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Gazprom Neft mulls new projects

The Russian firm had stellar production growth of late, but it urgently needs to find new resources

Gazprom Neft, Russia's fourth-largest oil producer, is considering more than 10 new exploration projects to ensure that its output after 2020 maintains current record levels. To achieve this, the state-controlled company is looking at different ways to obtain new licence areas, including auctions, joint ventures and acquisitions.

Alexei Vashkevich, head of geological exploration, said in Moscow in February that Gazprom Neft's resource base was sufficient to maintain production at the current level of around 100m tonnes of oil equivalent a year by 2020, but that it was essential to acquire new fields to maintain this over the long-term.

By the end of this year, the company plans to make an agreement with a foreign partner in the East Siberian Chon group of fields, with projected output at 5.35m t/y by 2030. Participation in the tender for nine fields in Iraq is also under consideration.

In recent years, Gazprom Neft—which is 96%-owned by gas giant Gazprom—has been the star performer amongst Russian producers, with annual output growth of 7-9%, thanks to the ramp up of the Novoportovskoye, Prirazlomnoye and Messoyakha greenfield production sites. However, Opec's oil output reduction pact with Russia has slowed growth to about 5%.

Nonetheless, the company produced record profits in 2017, making a net profit of 253bn roubles ($4.5bn)—a 27% jump from 2016. Overall hydrocarbon production increased 4.1% in 2017, while refining throughput fell 4.2%.

Gazprom Neft is one of many Russian oil firms beginning to feel ill effects from the restrictions imposed by the Opec deal. Chief executive Alexander Dyukov suggested in February that an adjustment to the pact should be made in the second quarter of this year. He believes the global oil market is nearing a balancing point and hopes that participating countries will agree to increase production, rather than make further cuts.

The company made healthy profits, despite impact of Opec agreement

"As far as I know, the Opec members agreed that in the second quarter it is quite possible that there will be a clarification of this agreement in which there may be adjustments that will lead to an increase in quotas for the participating countries," Dyukov told reporters in Moscow in February.

In the meantime, Gazprom Neft said in February it had discovered a new field in Orenburg, a federal district, north of Kazakhstan, with a reserve estimate of more than 80m barrels of oil. Discoveries were made in the area two years ago and Gazprom Neft said the latest find confirms expectations of a licence area consisting of several smaller fields. At a meeting with investors in New York in February, the company said it expected new greenfield projects to produce up to 28m t/y of oil at its peak.

Deputy chief executive Vadim Yakovlev told Reuters in October last year that Gazprom Neft's Middle East operations are of "strategic importance", adding that the company plans to increase its presence there. At the Badra field in Iraq, production in 2018 is expected at between 85,000 barrels a day and 90,000 b/d, with the potential to reach 110,000 b/d in the future. He said Iraq had not asked Gazprom Neft to reduce output there.

Gazprom Neft also plans to develop two oilfields in neighbouring Iran-Shangule and Cheshmeh-Khosh. The Iranian government has said it expects to sign deals this year with Russian firms on developing the country's oil and gas resources.

To ensure future financial stability, the company intends to divert income resulting from the current higher oil price to a reserve fund, which will only be used for financing capex, debt repayment and dividend payments. Gazprom Neft's three-year business plan implies a Urals oil export grade price of $43.8/b, well below where Urals currently trades—in early March, it was trading at more than $60/b.

Dyukov said last year's financial result reflects the company's "overriding objective" of becoming a global leader in terms of financial and operational performance. If the company can turn words into deeds, Gazprom Neft may finally emerge from the long shadow cast by its parent, Gazprom.

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