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Russian minnow embarks on Arctic megaproject

A Rosneft-linked independent is developing one of Russia’s biggest ever discoveries

A little-known private company has kicked off development at an oil project in Russia's far north that could eventually pump out 1mn bl/d.

The Paiyakhskoye field on the Taymyr Peninsula was identified during the Soviet era but was dismissed as being too remote and challenging to exploit. Following a recent appraisal, state authorities place its C1+C2 reserves at 1.2bn tonnes (8.8 bn bl), putting it on a par with Russia's biggest discoveries.

Managing this ambitious enterprise is Neftegazholding (NGH), a small Moscow-based independent run by businessman and former senior executive at state-owned Rosneft, Eduard Khudainatov. According to local authorities, development drilling at the site began on 14 June.

"The rig-up and commissioning work is finished and we have begun drilling the first well cluster," according to Andrey Polyakov, NGH's vice president of exploration and production, in a statement published by the Krasnoyarsk government. Some 12 exploration wells have already been drilled, he added, with work slated to start this year on a further three exploration wells and two production wells.

NGH aims to launch commercial production in 2024, with output expected to reach a first-phase plateau of 26mn t/yr (520,000bl/d) by 2030—equivalent to 4.7pc of Russia's current overall production. It could ramp up to 50mn t/yr (1mn bl/d) in further development stages.

Russia's Arctic Circle is emerging as a hotspot for E&P activity, as technological advances and infrastructure expansion have paved the way for ever more challenging developments.

Moscow has restricted access to its Arctic resources to a select few operators, however, due to their strategic importance. Non-state companies are barred from controlling offshore licences altogether while onshore, the only private firm that has managed to build up a sizeable footprint has been Novatek, Russia's top independent gas producer.

Rosneft connection

There has been speculation about how a company as small as NGH, which produced just 40,000bl/d of oil last year, has landed such a major project.

A possible explanation is Khudainatov's close ties with Rosneft and its powerful CEO, Kremlin ally Igor Sechin. Widely viewed as one of ‘Sechin's men', Khudainatov served as Rosneft's president between 2010 and 2012 and later as Sechin's deputy. In August 2013, one month after leaving Rosneft, he acquired licences for the Paiyakhskoye fields along with several other assets for $500mn, founding what would later become NGH.

Rosneft and NGH are suspected of having a close working relationship. A Moscow city arbitration court recognised the latter as a Rosneft affiliate in 2015, before a federal court annulled its decision.

There are doubts about how NGH will secure funding for Paiyakhskoye. Analysts estimate that achieving first commercial oil would cost $5bn, with total costs over the first phase projected to be more than $20bn. NGH's financial position is precarious, with its parent company Alliance Oil struggling with a net debt to EBITDA rating of 4.3 in 2018, according to Moscow-based ratings agency ACRA.

Given NGH's small size, Fitch Ratings analyst Dmitry Marinchenko expects the company will reach out to partners—either domestic or international—for financing.

ACRA director Vasilii Tanurkov told Petroleum Economist that he thinks the most likely outcome is that NGH will forge an alliance with Rosneft. The national oil giant operates the adjacent Baikalovskoye oilfield in a joint venture with BP and it intends to secure rights to the neighbouring West-Irkinsky block. Co-operation between the pair would help bring down infrastructure costs and help de-risk development.

One of the main challenges at Paiyakhskoye is its remote location, which will require the construction of a 413km pipeline to the coast and a 500,000bl/d export terminal to ship oil to market. Marinchenko believes the project's success will hinge on whether it is granted tax breaks and other state support, as well as securing funding.

ACRA estimates the project's breakeven price to be $25/bl, assuming breaks on export duty and mineral extraction tax (MET) are applied, and excluding transport costs. The field's high-quality oil, which has a sulphur content of only 0.09-0.2pc, should sell at a $5/bl premium over Brent, according to the agency. Valued at $4-6bn by ACRA, the project is expected to generate $15/bl of EBITDA at its first-phase production plateau.

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