Repsol bets on Russia’s upstreamAugust 20, 2019
Angelina Pershukova, director of the Moscow branch of Repsol Exploración, talks to TOGY about the company’s activities and strategy in Russia and potential benefits from the government’s reassessment of the oil and gas tax scheme. Repsol holds mineral rights for 11 exploration blocks and 21 production blocks in Russia.
What are Repsol’s key recent activities in Russia?
Repsol has recently made a major shift regarding Russia. Our portfolio in the country was mainly focused on production assets and the pure exploration part was missing after the discovery we made in the Karabashsky licence blocks. Over the past 24 months, we have been working very hard on new exploration projects. We are very happy with our work and partnership with Gazprom Neft.
At the St. Petersburg Forum in June 2019, we signed a memorandum of understanding with Gazprom Neft and Shell to establish a joint venture to explore the Leskinsky and Pukhutsyayakhsky licence blocks in the Gydan Peninsula.
How would you assess the importance of the Karabashsky exploration zone in Repsol’s development strategy in Russia?
Karabashsky is our mid-term producing project. For the moment, it is at the appraisal stage as we are facing some challenges from a technical point of view. New projects today are not as easy as they were 20 years ago. We are still concentrated on the appraisal and trying to see which technologies can help us to develop the asset in the best way.
In the mid-term, we also are looking forward to seeing the results of exploration activity in the surrounding blocks to ensure that we have an economy of scale and so that the project can grow.
Can you share the main characteristics of the blocks that you are managing in this area?
The Ervie field (formerly the Ourinskoye field) was discovered six years ago and it is one of the biggest fields discovered during recent years in the West Siberian Basin. The biggest challenge we face is that the discovery is on the flank of the basin and thus, the productivity per well decreases. The first approach was to drill vertical wells, and the results obtained were not commercially viable. Then we started drilling horizontal wells and testing different lengths of these wells. Now we are working on the different types of completion of the wells to ensure that we can find the appropriate development scheme. That is where we are.
What is the potential in terms of recovery?
Everything will depend on the development scheme we end up with. An additional challenge we have with this asset is that it is located in Western Siberia, in an area that does not qualify for any of the tax incentives that are widely used in Russia. There are different tax incentives for different geographical regions, which have some specific aspects in terms of technical characteristics of the reservoir. Our case is unique and it is not covered by the current tax code. We are currently following the government’s initiative for the revision of the whole tax system for oil companies.
How important for exploration activities in Russia is this assessment of the current oil and gas tax system?
Historically the tax and royalty regime has been applicable to the fields that were developed in the Soviet era and did not require big investments in development and infrastructure
With the development of new fields in Russia, the government started to introduce tax incentives because companies would need to invest and to be able to pay off such investments.
First, tax incentives were implemented for specific geographical areas, which was the most obvious criterion, as companies were moving into new areas to find new reserves. Then, some projects were so capital intensive that this mineral extraction tax incentive was complemented with export duties. Also, tax incentives for technically challenging, small and marginal fields were introduced. This process of permanent introduction of changes to the tax code has become the norm in the industry, which resulted in a very complex tax system and apparently it has reached a saturation point.
There is a clear need for a universal system. The current system is characterised by the fact that production is taxed based on quantity of extracted oil. But the barrels have different risks and cost factors. And it is challenging to ensure profitability of projects under different development scenarios.
How is this assessment being conducted?
There is a long process to find a mechanism to control the cost of production with a proper benchmark. Digital solutions can be used to assess this and create a database that could not have been created 10 years ago. Consulting companies can help to develop an economic model in which you can input the technical details and get results according to different fiscal scenarios.
Recently, a new tax system of an added income tax concept was approved in Russia. There are several groups of fields that can qualify for this system. For one of them, there are 15-20 fields in the pilot project that are representing different companies in Russia. The results of this pilot project still need to be seen to define whether the companies have been able to increase production, reduce costs and give some additional value to the project and the country, while maintaining tax payments to the government.
What is your prediction for the outcome of this assessment?
There are different stakeholders with different views who are involved in the discussion and assessment. We hope that in the end the balance will be found and the results of this assessment will positively impact our and other projects in Russia.
How have Western sanctions impacted the development of Repsol in Russia?
Sanctions are the new reality that we have been living for several years already. Our projects are onshore and conventional, so they have not been directly affected by sanctions, but some indirect activities can experience some additional compliance analyses, such as the use of dual equipment, for instance. However, as long as you are working within the framework of what is allowed, there are no problems.
On the other hand, it has given a push to Russian companies to develop their own technologies. It also creates a window of opportunity for foreign investors who want to develop business in Russia.
What is Repsol’s strategy regarding the LNG market?
On the LNG side, we are pursuing a different set of opportunities. Spain is the only European market that does not receive Russian gas by pipeline. In other European markets, the presence of Russian LNG creates competition for Russian piped gas. So Russian LNG is a good way for Spain to diversify its supply and for Russia, Spain is a new market. These are the fundamental reasons that led to the deal we signed with Novatek in April 2019, for the annual supply of 1 million tonnes of LNG from Arctic LNG 2 to the Iberian Peninsula under a 15-year contract.