Russian Oil and Gas Industry: News

Novatek announces 3rd LNG project in Arctic

Oil was extracted for the first time at the Vyngapurovskoye field in Yamal, which was discovered by artificial intelligence after digital processing of geological data.

Drilling of one of Russia's largest oil fields began on Taimyr

ST PETERSBURG (Reuters) - Russia’s Gazprom Neft expects lifting costs at Bazhenov formation, the world’s largest shale oil resource, to gradually fall and reach an acceptable level for viable production by 2022-2023, a top company official said on Thursday.

Russia sits on huge reserves of shale oil, which needs more investments for developments than the conventional oil. Unlike the United States, it lacks technology and funds to produce shale oil in large volumes.

The break-even lifting costs for shale oil production at the formation stand at 8,500 rubles ($132) per tonne, Alexei Vashkevich, head of geological exploration and resource base development at Gazprom Neft, told reporters.

“We are ready to get that number in 2022-2023,” he said in comments, cleared for publication on Monday.

He said the company had been working to raise its effectiveness, including via implementation of state-of-the-art technologies.

The company plans to start commercial production of oil from Bazhenov formation in 2025, Vashkevich reiterated.

The International Energy Agency describes Bazhenov as the world’s largest source rock, a bed of ancient organic matter dating back to the Jurassic period which has given rise to most of the crude oil pumped from the fields of West Siberia.

Gazprom Neft estimates that the reserves of the light, low-sulphur and of low-viscosity Bazhenov formation stand at between 18 billion and 60 billion tonnes.

owais.usmani wrote:

ST PETERSBURG (Reuters) - Russia’s Gazprom Neft expects lifting costs at Bazhenov formation, the world’s largest shale oil resource, to gradually fall and reach an acceptable level for viable production by 2022-2023, a top company official said on Thursday.

Russia sits on huge reserves of shale oil, which needs more investments for developments than the conventional oil. Unlike the United States, it lacks technology and funds to produce shale oil in large volumes.

The break-even lifting costs for shale oil production at the formation stand at 8,500 rubles ($132) per tonne, Alexei Vashkevich, head of geological exploration and resource base development at Gazprom Neft, told reporters.

“We are ready to get that number in 2022-2023,” he said in comments, cleared for publication on Monday.

Operations are in the making at Payakha, the oil fields that could become among the biggest in the Arctic.

Russia defies pipeline threats over gas for Europe

In the extreme conditions of Russia’s far northern Yamal peninsula, 500km from the nearest town, thousands of workers are drilling 1.7km through permafrost for a contentious resource.

The natural gas from Yamal’s Bovanenkovo field is intended to reach Europe via the Nord Stream 2 gas pipeline — a 1,230km project linking Russia to Germany under the Baltic Sea that has split Europe and sparked threats of sanctions from the US.

Critics of the project, due to enter service this year, contend that it will keep Europe hooked on Russian gas and deprive Ukraine of billions of dollars earned from allowing gas across its territory. While the pipeline is more than half-built — with European companies’ financing half of the €9.5bn cost — it still faces pressure with Denmark delaying a permit to build in its waters. The European Commission has tightened its oversight.

But from Yamal, the companies behind the project — led by Russia’s Gazprom — have a simple message: the abundant gas here will be coming to Europe whatever the obstacles thrown up by Brussels or Washington.

“We will still produce and submit our gas into Russia’s Unified Gas System, which will then distribute it,” said Igor Melnikov, managing director at Gazprom Nadym Dobycha, the unit developing Bovanenkovo, 2,200km north of Moscow.

“We see no option of halting production,” he said of a field that is costing Gazprom Rbs500bn ($7.6bn) to develop.

Oleg Andreev, deputy head of the production department at Gazprom, said the company would seek other routes for the gas if NS2 were not ready in December — perhaps even via Ukraine. “Turning off the tap is not an issue,” he said. “In principle, there is demand for gas in Europe, and the demand is high, and all corridors can take the gas.”

Gazprom is building Nord Stream 2 with five European partners: Germany’s Uniper and Wintershall, Engie of France, Anglo-Dutch Shell and Austria’s OMV. Some 670 companies from 25 countries are involved in the construction.

Gazprom and Germany, the project’s main EU supporter, maintain that Nord Stream 2 is needed to replace Europe’s declining gas supplies. European gas demand is expected to reach 564bn cubic metres in 2020 and 618bn cu m in 2030, according to the Oxford Institute for Energy Studies.

Russia, which supplies one-third of EU needs, has gas to spare. The Bovanenkovo field alone is expected to produce 95bn cubic metres this year, up 9 per cent on the year, before stabilising output at 115bn cu m per year as of 2020, according to Mr Melnikov.

The US has threatened to impose undefined sanctions on companies involved in the project. “Russia wants Nord Stream 2 to use energy as a leverage over Europe. We shouldn’t allow it to proceed,” Mike Pompeo, US secretary of state, said in May.

Moscow contends that US hostility is motivated by a desire to hurt Russian business interests and stimulate American LNG exports into Europe.

“If it wasn’t in line with their interests, we would never see European partners in it. Who could force them into it? They entered because they are interested in implementing this project,” Russia’s president Vladimir Putin said of Nord Stream 2 this month. “But it does not follow the logic and interests of those who within the existing universal model got used to exclusiveness and lawlessness, and to others paying their bills. That is why the project is constantly being torpedoed.”

Henning Kothe, chief project officer of Nord Stream 2, told the FT that no contractor had quit because of sanctions risk. “We do not expect that any sanctions will be imposed,” he said.

Another risk arises from the permits needed to finish construction. The project has yet to obtain a key approval from Denmark. The Danish Energy Agency, which has to process the application, said it “cannot say when a permit can be granted”.

Further delays could create more scope for legislative risks, said Mitch Jennings, Moscow-based analyst at Sova research.

“A limitation on capacity for Nord Stream 2 upon its launch is not out of the realm of possibility, given the recent changes to the gas directive by the EU,” he said.

The proposed EU gas directive, expected to go into effect next month, foresees that at least 10 per cent of the German part of the pipeline capacity should be available for third-party access, as well as setting tariff and ownership rules.

Dmitry Khandoga, deputy head at Gazprom’s macroeconomics department, said the company was not yet concerned by the delay in Denmark. The required 140km of pipeline could take under a month to build at current rates of 8km per day, he said.

If Nord Stream 2 is finished this year, it could carry some of the gas now running via a longer route through Ukraine. The country’s gas transit contract with Russia expires on December 31 and will have to be renewed.

But if the new Baltic link does not open on time, Mr Kothe said Europe might need to import more LNG. That would cost between €8bn and €24bn more depending on the LNG price, he said.

Annette Berkhahn Blyhammar, a Stockholm-based energy and utilities adviser at Arthur D Little, a consultancy, said: “Nord Stream 2 is significant from the market perspective in that it brings another opportunity to transport gas from Russia to Europe. If you take that away, costs will rise.”

The abundance of gas in Yamal — which has fields with combined production prospects of 360bn cu m per year — and Europe’s growing demand, is already raising questions over potential need for a “Nord Stream 3”.

“Gazprom is ready to develop even further infrastructure if needed, if the demand is there,” Mr Khandoga said. “Of course with this project we see some reluctance from the European policymakers. Therefore if any Nord Stream 3 is needed, I think Gazprom will find partners to build it. We definitely have the resources to utilise it.”

A Watershed Moment For Gazprom

In Russia, oil stands for money and gas for power. The extensive pipeline infrastructure connecting gas fields in Siberia with consumers in primarily Europe has been the source of interdependency and relative political power. In this context, no company is more powerful and essential than Gazprom, which is sometimes referred to as “a state within a state”. It also means, however, that the energy giant is no ordinary company as it has to deal with different KPIs than its peers.

Gazprom controls some of the world’s largest gas fields which dwarf the assets of competitors. The seemingly unlimited production capacity is the source of the energy company’s power and influence. Gazprom’s 10 percent share of the Russian economy is a token of its importance for the country’s economy. Furthermore, the company’s activities make up the bulk of Russia’s total fixed investments.

Before the financial crisis of 2007-2008, Gazprom’s market value stood at $360 billion. The company’s management even promised to raise the valuation to $1 trillion. Instead, things went from bad to worse, and share prices fell to a mere fraction of their previous value. The energy giant had lost approximately $300 billion of its value by 2015 when market capitalization stood at $51 billion.

Gazprom stocks, however, soared to unseen heights last month, rising 30 percent as the gas major decided to double its dividend to 16.6 rubles from 8 rubles previously. According to several sources, the Russian Finance Ministry has been pushing state-owned enterprises (SOE) such as Sberbank, VTB, Gazprom, and Rosneft to increase the pay-out ratio to at least 50 percent. This, in turn, raised investors’ profitability expectations.

Gazprom was rewarded with a sharp rise of its valuation by almost $25 billion to $71.4 billion within a couple of days. At the end of May, the company’s share value had risen sufficiently to break through the $75 billion mark for the first time in years. Gazprom’s performance had been lagging behind most SOEs in 2018, which the management ascribed to the company’s substantial investments in new pipeline infrastructure for markets in Europe and Asia. The Kremlin, however, seems to be losing its patience
when it comes to improving the efficiency and performance of the energy giant.

The Kremlin has launched 12 national projects to reinvigorate the Russian economy. One of the stated goals is to improve the efficiency of SOEs. An earnest effort has been made to curb spending on tenders and procurements, including the massive investment programs for the expansion of pipeline infrastructure to China and Europe. One of the measures to keep spending in control is organizing all projects under a single contractor, Gazstroyprom.

According to the World Bank, Gazprom is the most unproductive company in Russia. After the collapse of the Soviet Union, the company suffered from mismanagement and corruption. One of Putin's first battles was to reform the company and change the management. However, in recent months, it seems that the current leadership is at risk of being sacked. Since February, three high-ranking employees have left the company.

According to specific sources, CEO Alexei Miller is also under threat of being sacked. His departure could be one of the reasons for investors’ believe that the current drive for efficiency is a firm intention to reform.

The Kremlin’s push for sustained profitability is music in the ears of private investors. The end of 2019 and the beginning of 2020 could be a watershed moment for the company as the construction Nord Stream 2, Turk Stream, and Power of Siberia near their end. It would benefit Gazprom’s position in two ways: sales should improve due to additional export capacity and the completion of the projects will reduce the financial burden concerning investments. Therefore, it seems likely that the company’s profitability will significantly rise in the next couple of years. The Kremlin’s intention seems to cash in after a long period of significant spending and infrastructure expansion. Furthermore, improving Gazprom’s efficiency and effectiveness should boost the company’s public standing and credibility.

No more Shtokman Development

For years, the Shtokman field was on everybody’s lips and the biggest energy companies in the world were eager to get a share. The field located in the central part of the Barents holds almost 4 trillion cubic meters of natural gas and is considered among the biggest offshore structures in the world. Developers planned a massive production of LNG and conventional gas.

Regional authorities in Murmansk, as well as in neighboring Norway, were preparing for a boom as big petro-money was on its way

Then, everything changed and license holder Gazprom ultimately announced in 2012 that it was postponing the project indefinitely «until better times». The expansion of shale gas and the lower prices had quickly changed the international energy markets.

Norway’s Statoil (now Equinor), and later also French company Total, abandoned the project.

However, it would take another 7 years before Gazprom closed down the Shtokman Development AG, the a subsidiary unit that was to develop the great Arctic field. The company, now a 100 percent subsidiary of Gazprom, was registered in Zug, the Switzerland.

This month, federal authorities reportedly approved the abolishment of the company. According to Interfax and Finmarket.ru, it was Deputy Prime Minister Dmitry Kozak that signed the document. The Gazprom-subsidiary has the last years been headed by Pavel Oderov, the president of the board of directors.