Material published in issue no. 5 of the corporate Gazprom Magazine, interview conducted by Denis Kirillov
Gazprom International’s Managing Director Valery Gulev answers some questions for the magazine.
Valery Leonidovich, several years ago the start of reforms for the Gazprom Group’s international production unit was announced. Why was this process initiated and what results can we talk about today?
It is obvious that activities related to the implementation of international projects have their own characteristics. This is tied not only and not so much with the technological aspects, which are, of course, also present, but most of all with issues related to the organisation of project management; the defence of commercial interests when signing contracts with involved countries’ governmental authorities, foreign partners and state oil and gas companies; and the structuring of contractual relationships with contractors. And this is not to mention such obvious factors as the need for studying and calculating the specificities of the industry and tax legislation of the country, conducting activities and documentation in English, at least, and sometimes in the language of the country we are present in, as well. The high level of competition that we must come up against when we enter a particular market cannot be forgotten either. Indeed, our foreign partners have actively and successfully implemented projects in countries and regions by far the most interesting in terms of resources. This is why the logic behind the decision to form a specialised company for the implementation of international projects that would accumulate the requisite technological, human, and financial capacities is absolutely clear and reasonable.
Gazprom International operates in nearly 20 countries on four continents and is participating in the realisation of about 40 projects.
Based on this logic, Zarubezhneftegaz CJSC was created in 1998, an establishment by Gazprom, Zarubezhneft, and Stroytransgaz. This enterprise’s main sphere of activity was projects in Central and Southeast Asia, India, and Venezuela. In 2007 Gazprom purchased its partners’ shares in this enterprise, which as a result was renamed Gazprom Zarubezhneftegaz. In same year, the company Gazprom EP International was registered in the Netherlands. It represented Gazprom’s interests in regions not covered by Gazprom Zarubezhneftegaz’s projects. Moreover, in 2011 Gazprom management made the decision to appoint Gazprom International as an integrated company specialised in implementing projects in the sphere of hydrocarbon prospecting, exploration and extraction outside of Russia. This was done with the aim of consolidating resources and experience in implementing international projects, as well as streamlining financing processes and management. Over the next three years, the procedure of merging the assets of Gazprom ЕР International and Gazprom Zarubezhneftegaz was carried out.
Today Gazprom International is conducting operations in nearly 20 countries on four continents and participates in the realisation of about 40 projects of varying scale. Among them, the key projects are in Algeria, Vietnam, Bolivia, Uzbekistan, Tajikistan, Kyrgyzstan, Bangladesh and on the North Sea offshore.
Vietnam and Algeria
Which of these would you highlight in particular?
Vietnam and Algeria. In these countries, we are not just implementing large projects but also acting as an operator. So, in Vietnam, the joint operations company Vietgazprom – within which we are working with the Vietnamese side on equal footing – is the joint operator of projects within licensed block No. 112 as well as blocks No. 129-132 offshore in the South China Sea. The Bao Vang and Bao Den gas fields have already been opened here. Along with this, we are participating in projects to develop fields in blocks No. 05-2 and No. 05-3. We are also taking part in a project to produce gas-engine fuel together with Gazprom Gas-Engine Fuel LLC and PV Gas – a subsidiary of the Vietnam National Oil and Gas Group Petrovietnam.
In Algeria, we are participating in a project to study the El Assel section, situated in the east of the Algerian part of the Sahara. Our stake in this project, in which we are the operator, is 49%. We are working in alliance with the Algerian State Oil and Gas Corporation Sonatrach; they have a 51% share. There are currently four gas and oil fields open there.
Gazprom International operates in Algeria, Vietnam, Bolivia, Uzbekistan, Tajikistan, Kyrgyzstan, Bangladesh and offshore in the North Sea.
Could you speak in more detail about what is happening in these two areas?
In 2000 we concluded an oil and gas contract with our Vietnamese partners for licensed block No. 112, located offshore Vietnam in the Gulf of Tonkin. It envisages the prospecting, exploration, extraction and sales of hydrocarbons according to the production sharing agreement (PSA). Its term of validity is 25 years, with the option of extending it for a further five. Vietgazprom is the operator. In 2003-2004, based on the results of prospecting-exploration works, the decision to expand the area covered by the contract to the adjacent 113th block was made.
The total volume of gas resources in these two areas was previously estimated at 207.5 billion cubic metres. We were able to identify recoverable gas reserves during the course of drilling the third exploratory well, so in 2007 a gas deposit was opened within the Bao Vang structure; it bears the same name. Since the area covered by this deposit extends beyond the boundaries of the 113th block, in 2008 the government of Vietnam gave us permission to expand the contract area to block No. 111/04 as well. As a result of drilling, in 2009 Vietgazprom discovered recoverable gas reserves in the Bao Den structure and therefore a second deposit was opened. Our most immediate plans are to ready the detected reservoirs for outfitting and development.
In 2008, we signed a contract for the development of blocks No. 129, 130, 131 and 132. Its implementation is based on the terms of the PSA; the assigned operator is Vietgazprom, and its period of validity is 30 years, with a possible five-year extension. The document entered into force in 2009.
The contract area covers a territory of approximately 28.5 thousand square kilometres, located in the Nam Con Son oil and gas basin. Their total potential resources were estimated at roughly 440 billion cubic metres of natural gas and 220 million tonnes of oil. To date, Vietgazprom has conducted the whole gamut of oil and gas explorations required for the initial stage of studying promising blocks and has begun preparations for drilling the first exploratory well.
In 2012, Gazprom International and Petrovietnam signed an agreement on the assignment of shares in the PSA for development projects on blocks No. 05-2 and 05-3, located offshore Vietnam. And in 2013, after Gazprom received adjusted investment certificates, the Russian side became a full participant in these projects with a 49% share. Blocks No. 05-2 and 05-3 are located in the south-eastern part of the South China Sea and have a total area of nearly one thousand square kilometres. The total reserves found within the boundaries of the Moc Tinh (05-3) and Hai Thach (05-2 and 05-3) fields are estimated at over 55.5 billion cubic metres of gas and nearly 25 million tonnes of condensate. We started industrial production there in September 2013.
In addition, in 2013 we became participants in the joint venture (JV) for the production of gas motor fuel PVGazprom Natural Gas for Vehicles. Specifically, it is planned for the joint venture to provide gas motor fuel for public transportation in southern Vietnam’s largest economic centre, Ho Chi Minh City. Thus, in the development of this project, the focus will be particularly on the south of the country. This is facilitated by the logistics of the project: natural and associated petroleum gas will be brought to the gas processing factories Nam Con Son Terminal and Dinh Co near the city Vung Tau, where liquefied gas will be supplied to Ho Chi Minh and refuelling complexes around the country. Naturally, we are also studying other possibilities for expansion in Vietnam in partnership with Petrovietnam.
With regard to Algeria, in 2008 Gazprom International won an international tender for the promising El Assel area located in the Berkine oil and gas basin. A corresponding agreement was concluded for its development 2039. It entered into force in 2009. Gazprom International, with a 49% share, is the project operator, and Sonatrach, with 51%, is acting as partner and co-investor. The initial territory of the area was more than three thousand square kilometres and was poorly studied in geological terms. In 2010, according to the results of testing the first exploratory well, a potentially commercial discovery was made on the Rhourde Sayah structure. In 2011, in the southern part of El Assel, we drilled an exploratory well which made it possible to assess the reserves of the Zemlet Er Rekkeb deposit opened earlier. In 2012, the exploratory well made the discovery of the new gas and oil accumulation Zemlet Er Rekkeb Nord possible and in September 2014, the exploratory well RSHN-1 confirmed the presence of yet another accumulation in the northern section – the Rhourde Sayah Nord deposit.
In addition to Vietnam and Algeria, I think it is necessary to say a few words about our projects in the North Sea. Shares and production volumes are relatively small, but our objectives for participating in these projects are somewhat different. We are working in the British and Irish sectors offshore in the North Sea as part of an international consortium alongside British, Dutch, and German companies. We are taking part in the development of the Wingate gas field as well as in geological exploration works in the promising Winchelsea and Sillimanite structures. For most foreign companies, the North Sea is primarily a testing ground for new technologies in the sphere of developing offshore fields and a unique school for personnel covering practically all aspects of project implementation, starting with geological evaluation and drilling and ending with issues related to project management and cost optimisation. Moreover, the highest demands and standards related to occupational safety and ecological security standards are applied there. By participating in the North Sea projects, we are obtaining extremely important experience for ourselves that we can use in our projects in other regions and countries.
We work in an extraordinarily tough, competitive milieu, and this demands of us increased mobility in decision-making. When considering various opportunities, our competitors try to find the correct balance between the depth of study and detailed nature of the conducted analysis and the “window of possibilities” offered by the market. The “prize” is often given not to the one who examined and evaluated all possible variants but to the one who did it fastest, the one who could react to the situation quickly and conduct a sufficient, though perhaps not utterly thorough analysis. Thus, we endeavour, of course, to make full use of the professional potential, credibility, and market position possessed by the Gazprom Group.
Could you also say a few things about other key projects?
Certainly. In Bolivia we are implementing projects on the Ipati, Aquio, and Azero areas jointly with French Total, which is the operator, as well as with the Bolivian national company YPFB and Argentinian TecPetrol. Our share in the Ipati and Aquio projects is 20%. The Incahuasi field is open here. At present, in the phase of geological prospecting, which we are conducting jointly with Total, we have a 50% stake in the project for the Azero area. We agreed as follows: if we succeed in making a commercial discovery in Azero, we will create a joint venture in which Gazprom International and Total each have a minor share – at 22.5%; the rest (55%) will go to the national oil and gas company YPFB.
In Tajikistan, on the promising territory of Sarykamysh, we have drilled the deepest (6,450 metres) well in the entire history of gas and oil drilling in Central Asia, the Shakhrinav-1p. We are now working on the interpretation of the unique geological and geophysical data gathered there and we are also gearing up for the initiation of geological exploration works on one site already – West Shokhambary.
We also have two projects in Uzbekistan: a geological prospecting programme on the Ustyurt Plateau and renewed development of the Shakhpakhty gas field, which was originally developed in the Soviet period. We are increasing production, have opened the Dzhel field and are making preparations for the signing of a production sharing agreement.
In Kyrgyzstan we are preparing for the start of geological exploration in two of our licensed areas – Kugart and East Maylisu IV at an accelerated pace. Contractors are currently being selected.
In Bangladesh we have a joint project with the state-owned gas and oil corporation Petrobangla – commercial drilling in a number of gas fields. We are setting up for the creation of a joint venture.
What do you link Gazprom International’s development prospects to?
From the standpoint of promising projects and regions, in the current situation, the most interesting projects look to be in Latin America and Southeast Asia. Moreover, we are not only actively searching for new opportunities in the traditional exploration and production of hydrocarbons but are also examining options in related sectors, including gas transport and electric energy. The project for gas motor fuel in Vietnam can be brought forward as an example of works aimed in this direction. There is also an idea to build an electric power station in the Dominican Republic, which appears very interesting to us. We are similarly working on developing and strengthening our presence in the CIS countries. Our cooperation with Kirgizia has received substantial impetus for development in this area as of late.
Last year Gazprom International signed a cooperation agreement with JSC Gazprom Neft. What does this entail?
Its objective is the exchange of information and coordination of activities while working in foreign markets. We created a joint working group in order to streamline our information exchange and in this way to prevent competition between Gazprom Group companies during participation in tenders outside Russia. So, last year our company prepared a unified position in the tenders in North Africa and the Balkans, and this made it possible to eliminate the duplication of expenditures on the purchase of source data. The information exchange is being conducted for offshore projects and the prospects for activity in regions of strategic priority for Gazprom Group. At the same time, Gazprom International and Gazprom Neft do not exclude the possibility of joint entry into international projects in subsequent stages.
Any company that becomes isolated in its domestic market risks not only losing the position it has but also lagging behind for many years.
Many wonder why Gazprom needs international projects when it has huge hydrocarbon reserves in Russia and maintains high production levels.
There certainly are huge reserves in Russia, and this is one of Gazprom’s obvious competitive advantages. Could Gazprom afford to concentrate only on its own resources and completely abandon the implementation of projects abroad while yet remaining a global energy corporation? I am sure it could not. Under modern conditions global energy companies compete at all levels: for premium extraction markets, promising commodity markets, new technologies, and financial and human resources. And we obviously feel this competition. Any company that gets locked inside its domestic market risks not only losing the position it has but also remaining behind for many years.
We are the authorised division of Gazprom responsible for implementing projects in the sphere of exploration, development and production beyond Russia’s borders. As part of this function, we deal with the issues set before us by management, including those related to the implementation of existing projects and entering into new promising ones. At the same time, we must be clearly aware that our shareholders expect positive results from these projects, which we must achieve. Above all, this is acquiring a significant share in the international market for hydrocarbon production. However, merely accumulating reserves and increasing production volumes overseas is not in itself the goal. Our projects must comply with the requirements of economic efficiency in terms of the risk-return trade-off. Moreover, our portfolio must be balanced according to a number of parameters, including distribution throughout countries and regions, the ratio of projects at the stages of production and exploration, the ratio between offshore and onshore projects, and the share of projects in which we are an operator.
Likewise, it is about getting the most advanced technological experience, for example, in the North Sea, where technology is a key success factor. A different example is the planned “deep-water” drilling in Vietnam. The organisational skills that we develop during the implementation of projects abroad are no less important. Working in joint projects, we have to find common language with our partners. And this is not a theoretical issue. Like we have in the Gazprom system, our foreign partners have a clear understanding of the phased nature of projects, points where key decisions are made and the volume of analysis and preparatory work that must be undertaken in order to make an informed decision. The problem is that our traditional approaches often do not correspond to the standards used in the international market. And this is not a question of which approaches are more correct. They are just different. Naturally, we must understand their project management standards clearly, so that we can agree on the timing and scope of work for each phase. This is equally true both for projects where we are the operator and for those where our partners are fulfilling the function of operator.
Entering into related sectors is another important aspect. The effectiveness of any given project in production is determined not only by the efficiency and cost of technological solutions, but also by the profit that can be gained from selling the extracted hydrocarbons. Along with this, in various countries and regions, the marginality along the chain of production to the end consumer is distributed in various ways, depending on the specifics of regulation, the demand and supply balance, level of infrastructural development and related segments, such as electric energy and gas motor fuel. Situations thus arise where a project for the extraction of hydrocarbons simply must be implemented alongside the construction of gas transport infrastructure, or, for example, a factory for liquifying natural gas. Likewise, the combination of a project for extraction with a project for a related segment – for example, for the creation of electricity generation capacity – often makes it possible to attain a synergistic effect and improve the economy as a whole. The possibility of offering a comprehensive solution to the government of a given country also increases the potential for cooperation significantly. So, obviously, in such projects we collaborate closely with the Gazprom Group’s specialised organisations, for example, in Vietnam with Gazprom Gas-Engine Fuel LLC.
And another extremely important point is strengthening the business reputation of Gazprom as a high-tech international company speaking a common language with its partners in all regions of the world.
What key challenges does Gazprom International face in the foreseeable future?
The challenge is balancing our project portfolio in terms of the exploration/production ratio. Due to historical factors, our portfolio is primarily based on projects at the stage of geological exploration and has a comparatively small percentage of projects in the production stage. But 70-80% of international companies’ projects are usually extraction projects or ones at stages close to the start of production. So this imbalance impacts our final indicators, of course. And we have to solve this problem in the foreseeable future.