OREANDA-NEWS. September 08, 2010. Russo-British TNK-BP, the third largest Russian oil company by production volumes, draws its plans relying on an aggressive development strategy. According to preliminary estimates, TNK-BP intends to produce 670 mln boe as early as 2013, and the figure may reach 1 bln boe in 2016, reported the press-centre of TNK-BP.

Sergey Brezitsky, TNK-BP Executive Vice President Upstream, told Petroleum Information Agency about how the company will achieve such production levels in an interview on the eve of the Oilman’s Day.

– TNK-BP investment may increase to USD5 bln in 2013. How would this affect changes in the production figures in the nearest years? What is the general company strategy in the short and long term?

– We are one of the leading Russian oil companies now, both in terms of production volumes and in terms of development rates and performance. Our short-, medium- and long-term objective is to remain among the leading oil companies.

As for investment, TNK-BP never experienced any problems with funding from our shareholders. Thus, the total company investment is expected to reach USD4.4 bln in 2010 (including USD3.3 bln of upstream investment). 2013 investment is planned to amount to USD5 bln. The growth is primarily associated with development of new territories of our operations and further production growth.

Our three-year plan envisages that TNK-BP production would grow by 1.7% in 2011 compared with 2010, by further 1.7% in 2012 compared with 2011, and by 2.1% in 2013 compared with 2012 reaching 670 mln boe.

Talking of a longer-term period, we currently estimate TNK-BP production potential to amount to 1 bln boe inclusive of Slavneft operations in 2016. As for the current year, we raised our production forecast from 1.4% to 2.8% or 634 mln boe.

– Is it new projects that will help you grow your production?
– For the most part of it. While our new projects, Verkhnechonskoe Field and Uvat, currently contribute about 8% of our production, their contribution will increase to as much as 18—20% in 2013. However, their development is not the only driver of TNK-BP production growth. We pin great hopes on the Orenburg region. This region saw production growth of 10% in the first six months of 2010. TNK-BP expects to produce 25 mln tons of oil in Orenburg in five years while current production is ca. 18 mln tons.

– How efficient does TNK-BP expect Yamal field development to be considering the parameters of the draft government program to develop the region?
– We plan to launch Yamal fields after 2013. We believe the benefits that currently apply to East Siberia should be extended to Yamal as well. This would make Yamal field development cost efficient. The size of the benefits for Yamal is subject to discussion, of course, but they should be at least equal to the East Siberian benefits for a start. An example here is our joint project with Gazprom neft, Messoyakhinskiy. It will generate a positive cash flow in case benefits are provided. Otherwise, it is uneconomic.

TNK-BP intends to increase investment in Yamal. We plan to allocate ca. USD800 mln to this region in 2011 and as much as USD1.5—1.8 bln in 2013. However, the rate of investment will depend on how quick they are in constructing Zapolyarnoe-Purpe oil pipeline.

– Is the scheme of potential funding of Zapolyarnoe-Purpe developed already? Would TNK-BP be prepared to invest in construction of the pipeline?
– TNK-BP is an initiator of Zapolyarnoe-Purpe construction. The project is being prepared now. They have already identified three companies that are seriously interested in the pipeline. These are TNK-BP, Gazprom neft and Gazprom. The latter has oil rims, for instance in Urengoiskoe Field. LUKOIL might also express interest in the project.

There are currently three options to fund Zapolyarnoe-Purpe but I would like to abstain from commenting on them. The final decision will be made by the government, not companies. The fact is important for us that the process got moving, we take part in working meetings with Transneft and Gazprom representatives, proposals are prepared for the Ministry of Fuel and Energy. I hope the required decision will be made in the nearest future.

As for TNK-BP preparedness to fund Zapolyarnoe-Purpe, I can tell you one thing so far. TNK-BP is prepared to participate in the project and supports the idea of pipeline construction because it is an extremely important infrastructure project for efficient development of oil production in Yamal and social and economic development of the entire region.

– To continue the new project topic, how is TNK-BP/Gazprom neft Messoyakha JV getting along? Could there be any other joint projects on new Slavneft assets such as Kuyumbinskoe Field in addition to this JV?

– For Kuyumba, we need to first adopt a development plan as a basis, understand, which options may be used for development. It is also necessary to solve the issue of constructing our own infrastructure and getting access to the existing infrastructure.

In particular, we are discussing whether it would be possible for Slavneft and Rosneft to jointly construct an oil pipeline from Yurubcheno-Tokhomskaya area. In case we reach any agreement in this respect, and we are in process of negotiations, Kuyumba will develop very fast.

For Messoyakha, so far, we have clear understanding of what the partners should do this and next year. We agreed a minimal plan that envisages 3D seismic, drilling five or six exploration wells, and doing further work to build a geological model and identify potential sites for pilot works.

Messoyakha has abundant reserves. The key issue is to find ‘easy’ oil. If we get good results, Messoyakha may be a very efficient project. TNK-BP investment in Messoyakha will range from USD35 mln to USD50 mln at the initial stage. Our joint investment in this field might reach USD1.5 bln, which is commensurable with our investment in Verkhnechonskoe.

We expect to be able to commence pilot development of Messoyakha in late 2012. Seismic results will show whether this will happen or not. In our opinion, USD60—100 mln more will need to be spent to explore the field until 2013, inclusive. Such is our vision of the nearest future of Messoyakha. Its final version is not yet agreed with Gazprom neft that operates the project.

– Slavneft production is currently on decline. What is you view of the prospects of this JV? How active is the discussion of potential future division of Slavneft?

– Slavneft currently produces more than 18 mln tons of oil per annum. Company management expects Slavneft to reach the minimum decline rates of up to 1% per annum and its production to stabilize in the vicinity of 17.5—18 mln tons in a year or two. TNK-BP calculations for West Siberia show approximately the same figures. While our regional production currently declines by ca. 5% per annum, it will decline by 3% in some time, by 2% some time later and by just 1% in more distant future.

Slavneft proposed 10-year development parameters to the Board of Directors, which were taken note of. The company is currently preparing a more detailed three-year plan.

The issue of Slavneft division is actually in the competency of the shareholders. My opinion is that Slavneft performance has an improvement potential.

– When does TNK-BP expect to cross the profitability level of 15% in Verkhnechonskoe, after which the field will no longer enjoy the benefit?

– The issue of profitability is the issue of quality of the reserves that the company is developing. Verkhnechonskoe has a lot of reservoirs that cannot be developed economically even under current conditions, and there are no technical solutions so far. At the moment, we are developing the main reservoir, Verkhnechonskiy horizon, only.

Verkhnechonskoe has very high development risks. The forecast error range is 30%. This means 30% error in well rates, capital expenditures, costs, and everything else. So, I would not talk about the time to reach 15% profitability at the moment. The field requires additional study.

By the way, Verkhnechonskoe is 200 mln years older than any other field in Russia or at least in West Siberia. Its age is 350 mln years if not more. Hence the particular complexity of its structure.

– Do the principal shareholders of Verkhnechonskneftegaz (VCNG), i.e. TNK-BP and Rosneft, plan to change the asset governance principles?

– The shareholders fund the project punctually based on their interests in VCNG share capital (TNK-BP owns 68.52% of VCNG shares and plans to purchase an additional block of 5.48% from JSC “ESGCo”; Rosneft owns ca. 26% of VCNG. – IF). VCNG oil is also divided between the shareholders in proportion to their interests.

TNK-BP and Rosneft are currently negotiating on that the partners would elaborate a mechanism to allow even more efficient coordination of their joint work in VCNG including company current operations, long-term development plans, and so forth. This is needed for each of the partners to have a clear understanding of what exactly they invest in. This is a standard business practice, there is nothing new. We interact in this manner, for instance, with Gazprom neft in our Slavneft venture and with other partners in many projects.

– Does TNK-BP intend to take part in the tender for Trebs and Titov Fields? Are you looking into opportunities to engage a partner?

– Yes, we intend to take part and are looking into the issue. However, the final decision is up to the shareholders because the expected amount of investment in Trebs and Titov is fairly significant. The decision on whether we should participate on our own or engage a partner is also in the competency of the shareholders.

When evaluating project efficiency, TNK-BP management concluded that a special tax regime would be required to develop both fields economically, especially if we consider their remoteness and the amount of payment. There are also additional tender conditions that cannot be neglected.
We are currently evaluating the project calculating various options to develop both fields because the situations are slightly different for Titov and Trebs.

– TNK-BP obtained permission from Gazprom to deliver Rospan gas to the Gas Transportation System in 2011—16. How much could it cost TNK-BP to construct infrastructure for further development of Rospan?

– We need to construct a new pipeline for full development of Rospan fields in any case. In principle, we already have specifications for pipeline construction but need to re-agree them with Gazprom, which we plan to do in the nearest future.

The pipeline will be ca. 80 km long. TNK-BP will finance its construction to the point of tie-in to Gazprom trunk gas pipeline. We are currently in process of design and survey work for the planned pipeline route. The pipeline construction investment is currently estimated at ca. USD200 mln.

We plan to spend ca. USD1—1.3 bln to develop Rospan until 2013 including construction of the pipeline and gas processing units and full-scale asset drilling and development. Gazprom endorsed gradually increasing deliveries to the pipe. 2013 permitted volume is 8.2 bln cubic meters of gas (2010 volume is 2.3 bln cubic meters). We expect Rospan to attain plateau annual production of more than 13 bln cubic meters of gas by late 2015. TNK-BP total medium-term investment in Rospan is estimated at USD5 bln.

– How active is TNK-BP in considering opportunities to acquire new production assets in Russia and abroad as well as BP assets? Could you possibly sell some of your underperforming assets in the nearest future?

– The topic of asset acquisitions and sales is a question to be addressed to TNK-BP shareholders. However, company management is always looking into ways to optimize the portfolio. We acquire quite a lot of licenses for the right to use the subsoil at auctions in West Siberia and Orenburg region nowadays. In addition, we are optimizing the package of our existing licenses, particularly in West Siberia and Novosibirsk Region.

– Did TNK-BP give up its old plans to sell Buguruslanneft that operates in Orenburg Region?

– Yes, we did, in the medium term. Buguruslanneft currently stands among the best performing TNK-BP assets. This was achieved thanks to two factors. The first one is the Mineral Extraction Tax (MET) benefit that increased asset efficiency by 60—70%. The second one is that we made significant investment in sustaining the production level upon securing the benefit. By improving cost management, we achieved cessation of production decline in Buguruslanneft and made the asset economic.

TNK-BP is not just active in acquiring licenses in Orenburg but also drills a lot. We drilled about 80—90 wells in Orenburg Region this year and plan to drill 120—130 wells in 2011.

– Ministry of Natural Resources is drafting proposals for permitting private companies to carry out exploration on the Russian shelf. Would TNK-BP be interested to work on the shelf?

– TNK-BP is interested in everything that is going on in the Russian and global oil industry. If there is an official decision to permit private companies to work on the Russian shelf, we shall certainly look into opportunities to do such work. This is obvious because TNK-BP has the appropriate potential. We have a highly skilled team, we can engage BP employees who have extensive experience working on offshore projects and, of course, we have access to the state-of-the-art technology of our shareholder, BP, in this domain. Besides, TNK-BP was always notable for the ability to quickly respond to any changes in the environment.

– Did the accident on the BP platform in the Gulf of Mexico affect TNK-BP operations or company attitude to the environment and safety of its facilities in any manner?

– I cannot comment on what is related to BP operations. As for TNK-BP, health, safety and environment always were and remain among TNK-BP priorities. Our investment in environmental protection activities amounted to ca. USD1 bln over five years from 2004 until 2009. Since company inception, we have built a safety system that includes elements of the best international practices but is adapted to Russian operating conditions. This system ensured improvement of the key TNK-BP industrial and environmental safety figures over the last five years. In particular, the level of oil spills decreased by 62% in 2009 compared with 2006. The frequency of injuries decreased by 35% last year compared with 2008 and by 68% compared with 2007.

If we talk of specific examples, we spend ca. USD20—30 mln each year for environmental purposes in our key field, Samotlorskoe, and remediate ca. 220—250 hectares of inherited contaminated land each year. Samotlor saw dramatic changes to the better in this respect over the last few years.

Further improvement of TNK-BP health, safety and environment performance still remains one of our absolute priorities.

– We are conversing on the eve of the professional holiday, the Oilman’s Day. What would you wish to your industry colleagues?

– I am very grateful to Interfax for this opportunity. On behalf of TNK-BP, I congratulate our employees, all our industry colleagues, our suppliers and contractors on the Day of the Oil and Gas Industry Worker. The credentials of the industry that employs millions of our compatriots are intellectual capability, professionalism and innovative technology. We all work together making a worthy contribution to further development of the Russian fuel and energy sector, growth of the national economy and well-being of all citizens of Russia.