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Interview: Gazprom Neft has cracked Arctic production code: strategy chief

London — Russia's Gazprom Neft is on the look-out for partners and wants to bring down costs now it has overcome the challenges associated with Arctic oil production, its head of strategy, Sergei Vakulenko, has said.

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It is now five years since Gazprom Neft, an arm's-length subsidiary of Russia's state gas giant, started producing from Russia's first offshore Arctic oil field, Prirazlomnoye, in the ice-prone Pechora Sea. That breakthrough gained international attention due to Greenpeace activists' efforts to derail it. The company is also targeted by European Union and US sanctions as the prime mover in Russian Arctic and shale projects.

But with three Arctic projects in production -- Prirazlomnoye, Messoyakha and Novy Port -- Vakulenko said Gazprom Neft "can do everything there." He underlined Gazprom Neft had dealt with issues such as operating on permafrost, and was using "fishbone" multilateral wells to extract heavy oil from the Messoyakha field, where the crude has an API gravity of 17.9. It drilled more than 130 wells at Messoyakha last year.

Gazprom Neft had upstream production of 1.9 million b/d of oil equivalent across its operations in the Arctic, West Siberia, and overseas last year, and having built its output, is now looking to bring down costs. "It's a matter of how to drive the costs down, how to get reliability up and so on, but it's not a breakthrough any more [in the Arctic], not for us. We've broken through," Vakulenko said.

The company still has an interest in attracting partners, including in further Arctic expansion, and sees cooperation and learning as one of the main benefits of its activities outside Russia, Vakulenko said.

He noted Gazprom Neft operates Iraq's Badra oil field, and dominates onstream production in Serbia. "We do appreciate the opinions and technical expertise of other companies," he said.

In the Arctic "the size of the prize is big enough that we'd be quite willing to share. Working together we could indeed come up with better decisions."

The goal of overseas activity in places like Iraq is partly to "learn new technologies, new approaches, so as not to be ossified, mummified," he said. In addition, "if we can sell our skills to other resource-holders, then why not," he said.

Another goal is to establish a base for developing two far eastern discoveries totaling around 550 million mt (4 billion barrels), which Gazprom Neft made offshore Sakhalin in the last two years, Vakulenko said.

He said he anticipated similarities in terms of project development between these finds and Sakhalin II, which is operated by parent company Gazprom, and the finds could be brought on stream in the late-2020s once they have been appraised and a development plan agreed.

With an oil industry already well established in the Sakhalin region, "we have to build up our own resource base, supply bases and all that," he said.

Elsewhere, Vakulenko reiterated Gazprom Neft's hopes of driving down unconventional costs at the Bazhenov formation, saying the company's license is designed to foster cooperation with others interested in developing the right techniques. Gazprom Neft believes it has pushed down operating costs at Bazhenov to around $40-50/b, and is targeting $20-30/b within two or three years, he said.

PRODUCTION CUT 'APPREHENSION'

Vakulenko offered only lukewarm support for Russia's participation in production cuts alongside OPEC. The company's mature oil fields in West Siberia are not easily shut down, due to the high proportion of water produced along with oil, which means valves and gathering systems tend to freeze in winter if production is shut down, he said.

While a temporary shutdown could improve reservoir pressure, the problem of freezing "is the reason for this constant Russian apprehension about shutting things down," he said.

"One shouldn't get carried away with it. It's one thing to take the froth and the foam out of the market, make it less interesting for speculators, to take the overhang out, that was a noble cause, fine," he said. "But we don't think the fundamental price could be managed, nudged somewhere. It's just whistling in the wind."

Russia agreed to cut its output by 230,000 b/d as part of a 1.2 billion b/d output cut deal with OPEC and its allies that started in January, but it negotiated a slow pace of cuts due to these technical difficulties and in March achieved around half its pledged cut level.

Observers continue to question the durability of the pact, but there is also talk of putting a long-term market management strategy in place after three years of closer Russia-Saudi ties.

--Nick Coleman, nick.coleman@spglobal.com

--Edited by Alisdair Bowles, newsdesk@spglobal.com