Stanislav Tsygankov, Director General of Severneftegazprom  answers questions posed by the Gazprom Magazine.

Mr. Tsygankov, Severneftegazprom celebrated its 10th anniversary in mid-June. What results have been achieved over these years?

Indeed, June 15 is a great day that marks rather tangible results of our company. Let me remind you that Severneftegazprom holds the exploration and development license for the Yuzhno-Russkoye oil, gas and condensate field located in the Yamal-Nenets Autonomous Okrug. It was defined as the main resource base for blue fuel supplies to Europe via the Nord Stream gas pipeline. Natural gas produced from the field will fully load the first string of Gazprom’s gas export trunkline. We promptly constructed the field’s infrastructure; in 2007 it was brought into operation ahead of schedule and in summer 2009 the nominal capacity of 25 billion cubic meters per year was achieved.

Number one energy resource

However, due to reasons beyond our control, the peak production level was reached only in 2010.

Do you mean restrictions on gas supply into the Unified Gas Supply System (UGSS) of Russia?

Yes, this is what I mean.

What was the reason behind it?

It was primarily driven by the impact made by the global financial and economic crisis on the international energy market and, accordingly, on our company. The rush on opportunities offered by alternative energy sources and non-conventional gas production also had its effect.

Has the situation in international gas markets changed by now?

I may state that the financial and economic crisis and its effects have been mostly overcome, although its negative results are still observed in some industries. This is, however, related to natural disasters rather than pure economics. For instance, the March earthquake in Japan and the subsequent tragedy with Fukushima 1 Nuclear Power Plant strongly affected the market not only due to the breakdown of some energy capacities, but rather due to the large-scale environmental collapse provoked by these events. As a result, many energy consumers changed their opinion of the nuclear power industry. And this involves other global systems as well. The public opinion is nowadays focused on environmental and energy safety issues that can be met using, first of all, conventional energy sources with natural gas as the top-priority.

This situation proves our words that we have been proclaiming for many years now: natural gas remains the most efficient, environmentally-friendly, clear both for producers and for consumers and, most importantly, the safest energy carrier. Its safety may be evaluated not only in terms of an individual business entity or a household, but rather on the global scale – by counties and state alliances such as the European Union. In this context, natural gas has been and will in the foreseeable future remain number one energy resource associated with stability, demand and development prospects for the global gas industry as a whole and our company in particular.

Why is there always a rush on alternative fuels in the European Union channeling substantial funds on their development despite financial challenges?

There is common sense as it relies on the economics that are impossible to outwit. And there is the policy that is often detached from real market demands, but willing to meet the interests of this or that country.

Policy and common sense

As a rule, such a policy serves factional interests, the desire to reinforce or weaken something, to offer or deny someone’s opportunities. As a result, the politicians’ deeds often conflict with economics and common sense. There is another crucial factor that has often been disregarded until recently and that is environment. The European community earmarks significant subsidies and allocates much money to promote and develop energy alternatives. This is absolutely reasonable from a political standpoint and, importantly, stimulates technology progress en total. However, one should account for a plenty of obstacles related to the economics and the environment. For instance, development of the nuclear power industry is impeded due to its capital-intensive nature, the need to treat spent fuel and significant environmental risks. Involvement of farmlands into biofuel production entails price elevation for crops and food. And, for example, massive transition to renewables – the wind, sun, geothermal sources, tides, etc. is hindered by the current level of technology advancement and, as a result, by a high prime cost of electricity based on these energy sources. In addition, there is also a high dependence on the weather and climatic conditions and some environmental aspects such as noise and vibrations are still poorly explored.

There are other obstacles. For instance, energy endowment and energy safety are crucial for any economy. Despite high rates of alternatives development, their share in the global energy consumption remains rather low. This means that fossil fuels will be given priority amid the backdrop of the growing energy demand. And natural gas is most promising among them today as it has the best combination of environmental, economic and technological features. Energy alternatives will be further developed, but they are unable to adequately compete with conventional energy sources or replace them in the nearest future. So far, the alternative sector can only serve as a supplement to the basic conventional types of fuel.

How would you comment on statements about great prospects of shale gas? Are they true?

Like many of my colleagues in Gazprom I do not hold to the extreme opinion on the prospects for non-conventional and, particularly, shale gas production. Production technologies for such fields imply a whole range of restrictions covering economic, legal, organizational, environmental and other spheres. Therefore, efficient development of non-conventional gas resources is only feasible in separate regions of the world. Each country has its specific features and technologies. What can be effective for the USA is not always effective for Europe. For instance, high population density and existing regulations on real estate, land and deposits ownership rule out large-scale development of shale gas in Europe.

At the same time, we think that development and adoption of new technologies and equipment in this sector as well as hydrocarbons development solutions and techniques can be really beneficial for the entire petroleum industry. This holds true for promotion of natural gas in the world as the most convenient, safest, economically and environmentally expedient energy carrier.

Speaking of your company’s business, what are the development plans of Severneftegazprom?

Last year we reached the projected performance indicator – the total output accounted for 25 billion cubic meters of gas. We are planning to retain this production level during the next 12 to 14 years. Nevertheless, we will go beyond this.

Turonian and underlying formations

By now, we have made three discoveries within our licensed block: the Yuzhno-Russkoye and Yarovoye oil, gas and condensate fields and the Zapadno-Chaselskoye gas and condensate field. The total recoverable ABC1+C2 reserves exceed 1 trillion cubic meters of natural gas as well as some 40 million tons of oil and gas condensate. Nearly 90 per cent of all reserves are accumulated in the Cenomanian and Turonian formations, the rest are in underlying formations that are poorly explored. We are now developing only the Cenomanian formations of the Yuzhno-Russkoye field. Later on, upon completion of follow-up exploration and relevant preparation work we will launch full-scale development of other formations.

When do you expect this to happen, at least approximately?

According to current estimates, this will not happen before 2020. Our near-term objective is to bring the first experimental multibranch well into pilot operation in order to tap the Turonian gas formations.

Why do you call it experimental?

We are starting the Turonian formations development which is novel for our company, for Gazprom and entire Russia. They represent hard-to-recover gas reserves lying at the depth of 810 to 840 meters beyond the Cenomanian deposit. They are featured by heterogeneity, variability of lithological composition and low permeability. Development of such formations is associated with one major complication – operation under low temperature that is close or below zero which results in gas hydrate formation during the production process. Development of the Turonian formations using vertical wells is economically unviable due to their low productivity. Until now these deposits remained untapped in Russia despite their abundance reaching at least several trillion cubic meters in Western Siberia alone. We think that our licensed block, for instance, contains no less than 300 billion cubic meters of Turonian reserves.

Therefore, in cooperation with TyumenNIIgiprogaz we created the design of pilot development of the Turonian formations. The unique well construction equipment was developed with the assistance of our researchers and produced by domestic enterprises – Korvet (Kurgan) and SibBurMash Scientific and Production Association (Tyumen). This year we have finished drilling of a two-branch sub-horizontal well with a ramified structure. The drilling was launched in late 2010. Contractors were represented by Gazprom bureniye (Russia) and Halliburton (USA). The well has passed some tests and first Turonian gas will be produced on May 12. Extra tests will be carried out and well infrastructure will be constructed before August. The well will be connected to the operating gas gathering network by the year end. The well output is projected to reach 197 thousand cubic meters per day.

Have you considered access to new licensed blocks?

We have neither addressed nor discussed this issue. We are considering operations within our current activity area.

Partners

Our company’s expansion is not limited by any regulatory documents. We have a vast experience, technical capacities and potential that can be engaged in new projects at any moment. Such decisions can only be taken by our shareholders comprised of Gazprom, Wintershall Holding and E.ON Ruhrgas E&P.

How efficient is the cooperation between Gazprom and foreign partners on the basis of your company? Is it the same as in the Shtokman project?

It is not quite correct to compare it with Shtokman as it is an offshore project and, therefore, it has different specifics, technologies and needs. We have a solid track record on offshore projects – I don’t think there is a deficiency of any technological solutions. We can share our expertise with foreign partners in this sphere.

As far as the Severneftegazprom output and operating results are concerned, they are divided among the shareholders in the following way: Gazprom – 40 per cent, Wintershall – 35 per cent, E.ON Ruhrgas – 25 per cent. All of produced gas is delivered into the Unified Gas Supply System and marketed to Gazprom within Russia.

The main idea behind the accession of foreign companies into Severneftegazprom shareholding structure is the purchase of promising assets by Gazprom. Let me remind you that the deal with German BASF enabled Gazprom to raise its stake from 35 to 50 per cent less one share in WINGAS joint venture focused on gas trading as well as to acquire 49 per cent in Wintershall’s gas producing company operating within two Libyan blocks. As a result of an asset swap deal with E.ON Ruhrgas, Gazprom consolidated 2.95 per cent of its own shares previously owned by the German company.

What challenges do you face?

We operate in Russia and all domestic challenges affect us as well. For instance, these are related to employment and training of personnel, particularly skilled workers and technicians. We don’t have any problems with the established pool of professionals. There is parity between young and experienced experts, we have a lot of talented and vigorous young people who have proven their skills in practice. Therefore, we continue our progress, set new and ambitious tasks and successfully meet them. The latest example is the success in project financing which resulted in the issue of a multi-currency loan totaling EUR 1.1 billion to Severneftegazprom by an international consortium of banks with Gazprombank among them. Another important aspect of the deal is unique experience. There have been very few examples of obtaining project financing from a consortium of foreign banks to a domestic company operating exclusively in Russia and receiving profit within the country.

Development milestones

I am convinced that the experience gained will be useful for our company and Gazprom and become a case study for shaping the Russian regulations on project financing being currently developed.

Being the company head, what challenges do you formulate for yourself?

Nowadays, our company is at the forefront of Gazprom’s business in many respects. I think that my almost decade-long experience in international business activity will be useful here in the matters of planning standards, budgeting, transparency and foreign relations, in a good sense. I am very grateful to Gazprom’s management for the opportunity of developing my skills in many ways, gaining expertise in many disciplines, advancing in my career and learning more. Such an opportunity is available here. The most important thing is to maintain the drive, the desire to do something useful and constantly excel.

You go in for sky jumping sports – do you exercise here as well?

I do, whenever I have the chance for it. A good weather has set in and the sky jumping season has begun. You have to be always fit for this kind of sports. It is hard to regain the physical shape after a long recess. Just like any professional activity it demands constant training. When the season comes I do my best to spend one or two days a week for jumping.

Sky jumping is not for amateurs. It is an extreme kind of sports demanding good skills. One has to jump at least 500 times a year to reach the advanced level. This equals 10 to 15 jumps a week every year, rather time-consuming. My job doesn’t permit me to devote so much time to sky jumping. I make up to 100 jumps a year. It depends on two things – free time and the weather.