Simon Durkin , Salym Petroleum Development
Release Date: 2010-08-12
Simon Durkin, CEO of Salym Petroleum Development, has been interviewed by Russiaenergy.com for a Russia Special report for Oil and Gas Financial Journal to discuss the history of Salym Petroleum Development in Russia, the main developments introduced by the company and its competitive edges in Russia.Could you make a brief introduction into Salym Petroleum Development and its operations?
Salym Petroleum Development (SPD) was set up in as a Joint Venture (JV) in 1996 on a parity basis by Shell, the world leading oil and gas company, and Evikhon, a subsidiary of Sibir Energy, a Russian enterprise involved in exploration & production, oil refining and oil trading. From 1996 to 2003, Salym Petroleum was mainly involved in discussions regarding the fiscal terms and tax regimes which also happened to coincide with low oil prices. In 2003, with the higher oil prices and significant pressure from the government, came the true launch of Salym Petroleum Development (SPD), when the company actually started to come together. To give you an idea of how much we’ve grown, back in 2003 there were 15 employees, whereas nowadays we have around 850 employees. 96% of them are Russian employed directly here for the JV, and the remaining 4% are essentially the shareholder employees, largely Shell Secondees, and a few Gazprom Secondees.
Currently we are operating 3 fields in the Salym area: West Salym, Upper Salym and Vadelyp located in Khanty-Mansiysk Autonomous Okrug (KhMAO). About 90% of the reserves are in West Salym; total reserves are about 900 million to 1 billion barrels.
The first development well was spudded in 2004; by 2006 we were a mid-sized company producing 1 million tons a year. By 2007, SPD was producing 70,000 bpd and reached 160,000 bpd in 2008 that turned into 170,000 bdp at the moment. As you see, considerable growth came in the past 3 years. The rapid growth was very dynamic for the Russian oil industry in particular, primarily because it was done very safely. We approached setting ourselves up in Russia with the primary aim of marrying the best of Russia with the best of international. We wanted to be very pragmatic about taking the best of both sides and we needed to do so quickly and, above all, economically. This idea of “Russia Plus” is the theme running behind the whole company.
Obviously, we wanted to run to international HSE standards and I think we have succeeded in doing that. If we take drilling technologies, we have worked with both Deutag and SSK to upgrade the Russian rigs and installed the key bits of international equipment into the rigs and the international ways of managing the rigs in the areas where we thought we could make a difference. We manage our rigs in a very hands-on way instead of the traditional Russian contracting system. Therefore, we manage the rigs ourselves alongside the local contractor. The advantage of this system is that the contractor - in this case SSK - is working together with our managerial capability and experience to achieve the best results.
When we first started, it was normally taking 35 days to drill a well. By now we have completed 500 wells, and the average is just over 10 days, and our record well – which is a record for Siberia – is 4.5 days. This is a great achievement in terms of utilizing the technology. One of our innovations at Salym Petroleum is the factory concept: the wells are drilled from cluster pads so that there is an ongoing cycle of wells being drilled, completed and tied in, just like a factory. This technology has gained international and Russian recognition.
What are the main assets that each of these partners – Shell and Sibir – have brought to the table in order to make Salym Petroleum so successful?
Of course, the Sibir partnership has been through a lot of change recently. But at the beginning they brought the assets, initially owned by Evikhon, they brought investment, and they brought the key Russian relationships, so that SPD could utilize their contacts to establish ourselves here. Shell brought the technology and the management systems to set up the venture. But there is a third party in this which we shouldn’t forget which is the Russian contractors. I think that one thing that distinguishes SPD is that we have from the outset worked to established partnership with our contractors; it is quite common in the Siberian oil industry to let one year contracts, whereas we only let long-term contracts, and our intention is to work with our key contractors to develop their capabilities with ours. For example, with our Russian logging contract, we worked with Schlumberger, but we also brought on board a Russian logging contractor bringing this Russian player to the standards of Schlumberger to create direct competition. We have done the same thing with SSK and Deutag. Essentially, what we did was to find a Russian contractor, partner with them and create a win-win situation to bring them on board so that they can sometimes have a chance to even outperform the international contractor who we have also brought in as a benchmark.
We have heard from many of our interviewees that Russia presents many challenges, in terms of IP, legal framework; you have said that from 1996-2003 the project was somehow on standby, only to develop quickly after that, so what have been the main challenges in this regards then and now?
Quite frankly, I think that the IP issue is often overplayed in Russia. Yes, IP is an element, but what’s really important is how you integrate your technology into your business, it’s the application of technology. IP has a shelf life, and if you don’t use the technology, ultimately it disappears. Even without an IP constraint, the biggest constraint is how you integrate the technology into the business and how you apply it. Yes, there are IP issues, but on the ground it is really more about how you implement it. In fact, that is the true IP.
What we were doing from 1996 to 2003 was trying in essence to create more favorable fiscal conditions, and now the oil price has helped create these fiscal conditions. We have gone in under the standard Russian fiscal conditions and have made a profitable business out of it.
Looking forward, there are things we want to do, such as EOR (enhanced oil recovery) – we are the leading edge experimenting in this field, particularly in alkaline surfactant flooding. We believe we can make that work to the benefit of Salym and Western Siberia; Gazpromneft, our partner, also believes we can achieve that. The challenge comes, as you could never make this work under the current fiscal terms, so we now do run into this situation of how we go beyond where we are. The Siberian oil industry has been very successful, and the Russian government has done very well out of it and quite rightly, but if you want to take the next technological step, the fiscal regime has to relax, it has to be there to encourage you rather than to be a constraint against you.
Could you introduce the main developments since the beginning of SPD and, especially, during the last year?
We have drilled 500 wells – a mixture of water injectors and oil producers – as well as in-field infrastructure flow lines delivering to a central processing facility on top of West Salym. We have just commissioned a facility that is currently producing 170,000 barrels of crude and it’s also designed for the water cut. Besides, the 45 MW that we currently generate are soon to be 60 MW - with our 4th turbine coming in this summer.
As for gas flaring, we flare about 60% of the gas and utilize 40% of the gas at our plant. We have made a very clever and successful arrangement to address the issue of gas flaring in partnership between Russneft (for pipeline construction), Monolit (for production of an LPG extraction plant) and SPD. The ultimate aim is to export rich gas to the LPG plant and receive back dry gas that SPD and Russneft will use in our power plant. That enables us to balance gas demands between Russneft and SPD because our gas demands are complimentary. This is a lovely example of how you can do business in Russia because you can bring together three parties to help each other. We help Monolit become an LPG producer and help Russneft in gas solution and long-term gas supplies. The outcome of this partnership will mean that by Q1 2011 we will be utilizing 95% of the associated gas and put the flares out, which will be 9 months ahead of the government legislative requirement.
What is the edge that Salym Petroleum brings – how do you frame yourself as partner of choice both for Russian and International companies?
I like to refer to SPD as “an incubator of technology”. SPD is a relatively small company, therefore we can do things and try things that others can’t, and we can do them quickly. Be it with Smart Fields technology, or the EOR work that we are doing, or drilling the limit. If they don’t work, we move on. But what that gives the industry is a technological incubator in the middle of Siberia; and the partnerships that we work with like that.
For instance, when we came to Russia, we were looking for drill bits. We found a Russian company that was producing very good drill bits that worked very well in this environment. We worked with Burentech to optimize their drill bits for our situation and improved the penetration rate by another 20% working with them. We then helped them to go international: they now sell drill bits to Shell in the Middle East. We found a local logging company that would log our wells with 4 separate logging runs taking 16 hours to do that. Working with them, we developed a combo-logging tool, and now they log our wells in 4-5 hours for each run in such an efficient way that they are directly competing with Schlumberger, and, moreover, we introduced them to Gazpromneft. They are now using this combo technique all around Siberia. To our advantage, we have created competition, and, to their advantage, we have helped them develop their technology.
Another example is our approach on safety. In general, safety is a huge challenge in the Russian environment where you try to set a standard as a small company that is significantly different from the environment around you. We worked the safety standards with our contractors in Russia and managed to raise their HEC standards so that the whole approach on safety can be utilized across their other operations. It is more than a partnership as it’s a multiple sets of partnership. The whole approach is to see how you can use it to the benefit of all parties.
How do you keep growing the activities in other regions in Russia?
With regards to the areas where we add value to Salym, which is our prime focus, the first case is the Smart Fields Technology implemented across the whole of Salym and we have some reasons to suspect that we’re the first company worldwide in this area. What we found with smart fields is that we can maximize and optimize well-by-well basis making each of the 500 wells controllable and measurable. On the ESP, we utilize this technology to maximize the production. In terms of product planning automation, you used to download all the available info on well production and use the models to forecast. Now that every well has a program, we can automate the production planning program. It also gives all sorts of spin-off benefits. As oil drops, the operation cost goes up and productivity goes down. Automation allows preventing it.
In the sphere of IT, we also found that we used to be highly inefficient in terms of using information. For instance, a reservoir engineer spends a couple of months quality checking the information. What we create now is an information arch where we move to 100% accumulated information held in one place where every company pulls the information. We’re pushing the boundaries today because in 10 years’ time the complexity will go up and we want to spare the operation costs.
Lastly, I have to mention the alkaline effects and flooding. After we accomplished a sets of well tests last year, we reduced the residual oil from about 25% to about 2%. Essentially, it indicates a significant prize out there. The residual oil is left after water had flooded reservoir. Alkaline effects and flooding is where we pull in the flood after water and sweep out the remaining oil and, as the tests show, it can be extremely efficient. If it works, we’ll look at it across the major area of West Salym removing the residual oil and increasing the oil reserves.
Summing up, what are the main ambitions and expectations for SPD’s activities in 3-5 years in Russia?
SPD is particular for having very good people in the company, and one of the things we have done in SPD is behind this success. Moreover, as an opinion poll has shown, almost 100% of the employees said they liked the values of the company. Besides, SPD has a completely open communication driven by honesty and respect for people. Regardless of who you are, you will be heard and taken seriously. It means that we have become quick to manage issues and grab the opportunities. It motivates people.
Firstly, SPD has a very clear roadmap that defines everybody in the company and defines the strategy and the priorities of the company. The first is to keep people safe and protect the environment. Beyond that, the next point is to maximize the production and ensure short-term and long-term recovery because, ultimately, one of SPD’s competitive edges is delivering the highest recovery factor as compared to any other company in Siberia.
The second thing to do it in a most cost-efficient and effective way is to be a company that applies efficiency in all what it does.
The third thing – given maximized recovery and minimized costs – is to extend the future of the company and be the best operator and meet the ecological challenge. Hopefully, it will enable us to develop new opportunities. That only comes when you can maximize what you have today in a most efficient manner. A new opportunity is a consequence of what you have achieved.
The fourth key area for SPD is to be seen as a social partner both because it fits with our corporate values and because the local community surrounding us shares it. We have entered in a contract with the regional government and Salym village for social development in terms of education (upgrade of the local schools, University grants, infrastructure and training), medicine (we intervene where we think we can make a difference through the local hospitals and providing equipment) and environment (safeguarding the local fauna).
Those priorities are underpinned by a very unique culture in a Russian company that we all value. We believe that if the information is not flowing freely through the company, you lose innovation and spend a huge amount of time auditing and checking.
What would be your last message to the readers of Oil and Gas Financial Journal who might still be skeptical about their opportunities in Russia?
We build our work around partnerships extended in all the aspects of our operation, and it always starts with a partnership with our employees. They are considered part of the company rather than just employees: they suggest innovations and keep the company going in the right direction. So, it’s a partnership with the employees and also with the local community that shows how and why things are done in Russia in unique ways for unique reasons and together we can find different technologies and applications.
It is also a partnership with our two partners – Gazpromneft and Shell – who, although having different outlooks in some aspects, are united around a common goal by the spirit of partnership so that each gets the best out of both partners. So, developing partnerships and integrating these aspects together is ultimately what we do.
| Company: | Salym Petroleum Development |
| Position: | Chief Executive Officer |
| Country: | Russian Federation |