Proverbs tell us a great deal about how a views the same phenomenon. Brits would say that necessity is the mother of invention whilst many Eastern European nations would contend that it is poverty that is the mother of all arts – and both would mean more or less the same thing. What happens if those at the helm get really creative, perhaps even without an apparent need for it? Rosneft’s push to propel its Vostok Oil project into the limelight might have brought about an illustrative case of how crafty people can get when future prosperity is at stake, defying the centuries-old proverbs (but not the market expectations). Foresight, anticipation, sense of timing – all of it is necessary when one is to reintegrate a company that was spun out just several years ago. Vostok Oil (a rather odd cross-combination of Russian and English meaning “East Oil”) is Rosneft’s latest grand project, centered around the Taimyr peninsula. The bulk of its aggregate reserves comes from the already producing Eastern Siberian assets – the 3.8bn Vankorskoye, the 1.8bn Tagulskoye and the 0.4bn Suzunskoye fields – which up to now were never really considered Arctic, their production is fed into the usual trunk pipeline system. Although crude output from the Vankorskoye field was subject to MET and export duty exemptions since the first day of production in 2009, Rosneft included it into its Vostok Oil, stating that were the Russian government to support the project with 40 billion worth of tax concessions, the state’s income over the years would be triple that amount.
Rosneft has long fought with Russia’s Finance Ministry, traditionally the only entity standing between state oil companies and further tax concessions, to include the Vankorskoye cluster in any further exemptions. Having wrangled another set of tax breaks for Vankorskoye, albeit with conditions of Rosneft tying the field to other assets within the Vostok Oil portfolio, seemingly the time has come for Rosneft to latch onto the largest untapped oil asset in the area, the Payakha group of fields, owned by an erstwhile colleague and longtime confidante of the Rosneft CEO, Eduard Khudaynatov. In a concurrent development, the Russian parliament has approved early December an export duty exemption for crude from the Taimyr peninsula, meaning that the soon-to-be-bought asset will also come in handy for a quick production ramp-up.
Nezavisimaya Neftyanaya Kompaniya (NNK) was created just as Khudaynatov left Rosneft in 2013, with the alleged aim of aggregating smaller assets that might have been otherwise overlooked by the megalomaniac strategy tenets of Rosneft. Very rare were those who genuinely believed that this spin-off company would be interested in competing with Rosneft and NNK was generally perceived to be a temporary company that would be at some point in the future reintegrated into the “mother organism” of Rosneft. Khudaynatov came to Rosneft as Sechin’s close confidante and left the company without any personal or emotional estrangement. NNK has been routinely loss-making and despite 9-digit debt tallies has always remained in Rosneft’s headlights, despite sporadic stories about Western or Middle Eastern majors teaming up with it to create a new entity. Related: Energy Stocks Soar And Oil Prices Climb
There are three interesting things to learn about the assets spun off from Rosneft. First, the company’s name has been alternating between Nezavisimaya Neftyanaya Kompaniya (Independent Oil Company, attesting to the founders’ sense of humour) and Neftegazholding – it is reported that the main reason for such variability lies in OFAC sanctioning NNK for selling oil products to North Korea. Second, almost as soon as the company was founded it bought its main assets, the Payakha group of fields on the Taymir peninsula, whose initial reserves were assessed at 59 million tons of crude oil. Within a timeframe of seven years the Payakha reserve tally increased almost twentyfold to 1.05 billion tons of crude, raising some genuinely interesting questions about the asset’s initial assessment.
Third, almost all of NNK’s purchase activity was focusing on assets in Eastern Siberia and they seemed to be quite well suited to be fed into the Eastern Siberia – Pacific Ocean (ESPO) pipeline towards China. However, the current setup counts with Vostok Oil production being supplied to the to the Kara Sea, for the attainment of which Rosneft would need to build more than 400km of pipelines in the swampy territories of northern Siberia as well as to erect a new crude export terminal called Sever (“North”) with a nominal throughput capacity of 25 mtpa.Given that according to preliminary estimates, Payakha alone would require some $20 billion of investment over the course of its lifetime, it would be interesting to see who would eventually pay for the construction of such an Arctic port, ie would the Russian government be willing to invest billions into it similarly to how it helped shape the Sabetta LNG terminal.
The future of Payakha seems genuinely mouth-watering, considering that Russia has not witnessed a proper giant fields’ commissioning since 2016 when the Erginskoye fields. Although Rosneft has won the bidding for the Erginskoye field in a rather arguable bidding session, the fields surrounding it were also bought from NNK in 2016 (technically speaking, Rosneft bought NNK’s subsidiary called Kondaneft for 40 billion RUB, equivalent to $0.6 billion at the time). A quick glance at the map might suffice to understand why Rosneft was bound to take over Payakha at some point. Almost the entire portfolio of Vostok Oil fields – Baykalovskoye, Verkhnekubinskoye, Suzunskoye, Vankorskoye and to a lesser degree the Tagulskoye field- surround Payakha, located along the Yenisey estuary.
Graph 1. Vankor Production in 2009-2020.
Source: author’s data.
Rosneft wants to transport all the produced oil along the Northern Sea Route, making Payakha the first Russian Arctic giant field as all other currently producing assets like the Prirazlomnaya platform pale in comparison. From Payakha alone plateau production is assumed at a hefty 50 million tons per year, however one needs to recall the difficulties Russian oilmen experienced with the adjacent Vankor field to recall that such a peak might be quite short-lived considering the local geological peculiarities. Payakha seemingly shares many geological similarities to Vankor, both wielding light and sweet crudes (Sulphur content around 0.1%). Market speculation has it that in return for the golden Payakha assets Neftegazholding might purchase some of Rosneft’s mature Volga-Urals acreage. Now the only thing remaining is to find a suitable price for this peculiar transaction.
By Viktor Katona for Oilprice.com
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