue our efforts to create favorable economic conditions for such projects. The ASP project has an obvious environmental advantage of producing less waste per ton of produced oil. The Ministry of Energy regards the launch of the new plant as a start of a major journey, which has relevance for the whole oil and gas industry of Russia. This project will trigger off the process of modernization in the production industry. It is not only about improving recovery factors. It is a strategic undertaking for the industry, which would stimulate the development of high-tech petroleum services, new areas in the petrochemical industry and other adjacent manufacturing industries in the country.

Interview taken by Maria Kutuzova
"Oil and Gas ". Supplement №64 dated 14.04.2016, page 19

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