Mikhail Ivanov , Volga Gas
Release Date: 2010-09-08
Mikhail Ivanov, General Director of Volga Gas, was interviewed by RussiaEnergy.com for a Russia Special report in Oil and Gas Financial Journal to discuss the general situation for junior companies operating in Russia today, the advantages of acquiring assets in Russia and the company's expectations for 2010.The large national oil and gas companies here in Russia seem to dominate the market. A lot of people argue that there is not a huge amount of room for smaller companies. What do you think about that?
My understanding is that the market is always segmented, and so there is enough space for everyone. The Russian oil and gas market is sizeable, with gas reserves comprising a third of world reserves, so clearly there is enough room for exploration and service companies to operate in this environment. Volga Gas considers its niche to be below the size of strategic reserves: we don’t want to grow as big as LUKOIL, for example. Staying below 70 million tonnes of oil will provide us with enough to operate and generate profit.
What’s the general situation for junior companies operating in Russia today?
It’s pretty difficult: if you are in the oil and gas business and have a big field, then you can built a better, more effective business. If you are small, then there are disadvantages: it’s not easy to have a good government relationship, because you are not as big, so you cannot open the door easily. This means that if you have problems you can expect less help. At the same time, you don’t have large overheads, and in small companies, people tend to work hard, and as an owner you don’t need to pay all the way to the top. Small companies can also take decisions quickly, unlike companies such as Gazprom, which makes them more effective in terms of decision-making. If there are changes in the market, then juniors can adapt to them much faster.
Why do you think there are so few junior companies operating in Russia compared to countries like Canada or the US?
Primarily because of the different tax systems. There are discussions currently ongoing in order to push for small, independent oil and gas producers to get access to tax benefits. Recently, a letter was sent to Deputy Prime Minister Sechin by major companies such as Tatneft and Surgutneftegaz, asking to assign some incentives to fields that have less than ten million tonnes of recoverable reserves. A lot of small fields are not being developed because they are not economical under the current tax system, but if the government were to reduce the unified natural resource tax, then it becomes more beneficial to develop these fields, which will need to an increasing number of small independent producers operating on these fields, which will consequently increase Russia’s GDP. There will be more oil produced, because more fields will be developed, which today are mothballed.
Clearly, incentivizing these fields will give some benefit to the country, but there are concerns that it will mean that less tax revenues. This is a complicated issue to be discussed and reviewed, as there are so many parameters they have to take into consideration.
Volga gas has only been operating for a short period of time. What where the advantages of acquiring assets here in Russia when the company was founded?
Firstly, Volga Gas was created by the Baring Vostok fund, where I was the partner responsible for oil and gas operations. Baring Vostok is focused on Russia and the CIS only, which meant that the choice of location was immediately narrowed. Secondly, The founders of Volga Gas have a full understanding of how the system works in Russia: half of the partners in Baring Vostok are Russians, which makes it easier to operate in this environment and understand how business is done here, which gives us an advantage over others.
In Volga Gas, we try to stay very focused. I have a lot of operational experience, so I understand that if you develop assets, you have to develop them efficiently. If you have assets spread over different countries, it’s not efficient, especially for small companies. Geographically, assets should be located closely to one another. We operate with one office, a group of 40 people and operate four licenses. It’s very effective: Volga’s operating cost per barrel is less than $1 USD.
You launched your IPO on the London Stock Exchange in 2007. What was the reaction to on the Stock Exchange to a Russian company? Sometimes it seems as if the risk of Russia as a country overshadows the value of the assets, even in the oil and gas industry.
At the time of IPO, the market was booming. There was a hunger for oil and gas assets, because prices were going up. There are limited reserves and assets in the world, and people wanted to participate and hedge their risk in the future of dependence on oil and gas reserves. Although at the time, investors were a little wary of Russia, and the country’s business practices, which had an effect on Volga Gas’s share price, it was still a successful IPO: we raised enough money to continue our programme, raising $135 million USD.
Since that time, the financial situation has obviously been quite tricky. How did it affect the company, and how is the situation today?
The financial crisis affected us strongly. At the same time, we are different from many other listed companies as we have a majority shareholder, Baring Vostok, who is fully supportive, and has an interest in supporting the company in the years to come. All the founders of Volga Gas come from entrepreneurial backgrounds and we know all the worst-case scenarios which makes us a financially cautious company.
We started to generate cash flow by ourselves just two years after creating the company, which was a unique position. We discovered the field in 2007 and put it into production, and started generating a sizeable cash flow from it this year. That distinguishes us from other small oil companies, who, if they are publically listed, are trying to get money to build up reserves and eventually sell to somebody else. If they cannot do this in a short period of time, they are placed in a very bad situation, because they expect to sell the company next year, so only have enough money to survive for that period of time. Volga Gas would be happy to be acquired, which is the eventual aim of all junior companies, but we are not in a desperate rush to do this, as we are financially sound. The company is today in the process of raising more capital in order to launch more exploration. We have very sizeable targets, and are drilling in order to take advantage of a sizeable resource base of around 500 million boe.
What would you point to as some of the operational highlights of 2009, and what are your expectations for 2010?
This year was very busy for us. First of all we were developing our oil field. We completed development of the field, and now drilling has commenced, and the infrastructure is fully built. I call it our cash calf: small, but nice to have. We still expect a few legs, so there will be a small exploration programme next year. Hopefully some of them will be successful, and we will generate a few more cash calves that will create good cash flow.
Obviously you have the financial team, but must also have a very good science base in order to reach your levels of production after only two years.
Absolutely. We have an excellent team of professionals, both operational and geological, who have been instrumental in firstly finding this field, and later developing it. The head of that team is Vyacheslav Lepilin, who was a geologist at LUKOIL, and came to us with the idea of developing these sub-salt fields, and this is how the company started. Volga Gas bought a field from LUKOIL. He had good intuition about the location of the wells, and now we are drilling this deep well based upon his expertise. He knows this region by heart, and has 35 years spent in the region as a geologist.
Does Volga Gas intend to keep its operations in the region in the years to come?
Yes: the company bought its first license from LUKOIL in 2006, and acquired three more licenses in the same area, following the strategy of acquiring assets in the region. The area has a well-developed infrastructure, a Gazprom pipeline, and two cities with populations of one million, which have demands for hydrocarbons. It’s also an agricultural area where fuel diesel is needed. Clearly, it’s a nice place to be with oil and gas assets.
You’ve mentioned your aspiration to grow the company to 70 million tonnes production, and you’ve also said it’s the aim of every small company to be acquired by a larger company. What is your vision for the future of Volga Gas?
Ideally, it is to continue developing organically. We would potentially consider some acquisitions, but we have enough assets to develop right now, so organic growth is primarily the target. At the same time, we are open for any acquisitions, because the company was created for the benefit of the shareholders: the idea is to generate some cash for our shareholders, and the best for them would be probably to make an exit in the next few years at a good return for them.
Which sort of partners would be interested in such assets in Russia? Are Russian companies interested in the area of the country where you have your fields?
That depends on the outcome of our exploration activity. There is interest, because it is a nice field with good production, and it’s not a bad field to have in the portfolio. Now we are talking about 500 million barrels, so it could be good reserves not only for the book, but also for cash flow generation, for anybody who acquires us, because the infrastructure is developed, and the fields are ready to produce almost immediately. We have already showed how easy it was to start production in under a year. Now, the question is whether we have oil or gas in this deep well. We are talking about 500 million boe. If it’s gas, it could be very interesting for Gazprom. Their pipeline in the region transports Turkmenistan gas, so now if Turkmenistan will have this Chinese pipeline, Gazprom has to find somewhere to replace this gas. Our deep well, if it contains gas, has the potential to do this.
What is your final message for the readers of Oil & Gas Financial Journal?
Russia is not a place that you should be scared of. Business is done in different parts of the world, and there are different risks to be calculated into evaluations of potential investment. Nevertheless, it’s not prohibitive to invest in places like Russia. There are people here who have experience, and can really deliver value to shareholders and give a good return, even after factoring in the risks associated with doing business here.
| Company: | Volga Gas |
| Position: | Chief Executive Officer |
| Country: | Russian Federation |