FIELD-BY-FIELD TAX APPROACH NEEDED

What are Russneft's plans for production growth in the next few years?

Production in Russia will be unchanged at 7.1mn-7.6mn t this year, including our output in Azerbaijan. These plans are based on the presumption that the Russian participation in the Opec/non-Opec output deal will continue. Russneft will be able to increase production to 8mn-8.5mn t/yr over the next 3-5 years.

Which fields have the best growth outlook?

Our fields in west Siberia — Tagrinskoye and Verkhne-Shapshinskoye. The former is an established greenfield, in the process turning to brownfield, while Verkhne-Shapshinskoye is a greenfield. Development of Tagrinskoye enabled Russneft to revitalise and stabilise production.

Drilling at Tagrinskoye may be effective for another 2-3 years, but future output growth will come mainly from Verkhne-Shapshinskoye. It has similar, but more productive deposits than Tagrinskoye, so the return on investment is faster. Tagrinskoye has been in development since the 1990s, but we started drilling Achim deposits in late 2015, achieving significant growth in 2016-17.

Do you deploy enhanced oil recovery (EOR) techniques?

We are reliant on EOR. Russneft deploys horizontal wells and multi-stage fracking, in addition to different well designs. We are drilling low-angle boreholes rather than classic wells — these are virtually identical to horizontal wells, but much cheaper, so we have increased production efficiency.

Does Russneft use organic chloride compounds of the type that recently caused problems in the Druzhba pipeline system?

Russneft has never used organic chlorides — even before 2006 when their use was legal. This all-powerful solvent damages nearly all equipment if it enters oil treatment systems. We are not so self-destructive.

A number of Russneft fields were switched to the pilot profit-based tax scheme this year. What is your preliminary evaluation of the impact and do you plan to make the switch for other fields?

We do expect a certain effect, but I would prefer to wait until the end of this year to evaluate the profit-based system. Only a few of our fields are included in the pilot and for the future, we would like the energy ministry to lift restrictions on reserves [a cap of 50mn t determines which fields can be developed under the profit-based system].

Profit-based tax would work exactly as envisaged by the government at our East-Kamennoye greenfield in western Siberia, but recoverable reserves are 60mn t. If restrictions are lifted, the field could be included. East-Kamennoye's difficult geographic location makes the existing tax system inefficient, but profit-based tax would allow efficient development.

Do you back a proposed extension of profit-based tax to all of west Siberia?

Generally, profit-based taxation is a great tool. But it requires an individual approach — choosing fields that both the subsoil user and the state benefit from.

Russneft was previously a vertically integrated oil company — are there plans to revert to this business model, incorporating upstream and downstream assets of Russneft owner Safmar Group?

We have focused our competencies on the upstream and this model is working just fine. Within Safmar, there are divisions responsible for upstream, oil field services, and so on. But having a single focus is more efficient for the business. Of course, this is a question for shareholders, but we are unaware of such plans.

Do you plan to acquire production assets? If so, where?

We participate in auctions but there are very few, unallocated high-quality reserves left in Russia. It is cheaper and more effective to conduct follow-up exploration at existing fields than to participate in auctions — there are almost no readily available assets on the market. Our reserves are almost 600mn t, while Safmar companies have more than 1bn t.

How do you evaluate the Druzhba crude contamination incident and do you and your partners expect compensation from pipeline operator Transneft?

Compared with our colleagues, damage for us will be minimal. We should have specific figures in early July, when our buyers can raise claims according to their contracts. But we do not expect large-scale damages claims.

How is Russneft's Bazhenov formation development project progressing?

We suspended Bazhenov development for 3-4 years following the discovery of almost 40mn t of Achim formation reserves at Verkhne-Shapshinskoye. For now, accessing these reserves is a more efficient use of investment than Bazhenov development. But we have not abandoned the idea of Bazhenov development — we have sampled the core, are conducting research and Russneft is in contact with colleagues at Gazpromneft — today's leader in Bazhenov formation development.

Russneft is scheduled to start paying off the principal on its debt this year, aiming to repay in full by 2025. How much will you pay in 2019 and in 2020?

The company's total debt is $1.2bn. We will pay back $91mn this year, $113mn in 2020, and so on under the existing contract. But the rates are being revised and it is possible that these figures will change slightly.

Do you plan to reduce debt to zero?

The company is focused on generating profit for shareholders — the bank benefits from our debt and shareholders benefit when we have no debt. I guess this is obvious. This is a decision made by our shareholders.

What is the company's investment plan for 2019?

We will spend Rbs25bn ($397mn) and about the same again each year for the next 2-3 years, after which investment will start to decline and we will increase ebitda [earnings before interest, taxes, depreciation and amortisation].

What is the optimal crude price for Russneft? Is the Opec/non-Opec output agreement worth extending?

A price of $65/bl is good for us. Russia definitely should not withdraw from the Opec/non-Opec deal — because this would bring oil markets down. But the terms for Russia participating in the deal are a matter of negotiations and dialogue. We can remain in the partnership if we increase the production allocations for Russian firms. This is acceptable and is probably necessary.

*English version Argus.