№ 4 (April 2007)
In recent years, Rosneft has demonstrated steady production increases. Will this tradition continue in 2007? Sergei Kudryashov, the company's first vice president, describes how he sees this year ahead in the following interview reprinted in OGE's bilingual format from the original appearing in the quarterly corporate publication, Rosneft Magazine, (Issue #1 (4), January-March 2007).
By Rosneft Magazine
Rosneft Magazine: Mr. Kudryahsov, what production level has the company set for itself this year?
Sergei Kudryashov: Well, we managed to produce over 80 mln tons of oil last year, so we're setting the bar even higher for 2007 and are going for 90 mln tons. I think the figures speak for themselves.
RM: These are the plans for the company as a whole. Which producing subsidiary will account for the bulk of the production, and what will be the main drivers of growth?
Kudryashov: Yuganskneftegaz and Purneftegaz are the company's biggest 
producing subsidiaries. Yuganskneftegaz alone should break through the 60 mln ton barrier this year, while Purneftegaz is expected to produce 10 mln tons. As far as growth drivers are concerned, we intend to sharply increase the amount of drilling, especially at these two companies, and make greater use of new technologies, including hydraulic fracturing at Yuganskneftegaz and horizontal drilling at Purneftegaz. So we're not just increasing the number of wells, but also the technological sophistication of our drilling and management at these wells. As a result, we are also demanding much more from our geological service, especially with regard to flood management at Yuganskneftegaz, which requires very advanced technologies.
RM: What are the main tasks at the other producing subsidiaries this year, for example Severnaya Neft and Sakhalinmorneftegaz?
Kudryashov: These companies have to maintain the kind of production levels that they have reached in previous years, although I would stress that their output figures are already high. Achieving this will to a large extent depend on our production efficiency. Another crucial task is to reduce costs. And here I'd like to mention the second main thrust of our plans, which is no less important right now than increasing production. We have to increase efficiency of all our operations and maintain our position as the leader in the oil sector according to such indicators as cost reduction and effective capital investment. Whenever we meet investors, we always emphasize three main goals when it comes to increasing production: rapid growth, long-term growth and cost-effective growth. In other words - faster, longer, cheaper.
RM: That almost sounds like an Olympic slogan. Let's take a closer look at how that will work out in practice. Where do you expect the fast, long-term and cheap growth to come from this year?
Kudryashov: From achieving the right but delicate balance between three crucial drivers of growth, namely resources, technology and the "human factor" - people, in other words. And it's these three components that we are trying to improve and develop.
RM: You mentioned the "human factor." What exactly does that mean?
Kudryashov: The human factor means first and foremost training and preparing people for new projects. We now have to begin training people for Vankor, for instance. In addition, many projects are now in the exploratory stage, so the demand for people is constantly growing. And we need quality as well as quantity because our staff has to master the latest software products and state-of-the-art technologies, as well as apply the current knowledge to current conditions. And, of course, people also have to be able to work in a team. There are a lot of factors that have to be taken into consideration.
RM: So where do you find the people for new projects, how do you select them? Do you try to attract well-qualified experts from other companies or train existing staff for new tasks?
Kudryashov: It depends on the task at hand and the level of expertise required. If we need someone to give us a certain advantage or breakthrough, someone who has the knowledge the company requires today, we obviously try to bring in that person. But if it's a question of knowledge and expertise in this or that particular field and we already have that competence within the company, then as a rule we rely on our own human resources.
RM: Does the company suffer from a shortage of well-qualified experts and staff?
Kudryashov: Absolutely, but this doesn't just apply to our company. Take the period when an expert is usually at his peak, let's say between the age of 30 and 40. He or she has already acquired the necessary knowledge and experience, but at the same time remains full of energy and still hasn't lost any ambition or drive. Unfortunately, it is precisely this age group where we feel the most acute shortage right now. And there are very specific reasons for that shortage. First of all, there is a demographic problem with this age group because it is obviously still affected by the low birth rate 30-40 years ago. Secondly, these people graduated at the end of the 1980s or the early 1990s, when the whole structure of Soviet and Russian society was changing. That was a time when many young specialists went into commerce and business rather than working in fields related to their education. These two facts of Russian history are now playing out on the labor market. The "brain drain" was less of a problem, but it also played a role. As a result, it is very difficult to find a good middle-aged expert nowadays. But it's also worth noting that oil companies all around the world are "getting old" and facing the same kinds of problems in finding well-qualified people.
RM: Let's return to technology, one of the three drivers of growth that you mentioned. What proportion of the increase in production is due to technology? And is that because of new drilling methods, new software products or what? It's obviously hard to put this down in exact figures, but maybe you could give us a rough idea.
Kudryashov: Over the last two years or so we have left behind the old stone-age methods and have drilled virtually all our wells using some technological innovation or other. Take Yuganskneftegaz, for example, where we are using hydraulic fracturing. But here again, it isn't just any old hydraulic fracturing. Virtually nobody else in Russia is doing the kind of fracturing we are. To give another example, we switched to horizontal wells at Purneftegaz last year. Before that, average well-flow was less than 30 tonnes, but in 2006 we reached 125 tonnes. And this is the result we achieved after just one year. Here, the drilling teams put in a lot of effort at the start, and then the geologists also did all they could, because it usually depends on their decision how we lay the borehole not only along the clay, but along the collector basin as well. But this is the return we get from the technology. Let me give you another example. On Sakhalin we recently drilled a unique well that was 6 km from the coast. In a layer 10 m thick, we drilled a length of 500 m. As a result, we got a well-flow of over 500 tons, a result largely made possible by the experts at Sakhalinmorneftegaz.
RM: Not one major oil company in the world can do without the work provided by service firms. Which parts of the work does the company do itself, and which parts does it subcontract?
Kudryashov: We are positioning ourselves to manage the strata and the surface infrastructure. This is our core competence, which defines the integrity of the company and its value. We can't delegate that to anyone else. But some technical tasks are better left to service companies.
RM: Up to now we've just been talking about Siberia and Russia's Far East. But what about the Krasnodar and Stavropol Territories? How is the company able to maintain such high production levels in these old oil and gas regions?
Kudryashov: Let's look at the numbers from the previous reports. We can start with Krasnodarneftegaz, which last year produced 4,194 tons a day. Now, its output has risen to 4,549 tons, a significant increase of around 10 percent. Stavropolneftegaz now produces 3,281 tons a day, but last year it was just 2,793 tons. That's an increase of over 17 percent.
RM: Have any new reserves been discovered?
Kudryashov: As far as Stavropol is concerned, we are mostly talking about the exploitation of old oilfields using completely different technologies. For example, we've started applying hydraulic fracturing, which was never used there before. It's also a question of better quality pumps, which allow us to reach a large depression. And it's also about coping with sediments. In other words, we are carrying out highly methodical work there. And it's worth adding that in the previous two years, Stavropolneftegaz lowered its costs in comparison to 2004. With regard to the Krasnodar Territory, I would also single out our successful geological exploration. In addition, Krasnodarneftegaz drilled a series of new wells.
RM: And is it really still possible to find oil in the Kuban regions?
Kudryashov: There are oilfields nearer to the shelf.
RM: That brings us to the next question concerning the same topic and geographical area. What is the current stage of development at the new projects in Southern Russia and on the continental shelves of the Black Sea and the Sea of Azov?
Kudryashov: We've only just started working there, and had to begin virtually from scratch. Now, we're drilling the first well in the Sea of Azov. As far as our work in the Black Sea is concerned, we are negotiating with our partners and looking for ways to speed up the project.
RM: How significant do you think the reserves could be in this area?
Kudryashov: It's still too early to talk about reserves at this stage, only about resources. But we estimate the total resources on the continental shelf of the Black Sea to be over 500 mln tons of oil.
RM: The environmental requirements will probably be much stricter concerning the commercial development of these oilfields since they are located near many of Russia's main resorts. How much does that concern the company?
Kudryashov: It concerns us all a great deal, although technologies already exist today that can exploit oilfields in similar places very delicately. But the legal and environmental requirements will undoubtedly be tightened even further in the future, and we are ready for that. On the other hand, we have never done this kind of work before, so we will be studying foreign experience very closely to learn as much as we can. We will also be weighing every decision again and again before we make any move.
RM: Are there any similar examples anywhere in the world where a major resort is right next to an oilfield? Is there any experience to fall on?
Kudryashov: Of course. Take the Gulf of Mexico, for instance, which is just one big vacation spot.
RM: Let's take another look at the North. In 2008, Rosneft plans to begin commercial development at the Vankor oilfield, which is unique in terms of its complexity and its reserves. How has the development stage proceeded so far?
Kudryashov: For a start, we are continuing with geological exploration. We still haven't discovered all the reserves at Vankor. Secondly, planning is proceeding on the surface installations and infrastructure, but the main work still lies ahead. Thirdly, we are still drilling wells. In addition, we are finishing work on several other parts of the project, such as ordering equipment for the long-term cycle and are looking for sub-contractors. First of all, we will begin operating the project's so-called start-up cycle, and from there, we will proceed smoothly, step by step, to the main cycle.
RM: Last year, Rosneft acquired a whole series of new assets, including the promising licensed blocks. What plans does the company have for the development of these blocks?
Kudryashov: We have only acquired resources so far, and even if things go superbly, oil production there will only begin in ten years' time at the earliest. This is very methodical work for the future, so the company is already creating a geological exploration unit which will take on that work. We decided to set up this separate unit because Rosneft now has so many assets in the exploration stage that we thought this division of labor would avoid having to bring in people for exploration work when they were already engaged in current output. This way, we can avoid any disruption to the production process.
RM: Are any of the new acquisitions especially promising?
Kudryashov: Let's just say we think so.
RM: What can you tell us about the projects where the company is taking part? What important milestones can we expect to reach this year, especially on Sakhalin?
Kudryashov: Rosneft has a 20 percent stake in the Sakhalin-1 project, which reached its target production level this year, and we plan on producing more than 10 mln tons of oil. We are also continuing our collaboration with BP on other joint projects, Sakhalin-4 and Sakhalin-5, where we are now drilling two exploratory wells, which I very much hope will be successful. As far as the West Kamchatka shelf is concerned, we are working there together with the Korean National Oil Company and are preparing the structures for drilling. That is the main news regarding these projects at the moment.
RM: If we are discussing the company's plans, we can hardly avoid talking about gas...
Kudryashov: Perhaps, but gas is not central to our work at the moment. At the end of the day we are, after all, an oil company. Nevertheless, we do have certain gas resources and certainly intend to manage them appropriately, whether that means selling the gas or using it to generate electricity. We have made good progress in our negotiations with Gazprom regarding access to the Urengoi - Chelyabinsk gas pipeline to transport gas from the fields at Purneftegaz, whose gas reserves exceed one trillion cubic metres. Another issue is utilizing the gas at the Priobskoye field, which we will resolve in 2008. At Vankor, we plan to install a gas compressor station very soon, which will allow us to achieve full utilization of the gas, support the layer pressure and increase the oil recovery factor.
RM: Are there any areas now being explored or already in production where you would like to achieve a real breakthrough or bring things up to a new level?
Kudryashov: The main task this year is probably managing knowledge - ensuring that the flow of knowledge is smooth and uniform. In this regard, a lot depends on Rosneft's Corporate Scientific and Technical Center, which deals with a whole series of applied problems and tasks, ranging from planning to actually developing fields, coordinating the work of the company's research institutes, helping to implement new technologies and training and preparing specialists.
If we are talking about technology, we still have an awful lot to do in areas such as flood management. We are still a long way off the maximum numbers, but to reach them, we need to achieve a completely new level in our understating of the strata. I wouldn't want to say that we are behind other companies as far as that's concerned. In fact I think we are probably significantly ahead. But we've got to go forward, and keep going forward all the time.
Rosneft First Vice President Sergei Kudryashov
Sergei Kudryashov was born in 1967. 
Graduated from the Kyibyshevsk Polytechnic Institute in 1991 with a major in the Development and Operation of Oil and Gas Fields.
He received an Executive MBA (EMBA) from the Stockholm School of Economics in 2006.
He has been working in the oil industry since 1991.
From 1998 - first deputy managing director at the Nizhnevartovskneft oil company.
From 2001 - head of the Oil and Gas Production Department Strezhevoineft at Tomskneft.
2003-2005 - managing director of Yuganskneftegaz and vice president of YUKOS.
From February 2005 - first vice president of Rosneft.
He is responsible for Rosneft's production sector.
