Genadiy Shmal

The union strongly advocates the reform of our regulatory system.

Genadiy SHMAL President Union of Oil & Gas Producers of Russia

Russia’s upstream potential

September 10, 2019

Genadiy Shmal, president of the Union of Oil & Gas Producers of Russia, talks to TOGY about Russia’s capacity to continue supplying gas to Europe, as well as the key projects, challenges and upcoming developments in the country’s oil and gas industry. The union lobbies for the interests of oil and gas companies and supports the development of the industry.

How would you assess the capacity for Russia to supply gas to Europe and the importance of the Nord Stream 2 and Turk Stream projects?
The potential of our oil and gas sector is large enough to secure our needs and to deliver on the agreements that we have signed with many countries, especially European countries. Gas production in Europe is decreasing, including in Norway. Last year [in 2018], we increased gas supplies to the EU by 10%. It was a record number for the last few years. We will further significantly increase our gas supply to Europe if there is demand.
Last year [in December 2018], the third gas production facility was launched at the Bovanenkovo gas condensate field. This is one of the most northern fields in Russia and in the world. This field will produce up to 147 bcm [5.19 tcf] of gas per year.
In terms of gas reserves, Russia ranks first in the world. Our reserves are more than 50 tcm [1,766 tcf] of non-associated gas, and this is even excluding hydrates, and not taking into account prospects related to shale rocks.
During all the time of our relations with the EU, there has not been a single failure in the supply of gas and oil. Even in the most cruel and acute periods of the Cold War, Russia has always fulfilled its supply obligations. There was a single case in January 2009, when due to unfriendly actions by the Ukrainian authorities, there were interruptions in the supply of gas to the Balkans and some other countries.
It was then decided that we need a backup system. We built the Nord Stream gas pipeline and we are building the Nord Stream 2 and the TurkStream pipeline in order to ensure a reliable supply of gas to our partners.
TurkStream and Nord Stream are of great importance to European energy security. Nonetheless, all those pipelines won’t avoid Russian gas transit through Ukrainian territory. Approximately 5 bcm-10 bcm [176.6 bcf-353.1 bcf] of gas will continue to go through Ukraine. Otherwise we will not be able to supply the amounts planned to Europe.

What are the main projects recently launched in Russia’s oil and gas industry?
In recent years, we have implemented a number of very interesting projects that, to one degree or another, concern the world’s and Europe’s energy security. One of those projects was the Yamal LNG plant, where Total plays a great role. For the post-Soviet period, this is the first project that was built before schedule and kept within the original budget. Today, this project gives us about 17 million tonnes of LNG.
Russia now produces around 28 million tonnes of LNG. For the moment, Qatar is in the first place with 70 million tonnes. But we plan to invest a lot in this area. Minister of Energy Alexander Novak has said that we can produce up to 120 million tonnes.
Some other projects that are worth mentioning as they are very significant for our country are the Zapolyarye-Purpe and Kuyumba-Taishet oil pipelines [both inaugurated in January 2017 and operated by Transneft to supply the Eastern Siberia-Pacific Ocean (ESPO) oil pipeline].
When we built the ESPO pipeline [completed in 2010], we heard many questions and doubts. People were saying that it would be useless and unprofitable. Now, we see how right the decision was of our government and of Transneft to build this pipeline. As soon as the ESPO oil pipeline was built, we started producing more oil. In the past, oil production in Eastern Siberia was low, but now we produce up to 50 million tonnes [366.5 million barrels] of oil per year.
In Eastern Siberia, Surgutneftegas is operating in the Talakan fields, Rosneft is active in the Kuyumba field and in several other fields, and Irkutsk Oil Company – which was previously unknown – now produces 9 million tonnes [66 million barrels] of oil per year. The Vankor field produces more than 20 million tonnes [146.6 million barrels] per year. There is a large number of fields to discover and develop.

How have drilling operations been evolving in the past few years and what are the main tendencies?
Drilling operations have increased. Five years ago, our drilling capacity was less than 20 million metres per year. Last year [in 2018], it was 29 million metres. The volumes of horizontal drilling increased sharply and now account for 40% of the total amount of drilling. This fact is very positive and we have to continue working in this direction. But it is still not enough. Americans, for oil only, drilled approximately 100 million metres [in 2018]. We have a lot to strive for.
The number of new technologies available has increased. One of them is hydraulic fracturing. Last year, we did more than 5,000 hydraulic fractures, but this is not enough. Americans do approximately 100,000 hydraulic fractures per year. For now, there are only foreign companies, such as Schlumberger and Halliburton, doing hydraulic fracturing in Russia. They are experiencing some problems because of the sanctions. Nevertheless, they are working well.

What role do independent E&P companies play in Russia? And what measures have been put in place to incentivise the growth of independent private explorers?
We think that we need to significantly increase the number of small companies. In the USA, where the volume of production is similar to ours, they have more than 8,000 small companies. Our number of small companies is lower than 200.
The advantage of small companies is that they are much more flexible and mobile, and thanks to this, sometimes their work is more effective. However, small companies that deal with geological exploration have almost disappeared.
Last year, RUB 240 billion [USD 3.6 billion] of the state budget was invested in geological exploration, while oil companies invested more than RUB 600 billion [USD 9 billion] in this. Oil companies prefer to invest in exploration programmes that they conduct themselves.

Which of the country’s oil and gasfields, areas and projects will be in the centre of focus in 2020 and 2021?
The most promising oil and gasfields in our country are in Eastern Siberia. There are approximately 100 billion tonnes of oil equivalent in Eastern Siberia. Half of it is oil and the other half is gas. The problem there, however, is that each field contains gas and oil together, so we have to produce them at the same time.
We still have a problem with flaring associated petroleum gas. We flare approximately 10 bcm [353.1 bcf] per year. In other words, we waste all this gas instead of using it for our economy, and this is not right. The government has mandated that 95% of associated gas shall be used. Today, we use approximately 86%. They have succeeded in reaching 95% in the Khanty-Mansiysk District. New regions, such as Vankor, have not reached the goal yet. We need about six years to solve this problem.
Moreover, a number of new complexes are being built in Eastern Siberia. Gas there contains a lot of helium, which is an interesting strategic product. We need it for space exploration, to launch balloons, etc. By producing gas in Eastern Siberia we will meet our needs for helium and for other countries.
Moreover, a new gas processing complex is being built in the Amur region. In fact, there is a whole cluster of companies there. There is a complex for processing 30 bcm-35 bcm [1.06 tcf-1.24 tcf] of gas per year and there is a factory belonging to Sibur. Sibur is launching a major project in Tobolsk, in the Tyumen region, called ZapSibNeftekhim. The facility will produce 1.5 million tonnes per year of ethylene and 500,000 tonnes per year of propylene. The cluster in Amur will be even larger.
The second main development zone is the Caspian Sea. Lukoil succeeded in discovering several fields there and started oil production. Last year, oil production in the Caspian Sea fields amounted to 7 million tonnes [51.3 million barrels]. They have various types of equipment there, locally produced and foreign, but all of the platforms were constructed by Russian engineers and workers in Russian factories, in the Astrakhan region.
It is important to note here that this type of platform does not discharge oil at all. It works with a zero waste system: No waste goes to the sea; everything is transported to the shore, where it is utilised.
There are a number of other interesting fields in the Caspian Sea that are discovered but not developed yet. Now two fields are being developed there, the Filanovsky and Korchagin fields.
The current paradigm of development lies in the fact that the vast majority of new fields are small, with reserves of 1 million-5 million tonnes [7.33 million-36.7 million barrels], excepting the Filanovsky field. In this framework, we need to develop new approaches, new technologies and a new strategy for the oil industry’s development.

 

As several Russian oil and gas companies are about to invest in new LNG plants, could you tell us the main challenges and competitive advantages of the Russian gas industry in the LNG market?
First, our extreme and harsh natural conditions actually pose an advantage for us. In Australia, the average annual temperature is 50 degrees above zero Celsius. In some parts of Russia, such as Sabetta, it is -20 degrees Celsius. LNG is produced at a temperature of -163 degrees Celsius. A temperature of -20 degrees Celsius is closer to -163 degrees Celsius than the Australian +50. So, the cost of the technological process itself is much lower for us. So extreme weather conditions and climate are useful for our production. This is why our LNG is competitive in the world market.
Secondly, the gas produced in Yamal that is used for the LNG facility there is less expensive than in many other countries. And the wells there are very effective. For example, one well produces up to 1 mcm [35.3 mcf] of gas per day.
Third, our transport logistics allow us to ensure the competitiveness of our LNG. As for the Northern Sea Route, work is being carried out there actively. This allows us to supply gas to the Asia-Pacific region – China, Korea, Japan, and other countries – without significant delays or costs. This way of supplying gas is lower-cost and faster by six or seven days. Later, some plants will be built in Russia’s far east close to Japan and China. These are the main competitive advantages of plants that are being built in the Yamal region.

What fiscal mechanisms or regulatory changes could be improved to support the development of the oil industry?
Our legislation requires improvement. The union strongly advocates the reform of our regulatory system. For example, we do not have an oil production law. 104 countries in the world produce oil, of which 102 have a law concerning oil production, and we do not.
Oil plays a huge role in our economy. Oil and gas contribute 50% of our consolidated budget. Oil and gas bring in 70% of foreign currency. This is why we need a law concerning oil, to tackle for instance the development of hard-to-recover [HTR] reserves.
The entire tax system associated with the oil and gas industry needs to be reformed. Today our fiscal system plays only one role, which is taxing companies. But it needs to play a second role, by creating incentives, especially for foreign companies that work with us.

What are the main challenges faced by the Russian oil and gas industry today?
Not everything is as smooth as it seems in our industry today. We have problems. The first is the HTR reserves. Several years ago, HTR represented 10 or 12% of our total reserves. Now they represent 60%.
Another problem is the ageing of fixed assets. Gas pipelines and towers age. Every 20 or 30 years they must be replaced. For now, we are not able to do this. Approximately 50-60% of structures in our oil production industry need to be replaced. And we do not have sufficient finances for this even though we invest USD 20 billion per year. We need to invest twice as much.
Another one of the issues we have is that there are a lot of idle wells. In Russia, 13.6% of wells are idle. Some of them are idle due to technical issues, some of them are idle because of economic issues or because of our tax system. If a well produces less than 4 tonnes [29.1 barrels] per day, it is considered unprofitable and is abandoned. In the USA, a well that produces 500 litres [around 3.6 barrels] per day is considered profitable.
Another problem is low productivity of our wells and the high costs of oil production in our country. These costs, for sure, are lower than in many other countries. In the Persian Gulf one barrel costs USD 1.5-2, while in Russia one barrel costs USD 3-4, even though some companies experience higher costs. But half of our expenses go to drilling. This is why one of the main tasks for us is to significantly decrease the costs of drilling. America has already reached this goal. However, their wells are not so deep.
Another problem that we experience is connected to sanctions. This is why we need to find new ways to produce equipment and find new technologies. And we do find them. But there is still a lack of investment due to a difficulty in accessing financing for private companies. Russian banks provide mainly short-term loans, such as for three to four years, and their interest rate is high. All of our oil and gas projects are expensive, as well as being time- and capital-intensive.
In the past, foreign banks could provide solutions, and many of our companies contracted loans with foreign banks. But now Russian companies are experiencing problems with the current sanctions. This will not break us. We will find a way to solve this problem, but it still affects the industry.
Finally, we have to deal with the problem of oil prices, whose volatility affects our industry. But the work that was carried out by the Russian negotiators, especially by Minister Novak, to stabilise the international oil prices gave good results. This price is suitable both for the country’s economy and for the companies.

What is your vision of the importance of oil and gas in the global energy future?
Many people in our country and around the world are saying that the oil era is over. I am one of those specialists that say those people are not to be believed because oil and gas are going to remain the main energy resources for many years to come. This point of view is shared by many specialists abroad, including the International Energy Agency.
In the past, the IEA used to be very pessimistic about the future of the oil industry. However, now they are sure that oil and gas demand will account for a large share of the world energy consumption for at least until the middle of our century. In 2015, oil, gas and coal accounted for 86% of the world’s fuel balance. In 2040, we expect it to account for 79-80%.
I have been dealing with the oil and gas industry for more than 50 years now, and people have been saying all the time that the reserves are running low. Today, we have about 232 billion tonnes [1.7 trillion barrels] of oil reserves, which will last long if we produce 4.3 billion tonnes [31.5 billion barrels] per year. It is the same case with gas. There are about 197 tcm [6,956 tcf] of gas reserves and we produce 3.4 tcm [120 tcf] per year.
Moreover, the oil and gas reserves are growing. Not so long ago, we did not even know what shale gas and shale oil were. Apart from those resources, there are gas hydrates and oil and gas in tight reservoirs, and much more to discover. Taking into consideration that science is advancing, I am sure that until the end of this century we will use oil and gas at whatever level is required. The amount in demand may be lower than it is now, but there will be resources to satisfy our demands.

How have the sanctions on Russia’s economy impacted the development of its oil and gas industry?
Let’s take a look first at the global picture. Russia accounted for almost 15% of hydrocarbons production [in 2018], and the USA accounted for 17%. Americans, due to their shale oil and shale gas, are the leader in oil and gas production. Several years ago, and Russia was ahead of the USA.
In 2014, against all international laws and regulations, against the policies of the World Trade Organization, sanctions were announced against our country. These sanctions mainly affect companies from the oil and gas sector by hindering the supply of technologies and access to financing.
We have been working under sanctions for more than five years now, but our oil and gas industry did not stop developing. On the contrary, it is quite steadily satisfying the needs of our country as well as those of other countries.
If you look at our country’s oil needs, a quarter of what we produce today would be enough for us. Last year [in 2018], we produced 556 million tonnes of oil [4.08 billion barrels], against 499 million tonnes [3.66 billion barrels] in 2013, before the sanctions. Our production increased by 10% over these five years, and this is taking into consideration that we have to restrain it in compliance with the OPEC+ agreement.

Could you highlight the importance and main success stories of Russian oil and gas producers’ recent regional and international expansions?
Lukoil and Gazprom Neft are very active abroad. Lukoil operates in 42 countries and conducts exploration and production activities. Gazprom Neft also works in a number of countries, mostly on the African continent. With the arrival of Igor Sechin, Rosneft began to expand its activity abroad, especially in Venezuela, even though the political situation is complicated right now.
Of course, more work has to be done on the South American continent. Lukoil is trying to enter Mexico. We used to be active in Cuba, and we still are interested in Cuba, as well as in Brazil. However, Brazil’s deep-sea shelf poses a challenge for us. We do not have experience in working in the deep sea shelf. Waters there are 2,000-3,000 metres deep, which entails its own specifications.
However, the main development for Russian companies is to be Asia, with the supply of gas to China. The demand for gas in China is huge. China emits the largest amount of greenhouse gases, much more than the USA or Russia, because of their intensive use of coal for power generation. A transition of those plants from coal to gas will solve these problems.
We will supply 38 bcm [1.34 tcf] of gas per year to China through the Power of Siberia pipeline, which we are building now. A number of fields have been discovered in the Krasnoyarsk and Irkutsk regions that will be used to feed the pipeline.

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