Given the restrictions resulting from sanctions, how is the Company functioning in terms of funding new projects and utilising advanced technologies and imported equipment when developing oil and gas fields?

An analysis of the existing contracts in the reporting year revealed that the average annual procurement of foreign-produced material and technical resources and services does not exceed 5% of the total volume. The average usage level of goods and services from the domestic market at Gazprom Neft is close to 95%.

The ratio of procurement volume from domestic and foreign suppliers is an approximation.Ratio of procurement volumes from domestic and foreign suppliers as of 31 December 2014

The value of this parameter in a particular case depends on the stage of the project implementation. Foreign technologies are primarily used for the development of promising projects. At the same time, as a technology owner the Company is not required to order equipment from any particular manufacturer, but should determine which international standards a given manufacturer should meet. A significant portion of the Company’s Russian and Asian equipment meets the declared international standards.

In addition, the Russian oil industry has made serious progress in recent years in the utilisation of high-tech operations when developing hydrocarbon fields, including horizontal drilling, multi-stage hydraulic fracturing, multi-stemmed injection and other advanced works. Many Russian oilfield service companies now successfully utilise sophisticated geological and technical measures at wells. Over the last two years, Gazprom Neft has increased the number of such operations by five or six times, making the impact of technological sanctions on current Gazprom Neft operating activities negligible.

As part of import substitution, Gazprom Neft is consulting with domestic manufacturers of various equipment about the feasibility of manufacturing products that are comparable in terms of technical and consumer features to the equipment of leading foreign manufacturers. The Company purchases reactor, tank and column equipment from domestic manufacturers as well as basic services for drilling, repair, well maintenance and hydraulic fracturing. Strategic partnership agreements have been concluded with Russian manufacturers for key material and technical resources that are the most capital intensive, with one such area being R&D for the manufacture of equipment required for offshore projects. An alternative substitution strategy for key areas of procured goods, work and services (over 25 areas total) is also under development as part of the Company’s import substitution programme. At present, substitution strategies for catalysts in oil refining and spare parts for offshore projects have been developed and approved by the Company’s Management Committee for Import Substitution and Production Localisation on Russian Territory. A key aspect of the strategy is the involvement of domestic manufacturers for the production of domestic substitutes. Preliminary negotiations have been held with potential manufacturers of such replacement products and an open list has been compiled of Russian enterprises that are potential manufacturers of analogues of the required material and technical resources.

Gazprom Neft has established a Department for Technological Partnerships and Import Substitution. A key task of the new division is the systemic monitoring of the Russian goods and materials market to seek out ways to replace imported products with domestic analogues.

Gazprom Neft is closely following the decisions concerning sanctions against the Russian oil and gas sector. When planning further operations the Company cannot ignore the new circumstances, but they are not expected to have a serious impact on future work. The Gazprom Neft investment plans for 2015 remain unchanged. In addition, all factors that could impact the Company are being studied. Despite the growing cost of cash resources resulting from restricted access to the European capital market, the effectiveness of projects implemented by the Company along with the existing abilities to raise funds on the Russian and Asian markets will allow Gazprom Neft to keep its long-term plans intact.

How much does the Gazprom Neft Group plan to invest in 2015?

The Company’s Board of Directors has approved the Gazprom Neft Investment Programme for 2015 The funding amount for the 2015 Investment Programme may be revised in the event of significant changes to macroeconomic parameters.to the amount of 346.4 bn RUB. Approximately 30% of the programme will be spent on the implementation of major projects in production, including the Novy Port, Messoyakha and Prirazlomnoye fields. Investment in oil refining is planned at 49.2 bn RUB in 2015.

Planned investment in 2015
Investment area mn RUB
Exploration and production 256
Refining 49
Marketing and sales 19
Other 23
What actions is Gazprom Neft taking given the deteriorating situation on the market?

In the current conditions, the Company is conducting a weekly assessment of what impact the macro environment is having on the medium-term plan. At present, this work focuses on:

  • the effectiveness of current assets and maximising operating cash flow
  • the proactive management of the investment portfolio to minimise the negative effect of the current macro environment on the Company’s strategic goals
  • the proactive management of the investment portfolio to minimise the negative effect of the current macro environment on the Company’s strategic goals
  • seeking alternative sources of funding, including on Russian and Asian debt capital markets
  • ensuring the stable work of contractor organisations on strategic projects and minimising the inflationary component of the cost of oil services and materials
Does the Company need to attract additional funding for next year? What kind of funding sources is Gazprom Neft considering for 2015?

Debt repayment will total approximately 61 bn RUB in 2015. This debt service activity has been secured by loan agreements signed with major Russian banks, including Rosselkhozbank and Sberbank. We plan to cover our remaining needs with borrowing on the domestic market, a possible bond placement and by raising credits and loans from Asian banks.

Does Gazprom Neft plan to continue developing the reserves of the Bazhenov Formation?

The study and development of unconventional hydrocarbon reserves, the Bazhenov Formation in particular, is one of the most important tasks facing the Russian oil industry. It has an unconventional solution. Success requires not only mastering innovative exploration and production technologies, but also developing a scientifically and practically sound geological model. This is precisely what the Gazprom Neft geological exploration programme for the study of unconventional reserves in ­2015–2017 aims to do.