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The time of "office" geology. An interview with the CEO of Imperial Energy.

The time of “office” geology

In the year 2012 Imperial energy focuses on analysis of geological exploration.

Imperial Energy was founded in autumn of the year 2004 by a group of Russian and foreign investors to be an independent small- and medium scale petroleum company. The company began its activity in Tomsk region with vast geological exploration in purchased license blocks, which allowed it to discover nine new oilfields. Throughout its history accretion of reserves through successful geological exploration was one of the three key elements in company’s development strategy along with enhancement of production from oilfields by using new technologies and selling petroleum goods to the market with the help of established infrastructure. Having made significant steps in each of these directions, in the year 2011 the company faced a series of technological problems. This led to making an important decision: to halt and analyze the results achieved to identify and rectify the mistakes made. Ashok Varma, Chief Executive Officer of Imperial Energy told us about the reasons behind such decision and the hopes for the year 2012.

-                    Firstly, a couple of words about our parent company – Oil and Natural Gas Corporation Limited (ONGC) – the largest petroleum corporation of India, founded by the state over 55 years ago. Today ONGC is India’s leader in exploration and production of oil and gas. Its share amounts to around 70% of all produced hydrocarbons, totaling to over 1.27 million barrels of oil equivalent per day.

In the course of time its rich heritage allowed the company to fully cover such spheres as drilling, treatment and transportation of oil, as well as power generation, petrochemical industry and development of new energy sources.

The corporation encompasses several subsidiaries: ONGC Videsh Limited (OVL), the overseas arm of ONGC, which acquires foreign assets and operates them.

OVL currently has equity stakes in 33 projects in fifteen countries of the world. The portfolio includes 9 producing assets, 4 open territories at the stage of development and 19 exploration projects. Among its achievements are oil pipeline in Sudan, participation in construction of gas pipeline in Myanmar, undertaken hand in hand with offshore development of A1 and A3 areas.

ONGC has two projects in Russia – “Sakhalin-1” and Imperial Energy, the latter turned 7 this autumn. From the point of view of petroleum industry, this period is sufficient to make certain conclusions about its efficiency.

- Mister Varma, what is the opinion of headquarters on the current condition and prospects of the Tomsk subsidiary?

- Imperial Energy has interested employees and quality equipment for production and drilling, and the company receives great support from regional authorities. Such were the conclusions of the Managing Director of OVL, Mr. D. Sarraf during his visit to Tomsk in October last year. However there are certain technical, logistics-related and finance difficulties. Our setup is somewhat different as compared to other projects. Standard problems (production of hydrocarbons from shale interlayers and heavy oil) experienced by many subsoil users around the globe, are accompanies by specific ones. Russia and especially Siberia has many low-permeability reservoirs, from which not a single company in the world would produce oil. We set a target for ourselves to solve this problem that would allow for significant increase in oil production volume. This is going to be our focus this year. As said by Mr. D. Sarraf, as per his understanding a child will never learn to walk if his mother always carries it on her arms. The child shall be put on the ground for some time so that it would try to crawl, walk and then run. We must do our best to achieve financial self-sufficiency of Imperial Energy. We should discuss and find technical and other know-how to advance the project. Some of the problems may require exchange of experience with other companies, getting to know how they survive in such conditions. It is not only professionalism of our employees that gives us hope for the happy outcome of the case, but also confidence of ONGC management that if we put joint efforts we will be able to rise to even higher level.

- What were the highlights of the year 2011 for the company?

-  The year was anything but simple as production volume did not meet our plans, despite all the whole range of measures taken. To enhance oil recovery over 50 hydraulic fracturing operations were carried out, a new Fiber Frac technology, based on utilization of fiber materials was applied, and hydraulic fracturing was done in horizontal wells. Unfortunately none of the operations resulted in due effect. At the first stage of hydraulic fracturing we engaged one of the renowned leaders – Halliburton, which failed to meet our expectations: almost in all the wells we got complications and accidents. It is fair to say that the invited specialists had to work in extremely difficult conditions. The next – more successful stage of hydrofrac was done by Schlumberger. The last – third – stage in August-September was carried out by LLC Imperial Frac Service. It is yet early to give an absolute estimate of its performance: some of the development wells after problematic operations still did not show results.

The year 2011 had not only failures but bright spots as well. This year we tapped on peak production level – 20 000 barrels per day. We discovered Middle Maiskoye oilfield and confirmed potential of the southern part of South Maiskoye oilfield, owing to well #5, to which a pipeline was promptly constructed. We build a road and high-voltage line between Maiskoye and South Maiskoye oilfields, installed GPPS to save expensive diesel fuel. We also achieved a drilling record. Taking into account well logging, we drilled 11 appraisal and exploratory wells – more than all other subsoil users of Tomsk region together. Increment in C₁ recoverable reserves amounted to 1 894 thousand tons over the year.

- The company has oilfields with associated petroleum gas deposits. What are the ways of APG utilization?

- High gas factor is present only in one of our fields. However, taking into account that from January 2012 legislation on gas flaring penalties changed, we may also come across serious problems with such penalties. Even despite the fact that we are trying to utilize APG for own needs. For example we are using gas piston power stations to generate electrical power. All in all we have 12 GPPS of nominal capacity of 12 MW. However due to necessity to ensure special treatment of gas, we generate around 7-8 MW in Maiskoye oilfield and slightly over 2 MW in Snezhnoye. We are considering an option of processing APG with hi-tech equipment. Relevant technical solutions applicable to our oilfields have already been selected. However, taking into account that the oilfields are hard to reach and that there is no infrastructure to collect and transport end product, such projects are not economically attractive. Most probably it is a matter of a more distant future.

- What is the company’s work program for the year 2012?

- We do not set ambitious targets for ourselves. The plan is to produce 651 tons of oil, which is less than in the previous year. This is due to the fact that we are currently focusing on solving the problem, set forth to the management of Imperial Energy by the management of OVL – to find a reliable technology to efficiently recover reserves, enhance production and optimize expenditures. I think by the end of the year we will manage to find the answers to all questions and carry out pilot testing. Then we will have clear prospects for the year 2013 which, as I firmly believe, shall be much more successful. At the same time we should summarize colossal geological exploration experience that we accumulated. Necessity in deep analysis has ripened, for which along with in-house geological service we might engage outside organisations. Negotiations with some of them are already going on. Brainstorming on the problems is our geology and geophysics centre, where Russian and Indian employees work hand in hand. All in all I might say that this year is going to be full of “office” geology.

- How will reduction of activities affect the social aspect?

- We are not planning staff reduction. However we informed our employees that we are not going to be against their separation from the company if they find a good place. We understand that in this situation some people may feel non-demanded at their work place. Herewith we are asking them to promise to come back when we invite them to do so. And no doubt we are strictly complying with the requirement of effective legislation.

The temporary reduction of activities will not affect our partnership with our operation areas, Parabel, Kargasok and Aleksandrovskiy areas of Tomsk region. With all these municipalities we have territorial social-development contracts. Last year our company extended financial support for 4 million roubles. We provided funds for capital repair of kindergarten named Beryozka, repair of recreation centre and secondary school in the settlement of Novoseltsevo of Parabel area, and construction of leisure-time centre in v. Kievskiy of Kargasok area. Moreover sponsorship support was provided for over 1.5 million roubles. In the year 2012 financing of contracts will be reduced by 400 thousand roubles as certain work was finished in some of the license blocks. Nevertheless sponsorship budget remains at the same level of 8.5 million roubles. As before, the funds will be targeted for support of the three unprivileged categories of people: children, pensioners and the sick.

Having closed the year 2011 with not so bright results, we began the year 2012 with an optimistic approach, willing to focus all our resources to solve the above mentioned tasks. We are really looking forward to tax reforms in the Russian Federation. First steps in this direction were made last year, when export duty was reduced. It is hoped that more measures will follow. In the context of the current strict Russian tax policy, the company has practically no profit from its activity. It is even unable to return its expenses for drilling. If the state provides us with certain tax privileges or the system gets really reformed, Imperial Energy will be able to return to profitability. This would mean that we fulfilled the objectives, given by our shareholders, which would allow us to return to financing of long-term investments that are currently suspended until the time comes.

Written by Svetlana ANISIMOVA.

Reference:

Imperial Energy has been dealing with geological exploration and oil production in the territory of Russia since the year 2004. Keeping in view efficient fields development and long-term oil production growth, in the course of four years the company purchased licenses for undeveloped and underdeveloped blocks in Tomsk region. Currently it has 14 license blocks, being the second in total license area after JSC Tomskneft VNK. Hydrocarbons are produced in 5 main license blocks: Snezhnoye, Festivalnoye, Kiev-Eganskoye, Maiskoye and South Maiskoye. Geological exploration is going on in the other blocks.

In the year 2006 the company founded its own drilling subsidiary Rus Imperial Group (RIG). Later it acquired 50% of the shares of Imperial Frac Service (IFS), dealing with hydraulic fracturing. Apart from the above, the company has the following subsidiaries: LLC Nord Imperial, LLC Allianceneftegaz, LLC Sibinterneft, LLC Imperial TransService and LLC Imperial Energy TomskGas.

In the year 2005 proven and probable (2P) reserves amounted to 228 million barrels. Thanks to active geological exploration Imperial Energy significantly increased its reserves and entered top-10 list of largest companies in Russia by oil reserves as per SPE. The company has its own infrastructure, comprising a net of pipelines (360 km total length), oil treatment facilities in Snezhnoye, Maiskoye and Kiev-Eganskoye oilfields, custody storage and transfer facilities Luginetskoye and Zavyalovo that ensure direct access to pipeline system of AK Transneft. The company began with trucking oil to domestic market and today it export oil also.

Since January 2009 the company is a fully-owned subsidiary of Indian petroleum company ONGC Videsh Limited (OVL), managing overseas assets of the largest Indian state corporation ONGC.

In the year 2010 ONGC took 413^th place by its current capital in the international rating of Fortune-500; 21^st  place among the leading international energy companies of “Platts Top 250”; 21^st place among international petroleum corporations by its market capitalization in “PFC Energy 50” rating and 172^nd place in high-prestige rating of Forbes Global 2000.