Nikolay Gagarin , Chernomorneftegaz
Release Date: 2010-08-09
Nikolai Gagarin, Chairman of the Board of CHERNOMORNEFTEGAZ, Honored Lawyer of the Russian Federation, has been interviewed by Russiaenergy.com for Oil and Gas Financial Journal to discuss the history of Chernomorneftegaz, its experience of operating in one of the most special regions of Russia and its views on its future potential of the Black Sea.Chernomorneftegaz was founded in 1998. Why it was the right time to found the company?
The founders of the company, former ex-officers of state companies, were big believers in the prospects of the project, although not a single well had been drilled at that time. The Black and Azov Seas had never been intensively explored for the oil and gas potential, despite the fact that the first well was drilled in that region of Russia at the end of the XIX century.
At the beginning, when there was no clear indication of where oil and gas deposits might be found in the region, the map looked like a treasure map. The geologists and engineers kept repeating, “there is something there”, but there was no concrete proof. The territory itself is very interesting: all hopes for oil and gas prospects in the eastern part of the Black Sea were linked to the primary biological substance on the Black Sea shelf.
How were the areas selected?
The initial geological risk was 90%, but the potential of such high returns were enticing. Mr. Vladimir Lisin, chairman of the Board of Novolipetsk steel (Novolipetsk steel is included in one group of companies with Chernomorneftegaz), and therefore, the potential of the Black Sea shelf had been known to him for some time, due to the demand for steel related to its exploration: Novolipetsk produces thick steel sheets that are a basic component of offshore drilling rigs. Back in 2002 the rules of the game in the Russian oil and gas market were not very clear, and the group wanted to hedge energy resources against the business costs of the metal industry. Today, fortunately, the situation is more predictable.
Chernomorneftegaz received its licenses in 2002 and carried out 2D seismic research on the potential fields. Over the next year the data was processed, and the results turned out to be impressive, revealing an unprecedentedly thick oil profile network and an unexpected capacity of the sediments. Many Western companies including Shell, Chevron, and ExxonMobil checked the results, and found them to be as promising as Chernomorneftegaz did. For instance, the depth of sediments in Azov Sea normally varies from 1.5 to 5-6 km, but in the Indolo-Kuban through it was almost 11 km.
At that time Chernomorneftegaz had only completed 2D examinations and were hoping to avoid the 3D examinations: strictly speaking, 3D is not completely necessary - all the oil discovered in the USSR was drilled using 2D maps, proving the high level of qualification and good instincts of Russian geologists. However, the industry’s regulators today require 3D surveys. In 2005, when we were about to start 3D examinations, the biggest issue that we had to face was the growing margin of the service companies. Costs rose from $19 million USD to $40 million USD for 2,000 km2 in the space of a year.
What is more preferable - a Russian or a foreign drilling company?
The regulating authorities introduced a law controlling foreign investments in the strategic areas of the Russian economy on May 5, 2008, and since then it has been very difficult to find foreign volunteers. There is only one Russian company that can offer 3D examinations, even though the first five drilling ships in the world were constructed in the USSR, which used to be the world leader. Nevertheless, I insisted on taking a Western service company with the best equipment that would show the exact prospects of developing the fields and make sure that our project was worth spending money on, as the future of the company depended on it. At that time we had just finished the merger with Tuapse port, which gave the company its own sea base on the Black Sea, which is important for onshore support. In general, offshore drilling takes a year to prepare, as the technologies are so advanced, almost like rocket science. A modern drilling ship can even operate during a 6-7 degree storm with a 1.5 m precision under 2,000m of water. Oilmen joke that they would rather deal with 1km of water than 1km of drilling. The problem is that there are no drilling companies in Russia capable of drilling under 2 km of water.
Chernomorneftegaz has chosen to invite Schlumberger as our contractor for 3D research. They use Q-Marine technology with calibrated sensors, sources and steerable streamers to deliver exceptional image quality and repeatability. It was pure luck: one of Schlumberger’s vessels had just completed 3D shooting in the Turkish waters of the Black Sea at that time, so ten streamers of 8km each arrived ready for immediate operation, and we gained a lot of time. This was very important, as Rosneft had licenses in a nearby section of the Black Sea, and were waiting for their ships to arrive so that exploration could begin. Regulations for geophysical surveys state that there should be at least 50km between ships that are conducting 3D research so that their scans do not interfere with the results. Timing was critical at this period, and it was a very tense time for all involved.
Now, the company has almost finished all geophysical and geological examinations of its licenses, and the current potential of this project looks much more optimistic. The risks are considered much lower and the potential rate of success is over 30%. We sometimes cooperate with geologists from other companies that are our neighbours there, LUKOIL for instance. They have agreed that the fields can be estimated as prospective. Today, this is the only structure of this scale in Russia ready for deep water drilling. Of course, we have reached the stage when we should look for a partner, as the period of pure scientific exploration is over.
When will production begin?
This issue is very sensitive in terms of ecology as Tuapse is one of Russia’s recreation zones with an 8-9 degree seismic activity. It’s very close to Sochi, and we don’t want to celebrate the 2014 Sochi Olympics with an oil spill. This is a feasible threat as the results of EASA’s survey have revealed oil spills and natural oil discharges as a result of the geochemical research.
Your cooperation with Schlumberger is a very successful case. Are you eyeing more potential partnerships?
Our two main competitive advantages are that, firstly, we’re the only company so far to reap the local benefits and premiums and, secondly, our offshore experience was more than 5 years by the time Russia enforced the latest amendments in the law ‘On subsoil’.
What is most important for us is to get an operator with the technological experience of a customer, and not just a contractor. The best option is an oil company, because oil companies have a lot of influence on their contractors. Normally, each large oil company has a few long-term contractors. This strategy allows it have better prices because the service companies, unlike oil companies, have not lowered their prices during the crisis. What is interesting about partnering with an oil company is that it’s a business partner combined with a partner in drilling, who has the geologists and can design future production. Now is the time for sharing risks, because the first well would pose even more questions than we had before it was drilled. As far as Chernomorneftegaz is concerned, we can offer a ready-made examination of the territory according to the Western industrial standards. Our choice of Schlumberger has paid off. At the end of the day, big potential partners are comforted to see that a western service company has worked on the assets.
As you told us in the beginning, the company was founded to hedge the risks in metal industry. What would you say to prove that Chernomorneftegaz is a serious company with serious future?
According to the structure of its capital, Chernomorneftegaz is an international company headquartered in Europe, and the Group constructs its tactics according to the practices of the market in Europe. But we’re Russian in spirit and will be happy to invite the best service companies to partner with us, as we simply cannot allow an environmental catastrophe. Business requires a serious approach. The predictions for our fields are coming true: the current stage shows a treasure chest in the exact place where it was expected to be.
Your final message to the readers of OGFJ and your hopes for the future of the company?
Russia has a unique oil and gas bearing potential and needs its own oil fleet. There are good human resources in the offshore industry, but a lot will depend on the price oil and gas. Mr. Lisin is encouraged by the Government of Russia for the efforts to develop the shelf. Black sea drilling would be a very good experience for the Russian oil school. Black Sea oil will be the cheapest and closest oil to the market. The question is when to untap it – at the beginning or at the end.
| Company: | Chernomorneftegaz |
| Country: | Russian Federation |