Related Articles
Forward article link
Share PDF with colleagues

Arctic gas boosts Gazprom Neft

The Russian producer looks on track to achieve its production growth targets

Gazprom Neft posted a 5.5pc year-on-year increase in its oil and gas production in the first half of 2019, leaving it well placed to meet its stated growth ambitions. Surging output from its Arctic gas fields was a major driver.

Hydrocarbon production in the quarter grew to 1.94mn bl/d oe, which the firm attributes to higher yields at its Novoport and Messoyakha projects beyond the Arctic Circle. Output gains at Gazprom Neft's Arcticgas joint venture and the recently-launched Tazovskoye field in western Siberia also played a role, says Maxim Khudalov, director at Moscow-based ratings agency Acra.

Liquids output grew by only 1.8pc year-on-year in the first half, as Moscow's commitments under the Opec+ agreement compelled all Russian producers to moderate oil production. Growth was instead largely gas-driven, with production climbing by 13.6pc to 20.1bn m3.

Gazprom Neft looks on track to meet its pledge to produce 100mn t oe (around 2mn bl/d oe) of oil and gas next year, up from 1.89mn bl/d oe in 2018.

Gazprom Neft's production has grown by an average of almost 9pc pa since 2014. In contrast, the country's largest state-backed oil company Rosneft has boosted output by just 3.2pc pa during the period, despite its $5.3bn takeover of mid-sized oil company Bashneft in late 2016. Meanwhile Lukoil, Russia's top private producer, has struggled to keep its volumes stable. Gazprom Neft's growth has also been largely organic, in contrast to Rosneft's acquisition-fuelled expansion.

2mn bl/d oe — Gazprom Neft's 2020 upstream target

Unlike its rivals, Gazprom Neft is saddled with fewer Soviet-era brownfields where output is declining. Instead, it has focused on major greenfield developments, such as Messoyakha, Novoport and Prirazlomnoye—Russia's only offshore Arctic field in production. Bar Messoyakha, where it has partnered with Rosneft, the firm has been the sole developer of these projects, bringing them from early-stage exploration through to first oil.

In exploration, Gazprom Neft has "quality engineering staff that help it to find good deposits", says Khudalov. It made two major oil discoveries—Neptune and Triton—in a drilling campaign off the coast of Sakhalin Island in Russia's far east that started in 2017. The discoveries together hold up to 115mn t oe (843mn bl oe) in resources and are slated to start up in the early 2020s.

At the development phase, "the company also uses an impressive scientific approach to all of its projects, employing up-to-date drilling techniques," Khudalov says. Gazprom Neft is heavily involved in efforts to exploit tight oil in western Siberia's Bazhenov shale formation, establishing its own centre for unconventional oil production technology. Bazhenov's development is still at the testing phase, although Gazprom Neft aims to extract at least 40,000bl/d from the play by the mid-2020s.

State support

While Gazprom Neft has proved its mettle in the Arctic, the Russian state has contributed to its success. Moscow views the development of Arctic resources as a strategic priority. It has therefore offered lucrative fiscal support to projects in the region.

At Novoport, Gazprom Neft began paying a profit-based tax this year in lieu of standard duties such as mineral extraction tax (MET) and export duty. This tax is seen as preferable, as it factors in operating and capital expenditure. Meanwhile oil from Prirazlomnoye is not subject to export duty.

Gazprom Neft’s production has grown by an average of almost 9pc pa since 2014

According to Fitch Ratings analyst Dmitry Marinchenko, these tax breaks have made the projects more profitable on a bl-of-oil basis to brownfields. The incentives are, though, set to be phased out by 2022.

Gazprom Neft is continuing its search for more oil in the Arctic, while also weighing up export options for its offshore Sakhalin discoveries. It is also working on a major new greenfield project in eastern Siberia. The Chonsky fields hold more than 1bn t of oil and 300bn m³ of gas, according to Gazprom Neft, which has been seeking a partner at the site for years without success. Compounding its remote location, the project has challenging geological characteristics, which Khudalov says would require similar production techniques as the Bazhenov formation.

Gazprom Neft has not said how quickly it will move ahead with Chonsky's development, although it confirmed that the project remained commercially viable in June, noting that pilot operations would begin next year.

Also in this section
Rise of the machines
15 November 2019
Technology is increasingly replacing the roles of humans across the energy supply chain
Latest licensing rounds
13 November 2019
The industry's most comprehensive list of current and recent rounds for onshore and offshore licenses
Landmark Brazilian auction falls flat
11 November 2019
Enormous offshore pre-salt reserves fail to entice IOCs to the Transfer of Rights surplus bidding round