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MIOGE Preview interview: Gennady Shmal, President of the Union of Oil & Gas Producers of Russia

Next up in the series is a veteran heavy hitter of the Russian oil and gas industry – Gennady Shmal, president of the Union of Oil & Gas Producers of Russia.

Mr Shmal, how do industry events like MIOGE help companies achieve their business goals?

I’ve said it before and I’ll say it again, exhibitions play a very important role at the present time. Before in Russia, we used to have a well-honed system of introducing new equipment, new technology and special scientific and technical services in each industry ministry, with top scientists and industry institutes involved – now that’s practically non-existent. So at the present time an exhibition is one of several possibilities that present platforms for sharing experience and ideas, as well as a chance to see what’s happening with others. Right now, even companies that operate side by side don’t know what each other is doing.

In those days there was a State Committee for science and technology that introduced new science and machinery into production. There were around 150 targeted programmes for scientific and technical development, all financed, and each programme was accounted for at the end of the year – what you did, what you got into production, and so on. It was a precise and clear system. If we want issues of introducing new equipment and technology to be sorted out like they should be, we need to revive a structure like the old committees. 

Production from traditional fields is declining in Russia, while the market share of smaller fields and unconventional resources is rising. New technology is required for this. Where can producers get it from?

There are more and more hard-to-recover resources, but there are no precise estimates as to their size. We don’t have a precise description in Russia of what a hard-to-recover resource is. The first thing we need to do is create a standard and decide the characteristics of an unconventional resource. A classification was developed in 1983, but much time has passed since then, and we need a more up-to-date one that takes into account the physical properties of oil reserves that could be described as hard-to-recover. Developing a precise classification or standard is the first issue that needs to be solved.

The second issue is which deposits to call hard-to-recover. Around 60% could belong to this category at the moment. This means new technology is needed, and we have it here.

For example, in May last year Salim Petroleum Development presented technology for chemical flooding by injecting a three-component mixture of anionic surfactant, soda and polymer in to the reservoir. All these reagents are produced in Russia. Technology can increase oil production by 1.5 to 2 times. But the technology is unprofitable with the current tax system. This leads to the conclusion that after improving technology, we need to improve the tax system.

It is my deep conviction that we need to double volumes of drilling in Russia. We need to use fracking. In 2016 we carried out 13,500 operations in Russia – the Americans did 100,000. But bear in mind it’s not always possible to use foreign technology. There should be a very individual approach for each field. This is why the USA has spent $30 billion on developing technology for oil and gas slant drilling. But we can’t use that technology at the Bazhenov Formation, for example.

Our geologists have made an optimistic assessment of 100 billion tonnes of oil in the Bazhenov Formation. Although a more realistic estimate is 18 to 20 billion tonnes, but how do you get it? If we manage to develop technology to produce oil at Bazhenov, we’ll be safe in any situation for the next 20 to 30 years.
Another problem is that right now we have practically no industry science!

However, a number of companies in Russia have R&D institutes…

These days they are called research centres. Gazprom Neft’s research centre is probably the most interesting. It has come up with know-how on numerous occasions, and that is why today Gazprom Neft is the most advanced company when it comes to technology. RITEK, the only company to include the word “innovation” in its name, is working, inter alia, on the Bazhenov Formation. As for the other centres, unfortunately, the return is minimal.

In Russia there is a significant gap between the development of an idea and actual implementation. In the old days a number of institutes had their own test sites where they would try out their ideas. Unfortunately, this is not the case nowadays. That is why we propose creating test sites to fine-tune technologies and equipment, in particular when this concerns the Arctic.

It has been claimed that Russian companies find it hard to implement technologies, and that the process can be expedited by involving a foreign partner. What do you think?

You can find such companies. However, this work has come to a halt as a result of the sanctions. Many companies operate as JVs. Take, for example, Shell, which is participating in all the projects in Sakhalin. There are some JVs where Russian, Chinese and other foreign companies participate. This is the right thing to do and essential. Experience shows that only JVs outside our country enable these companies to “stay afloat”.
When establishing a JV, you need to bear in mind that the government is also involved. Consequently, when such a document is signed, you need to make sure that the state’s interests are taken into account. 

For example, initially the Sakhalin-2 project was assessed at USD 9 billion; then this figure was “amended” to USD 11 billion. However, now it costs USD 25 billion! For the time being, we are not operating at a loss from this project. On the contrary we are receiving bonuses. At the same time, however, the costs of the investors that have to be reimbursed and leave the country for good are excessive. We need to take great care when regulating economic management mechanisms, so that the state’s interests come first.

What is your opinion on Chinese companies - how can they be considered – as investors, as partners?

It is hard to hold negotiations with the Chinese – the discussions can take an extremely long time. Nevertheless, I believe that this is one of the countries with which we need to work proactively in a large number of areas. For example, previously we made in Russia the drilling rigs that the Chinese currently manufacture. In the 1980s-1990s Uralmash manufactured 365 sets of drilling equipment, but has been manufacturing only 25-30 over the past two years. At the same time, most of the drilling equipment in Russia functions for 25-30 years. Where you can obtain new rigs? You can only acquire them from the Chinese.

For example, for one year Siberian Service Company tested a drilling rig supplied by the Chinese before buying it. And their specialists admitted that in terms of quality it was acceptable, while price-wise it was far cheaper than the equipment made in Russia.

When offering you something to buy, like these drilling rigs, the Chinese also turn up with their credits; moreover the terms are pretty good. Consequently people buy from them. The Chinese line of management in this respect is effective and correct. China can provide financial performance guarantees when it comes to construction. Consequently, Chinese companies establish a firm footing everywhere – they offer dumping prices and win numerous tenders. In China companies have what we lack – state support.

Is this the outlook for the next few years?

It is hard to say. You need to start from the premise that we need to revamp our banking system completely. Henry Ford once said: “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” Meanwhile what are the interest rates in our country? Today the biggest sanction we face is the lack of access to cheap and long money. Interest rates of 4-5% are acceptable, while interest rates of 17-20% are simply unrealistic for assets! The payback period of assets, in particular, transport assets equals approximately 15-20 years. Therefore, we need to start by improving the banking system so that banks actually promote development of the economy.
Today, as part of cooperation with foreign partners we need to find new forms – the lease of equipment, cheap credit, possibly transferring deposits on a concession basis to states that have no deposits – for example, neighbouring Belarus. We need to look for and find solutions. It goes without saying that MIOGE will help to draw attention to these issues; there are always meetings at the exhibition – conferences, forums and congresses. There are opportunities to communicate, exchange opinions, and establish very important and necessary contacts, which are never surplus to requirements. Over time, they may be converted into good projects.

Want to find out more about MIOGE 2017? Visit the website to get your free e-ticket and meet these and hundreds of other producers and companies.

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