Sergey Chernikov, CanBaikal Resources Inc.
Release Date: 2010-03-03
There seem to be very few junior companies operating in Russia today. As the Chairman of one of the few independent companies operating in Russia today, what would you describe as the major opportunities and challenges for those companies that want to operate in Russia today?It’s worth taking a few moments to explain how Petrotek’s involvement with CanBaikal Resources began, because it’s a very interesting story. CanBaikal was originally a publically listed Canadian company, founded in 1997, with its operations in Russia, and some gas assets in Canada. However, the company struggled with its Russian operations, and this was exacerbated by the 1998 financial crisis. On September 11th 2001, quite an auspicious date, we met the shareholders of CanBaikal in London. It was at that time that we realised just how bad the situation was for the company. They were suffering because of a lack of financing available due to the crisis, and also because of issues over their licensing. At the time, they only had two wells in operation, so it did not appeal to Petrotek at the time as a core potential asset. However, we decided to give the company a try, and see what would come from it. So at the beginning of 2002, eight years ago, we acquired the asset.
Answering your question, I would say that currently, there are more problems in Russia than opportunities, especially for juniors. The biggest of these problems are monopoly, and bureaucracy. However, despite these issues, it is possible to do business in Russia. Our eight years in the exploration and production business is a big deal for us, but in the context of Russia and its oil and gas sector, it is nothing. We set ourselves clear targets, and have achieved them over this time. The proved assets of CanBaikal were very small at the time of acquisition, only 770,000 barrels – today, that figure stands at 38 million barrels. As well as setting targets to increase reserves, we also wanted to increase production in parallel. Over our eight years, production has increased from 600 to more than 3,000 bopd.
Many companies struggle to find a successful balance when trying to increase both reserves and production. Where is your focus today?
Recently, CanBaikal reached a critical point, where the company has enough reserves to start building its own infrastructure, including pipelines and an oil processing facility. This project has already been launched, and all the necessary documentation has been provided. The pipeline project will reach for 96km. Some of the infrastructure has already been built, including the boosting station, and next year the system will be completed. It’s clear that as we are doing this, we need to increase production. Our current level of reserves, and the current oil price, is satisfactory. Even if the oil price dips to $50, we have been conservative enough with our planning to still make this a profitable project.
Now the company is looking for co-investors in this project, and to be able to launch an IPO in a three to four year period. International expansion is also being considered.
What are your objectives before you launch the IPO? What would you like CanBaikal to have in its portfolio?
The company would like to increase production to 500 to 600,000 tonnes per year, and by this point be making between $50 and $70 million USD of profit. When the company looks like this, it will be a perfect time to appear on the market, and help us further develop the potential of the asset.
What are the main differences between the operations of juniors in Russia and other markets, where independent, mid-size activity is much more prevalent?
In the Russian oil and gas sector, it tends to be the case that capital is not maximised in an efficient way. The capital expenditure on Russian projects can be very high, and return on investment tends to come very slowly. Despite this, CanBaikal has a positive outlook – we can see that good things will happen in the years to come, but because of the circumstances we have to expect these good things to happen on a longer timeline than in other countries.
I often go to Canada and the US. Their system is organised differently. Junior companies that operate there are able to react very quickly to changes in the environment. Globalisation for these companies is as much a fact of life as monopoly is for us here in Russia.
The reason that mid-sized companies can be effective here in Russia when perhaps larger international companies fail is that as a medium sized player, you can organise yourself very efficiently. CanBaikal employs around 250 people, which is enough to produce around half a million tonnes. The next challenge is the expenses of building infrastructure, which will require around $100 million USD of investment, that of course we would rather spend on drilling. However, to grow the company to the next level, this investment is needed.
What is it like working in the region where you are exploring, Khanty-Mansiysk? It is one of the historic oil and gas regions in Russia.
We work there very comfortably with the regional government. The Khanty-Mansiysk government, the city and the region as a whole are very supportive of companies like CanBaikal.
In 2008, we opened a new oil field, but over a year later, we are still negotiating with the federal government over the license. There are many different places in Russia where an international company could consider investment, but choosing your local government partner is an important step in ensuring eventual success. The general situation is improving year on year, and so the only problem for a company left to deal with is the efficiency of their assets. At CanBaikal, we understand this, and are very keen to invite international investors to consider our company as a potential partner.
Which sort of partners would you like to see? Junior companies, close to the oil and gas sector, or portfolio investors just to bring capital? What kind of formula would you propose?
We are open to everyone: strategic investors, be they large or small companies, or portfolio investors. CanBaikal as an asset is interesting for many different types of investor.
In my opinion, there are two types of businessmen: craftsmen and investors. When investors look at an asset, view it in terms of return on investment and profit. Then there are the craftsmen. There are many great examples of this type of businessmen throughout the Russian oil and gas sector. Mr. Bogdanov, president of Surgutneftegaz, is an excellent example that immediately comes to mind. This type of investor wants to be involved in every detail of their investment – for them, it is a labour of love as much as it is a wise business choice.
Both of these types of businessmen have their own distinct advantages. The management of CanBaikal today consider ourselves act more like investors. In looking for future investors, we could evolve in two directions. If we decide to continue as strategic investors, we could consider the possibility of leaving the company in the hands of new management. However, we are equally capable of evolving into craftsmen: if we see in three to five years the possibility for the further growth of our assets, then we can change our strategy and become craftsmen.
What would you like to say to the readers of Oil & Gas Financial Journal as a final message about your experiences in the Russian industry?
You do not have to be afraid of Russia, and you should not be afraid to invest in this market. Rules tend to change quite frequently, but with the right choices it is possible to work comfortably here in a business environment. Those who bid for Russia now are the most likely to gain opportunities in the future, which can only lead to a better position.
Wherever you have oil and gas, politics comes as part of the package. We would not like CanBaikal to grow into a big company as a direct result of this – what is the modern equivalent of a natural law. For investors looking for profit, CanBaikal is an excellent proposition.
| Company: | CanBaikal Resources Inc. |
| Position: | Chairman |
| Country: | Russian Federation |