OREANDA-NEWS. July 07, 2015. Interview by Valery Gulev, Managing Director of Gazprom International with Gazprom Magazine

Reasoning

Mr. Gulev, several years ago the beginning of Gazprom Group’s foreign production block restructuring was announced. Why was this process initiated and what results have been achieved so far?

It is obvious that international projects have their own specific features related not only to and even not so much to technological aspects, which certainly exist, but mostly to arranging project management, advocating commercial interests during contracts conclusion with the government authorities of the concerned countries, foreign private and national oil & gas companies as well as building up contractual relations with contractors. It is not to mention such evident factors as the need to study and consider the country’s industry-specific and tax laws, carry on business and maintaining documents at least in English, but quite often also in the language of the country of operation. The high level of competition that we face on entering this or that market should also be kept in mind, as our foreign partners have been for many years actively and successfully executing projects in countries and regions most attractive from the point of view of their resources. That is why a decision on setting up a specialized company to be focused on projects abroad and to accumulate the necessary technological and financial potential as well as human resources seems obvious and justified.

Gazprom International operates in almost twenty countries in four continents and takes part in about 40 projects

Based on this reasoning, Zarubezhneftegaz was established by Gazprom, Zarubezhneft and Stroytransgaz back in 1998. This company was mainly focused on projects in Central and Southeast Asia, India and Venezuela. In 2007 Gazprom bought out the partners’ shares in this company, which was later renamed Gazprom Zarubezhneftegaz. The same year Gazprom EP International was registered in the Netherlands to represent Gazprom’s interests in the countries where Gazprom Zarubezhneftegaz was not running its projects. In 2011 with a view to consolidate the resources and experience gained in international projects, as well as to improve financing and management procedures, Gazprom’s top executives resolved to appoint Gazprom International a unified specialized company responsible for hydrocarbon prospecting, exploration and production outside Russia. Within the next three years the assets of Gazprom EP International and Gazprom Zarubezhneftegaz were consolidated.

At present, Gazprom International operates in almost twenty countries in four continents and takes part in about 40 projects of different scales. The key ones are in Algeria, Vietnam, Bolivia, Uzbekistan, Tajikistan, Kyrgyzstan, Bangladesh and offshore the North Sea.

Vietnam and Algeria

Vietnam and Algeria

Vietnam and Algeria. In these countries not only do we implement major projects, but we also act as project operators. Thus, in Vietnam the projects covering license block No. 112 as well as blocks No. 129–132 offshore the South China Sea were operated by Vietgazprom, a joint operational company, as part of which we cooperate with the Vietnamese party on a parity basis. Here we’ve already discovered the Bao Vang and Bao Den gas fields. In addition, we are developing fields within blocks No. 05–2 and No. 05–3. We are also producing NGV jointly with Gazprom Gazomotornoye Toplivo and PV Gas, a subsidiary of Vietnam’s PetroVietnam state oil & gas group.

In Algeria we take part in the project for studying the El Assel area in the east of Algerian Sahara. Our share in the project, which we operate, equals 49 per cent. We cooperate with Algerian state-owned oil & gas corporation Sonatrach – their share is 51 per cent. By now four oil & gas fields have been discovered there.

Gazprom International operates in Algeria, Vietnam, Bolivia, Uzbekistan, Tajikistan, Kyrgyzstan, Bangladesh and offshore the North Sea

Could you please provide some more details about the progress with these two lines of activity?

In 2000 we concluded an oil & gas contract with our Vietnamese partners on license block No. 112 offshore Vietnam in the Gulf of Tonkin. It envisages hydrocarbon prospecting, development, production and marketing under the terms of a production sharing agreement (PSA) concluded for 25 years with a possibility of prolongation for another five years. Vietgazprom is the project operator. In 2003 and 2004, following the exploration activities, a decision was made on extending the contract scope to cover the adjacent block No. 113. The aggregate gas resources in these two areas were preliminary estimated at 207.5 billion cubic meters. We hit commercial gas reserves when drilling the third exploratory well – this is how the Bao Vang gas field was discovered in 2007 within the namesake structure. Since the boundaries of this field lie beyond block No. 113, in 2008 the Vietnamese Government granted us a permission to extend the contract area to block No. 111/04. Drilling operations conducted by Vietgazprom in 2009 resulted in encountering commercial gas reserves in the Bao Den structure – that’s how the second field was discovered. In the near future we are planning to prepare the discovered deposits for pre-development and development.

In 2008 we inked a contract on developing blocks No. 129, 130, 131 and 132 under the PSA terms, with Vietgazprom acting as the project operator. The document, which entered into force in 2009, has a 30-year term with a possibility of extension for another five years. The contracted area of some 28.5 thousand square kilometers is located within the Southern Nam Con Son oil- and gas-bearing basin. Their total potential resources were estimated at about 440 billion cubic meters of natural gas and 220 million tons of oil. Presently Vietgazprom has completed a whole range of geological exploration activities required at the first stage of studying the prospective blocks and started preparing the first exploratory well for drilling operations.

In 2012 Gazprom International and PetroVietnam signed an agreement on transferring the PSA shares in the projects for developing blocks No. 05–2 and No. 05–3 offshore Vietnam, and in 2013, after Gazprom had obtained the adjusted investment certificates, the Russian party became a full-fledged participant of these projects with a 49 per cent share. Blocks No. 05–2 and No. 05–3 are located in southeastern South China Sea and have a total area of about one thousand square kilometers. The aggregate reserves of the Moc Tinh (05–3) and Hai Thach (05–2 and 05–3) fields located within the blocks are estimated at over 55.5 billion cubic meters of gas and about 25 million tons of gas condensate. In September 2013 we launched commercial production there.

In addition, in 2013 we set up PVGazprom Natural Gas for Vehicles, a joint venture (JV) for NGV fuel production. The JV will supply NGV fuel to the municipal transport of southern Vietnam’s major economic center – the city of Ho Chi Minh. So, this project will be mainly focused on the country’s south. The project logistics is conducive to this goal: natural gas and APG will be delivered to the Nam Con Son Terminal and Dinh Co gas processing plants near Vung Tau, from where liquefied gas will be further supplied to Ho Chi Minh and filling stations across the country. Of course, we are also regarding other possibilities for expanding our activities in Vietnam in partnership with PetroVietnam.

As for Algeria, in 2008 Gazprom International won a tender for the El Assel prospect located in the oil- and gas-bearing Berkine Basin. A relevant agreement for its development until 2039 was concluded and entered into force in 2009. Gazprom International holding a 49 per cent share became the project operator, while Sonatrach with a 51 per cent share acted as a partner and co-investor. The initial area of the block exceeded three thousand square kilometers and was underexplored. In 2010 the first exploratory well testing resulted in a potentially commercial discovery at the Rhourde Sayah structure. In 2011 we drilled a prospecting & exploratory well in southern El Assel, which made it possible to estimate the reserves of the Zemlet Er Rekkeb field discovered earlier. In 2012 a prospecting well hit the new Zemlet Er Rekkeb Nord gas & oil deposit, and in September 2014 the RSHN-1 prospecting well confirmed the presence of another deposit in the prospect’s northern part – the Rhourde Sayah Nord field.

North Sea

In addition to Vietnam and Algeria I think it’s necessary to say a few words about our projects in the North Sea. Stakes and production volumes are not too big there, but the goals we pursue in these projects are also somewhat different. Offshore the North Sea in the British and Dutch sectors we operate within the international consortiums together with British, Dutch and German companies. We take part in developing the Wingate gas field as well as in geological exploration at the Winchelsea and Sillimanite prospects. For the majority of foreign companies the North Sea is primarily a testing area for new technologies in offshore developments as well as a certain ground for personnel training, covering all aspects of project implementation – from geological estimation and drilling to project management and cost optimization. In addition, highest labor safety and environmental security requirements and standards are applied there. By taking part in the North Sea projects, we gain a remarkable experience we can use in our projects in other countries and regions.

We work in an extremely intense competitive environment and it requires higher mobility in decision making. When considering this or that option, our competitors try to find the right balance among the depth of study, elaborateness of analysis and the ‘window of opportunities’ offered by the market. Quite often the ‘prize’ is drawn not by the one who has considered and evaluated all the existing options, but the one who did it faster: managed to get ahead of the game by carrying out a sufficient, though maybe not a full analysis. In the meantime, we certainly try to make the most of the professional potential, status and market position of Gazprom Group.

Could you please say a few words about other key projects?

Sure. In Bolivia jointly with French Total (which is the project operator) as well as Bolivian state-owned YPFB and Argentine Tecpetrol we implement projects at the Ipati, Aquio and Azero blocks. Our share in the Ipati and Aquio projects is 20 per cent. The Incahuasi field was discovered there. As for the Azero block project, which is currently at the stage of geological exploration, we carry out together with Total, we hold a 50 per cent stake there. We agreed on the following: if we make a commercial discovery in Azero, we’ll establish a joint venture, where Gazprom and Total will hold minority shares of 22.5 per cent each, and state-owned petroleum company YPFB will get the rest (55 per cent).

At the Sarykamysh prospect in Tajikistan we drilled Shakhrinav-1p, the deepest prospecting well (6,450 meters) in the history of oil & gas drilling in Central Asia. Right now we are focused on the interpretation of unique geological and geophysical data obtained there as well as on preparations for exploration activities in the Western Shaambary area.

In Uzbekistan we are also involved in two projects – a program of geological exploration on the Ustyurt plateau and the follow-up development of the Shakhpakhty gas field, which was under development back in the Soviet times. We are building up production, we discovered the Dzhel field, preparations are underway for signing the production sharing agreement.

In Kyrgyzstan we accelerated our efforts to start geological exploration at two license areas of ours – Kugart and Eastern Mailisu IV. Presently contractors are being selected there.

In Bangladesh we execute a joint project with state-owned Oil, Gas and Mineral Corporation Petrobangla. It stipulates exploratory drilling at a whole range of gas fields. We are getting ready for setting up a joint venture.

What are Gazprom International development prospects related to?

From the standpoint of promising projects and regions, the projects in Latin America and Southeast Asia nowadays seem to be the most attractive ones. At the same time, we are intensely looking for new opportunities not only in the traditional hydrocarbon development and production sector, but also in related sectors, including NGV and power generation. An NGV project in Vietnam may serve as an example of activities in this area as well as an idea of constructing a power plant in the Dominican Republic, which we consider to be quite interesting. We also try to enhance and consolidate our presence in the CIS. Our cooperation with Kyrgyzstan has recently acquired a significant momentum in this area.

Last year Gazprom International signed a cooperation agreement with Gazprom Neft. What does it envisage?

It is aimed at sharing information and coordinating activities when operating in the international market. We set up a joint project group in order to make our information sharing regular and thus not allow competition among the Gazprom Group companies participating in bidding procedures beyond Russia. For instance, last year our companies developed a unified approach to tender procedures in North Africa and the Balkans, which made it possible to eliminate doubling costs for purchasing the initial data. Information sharing covers offshore projects as well as business outlooks in Gazprom Group’s strategic priority regions. At the same time, Gazprom International and Gazprom Neft do not rule out the possibility of joint international projects at further stages.

Any company that confines itself to the domestic market risks not only to lose the established positions, but also to fall behind for many years to come

Global Corporation

There is a general question asking why Gazprom needs international projects as it owns huge hydrocarbon reserves in Russia and maintains high production levels.

That’s true, there are ample reserves in Russia, and it is Gazprom’s obvious competitive advantage. Can Gazprom take the liberty to focus only on its own resources and completely give up international projects, in the meantime maintaining its status of a global energy corporation? I am sure it can’t. In the current environment global energy companies compete at all levels: for premium production markets, promising sales markets, new technologies, financial and human resources. We acutely feel this competition. Any company that confines itself to the domestic market risks not only to lose the established positions, but also to fall behind for many years to come.

We are an authorized structural unit of Gazprom responsible for implementing exploration, development and production projects beyond Russia. Within this competence we resolve tasks assigned to us by the management, including the implementation of the existing projects and entering new promising ones. Meanwhile, we should fully realize that our shareholder expects a certain outcome from these projects, which we should obtain. First and foremost, it is acquiring a considerable share in the international hydrocarbon production market. However, building up the reserves and production volumes abroad is not an end in itself. Our projects should meet the requirements of economic efficiency in terms of the risk-to-expected return ratio. In addition, our portfolio should be balanced by a whole range of parameters, including distribution among countries and regions, proportion among the projects at the production and exploration stages, among the offshore and onshore projects as well as a share of projects, where we act as operators.

It also involves the advanced technological experience gained, for example, in the North Sea where technologies are the cornerstone of success. Another example here is deep-water drilling in Vietnam. Organizational & managerial skills we improve when implementing international projects, are of no less importance. Working together, our partners and we should speak the same language and it is not a theoretical issue. We in Gazprom and our foreign partners as well have a clear understanding of project division by stages, of key decision points and the scope of analysis and preparations to be carried out in order to arrive at a sound decision. The problem is that our traditional approaches often do not comply with the standards applied in the international market. It is not the issue of what approaches are better – they are simply different. Of course, it means that we should clearly understand their project management standards in order to agree the timeframes and work scope at every stage. It holds true both for the projects in which we act as operators and those where our partners fulfill the function of operators.

Another important aspect is entering the related sectors. The efficiency of any production project is governed not only by the efficiency and cost of process solutions, but also by the proceeds that may be received from selling the produced hydrocarbons. Moreover, in different countries and regions upstream and downstream margins are distributed in different ways, depending on the regulatory aspects, demand & supply balance, on how advanced the infrastructure and related segments are, for example, the power industry and NGV sector. Here situations may occur, where a hydrocarbon production project has to be implemented alongside with constructing gas transmission infrastructure or a natural gas liquefaction plant. In addition, combining a production project with a project in a related sector – for example, power generation capacities construction – yields a synergetic effect and bolsters the overall project economy. The possibility of proposing a comprehensive solution to the government of this or that country also considerably improves the cooperation outlooks. It is obvious that in such projects we closely cooperate with Gazprom Group’s relevant structural units, for example, Gazprom Gazomotornoye Toplivo in Vietnam.

Another crucial point is consolidating Gazprom’s business reputation as a hi-tech international Company, sharing a common language with its partners across the world.

What are the key objectives of Gazprom International in the foreseeable future?

Balancing our project portfolio in terms of the production-to-exploration ratio. Historically, our portfolio is mostly comprised of the projects at the exploration stage and rather a small share of projects at the production stage; whereas in international companies about 70 – 80 per cent of projects are, as a rule, production projects or those close to the start of production. So, this imbalance obviously leaves a mark on our performance. We are to resolve this issue in the foreseeable future.