22 Sep 2020

Geotech president Vladimir Tolkachev: Tyumen is our Texas, our Houston

The Tyumen oil and gas cluster is best suited for technological, evolutionary expansion as regards hydrocarbons, the president of leading Russian geophysics company Geotech Seismic Services, Vladimir Tolkachev said.

Tolkachev spoke with Interfax about how the economic crisis has affected the geological exploration market, technology partnerships, and the company's plans and prospects in the next few years.

Question: This year has been difficult for the country's whole economy, but for certain sectors particularly so. How has the situation with the pandemic affected the geological exploration sector and your company in particular?

Answer: The pandemic and the drop in prices for hydrocarbons demotivated most market participants. Thanks to early preparation, the pandemic had virtually no impact on our company, we took the situation in stride. We are doing all of the necessary work that we had planned back at the beginning of this year, all plans for financial and operating indicators are being fulfilled.

In the first half of the year we increased net profit [by 43%] from 0.8 billion rubles to 1.2 billion rubles compared to the same period of last year, which had a favourable impact on the positive dynamic of capital and net assets. Revenue for the first half of 2020 totalled 9.05 billion rubles, and EBITDA was 2.7 billion rubles, or 30% of revenue. In the course of the 2019-2020 field season, we carried out the biggest orders for Rosneft, Lukoil and Gazprom.

But on the oilfield services market in general, of course, the situation has had a major impact in terms of reducing companies' budgets, volume of work, pushed everyone back. Vertically integrated oil companies are postponing work in one way or another, and not even to next year, plans are being put off to later periods, until better times.

Q.: Which of your customers has postponed work and on which contracts?

A.: Big, major players, but I don't want to specify. The market is very peculiar now. There were recently tenders for government contracts for which there was a big scramble. Competition of the unequal, both in terms of capabilities and in terms of equipment and preparation. It will be clear what we're talking about based on the results of the fulfilment of this work. We're a commercial, absolutely straightforward market organization, we don't take on work for any price, that's senseless.

Q.: So even in the current market situation you are taking a selective approach to contracts?

A.: Of course, we don't drop below a certain margin agreed with our shareholder and board of directors. We know exactly what we're worth and have a steady, extensive portfolio of orders. We're certainly not interested in 2D work in a situation where there is a price war in order to survive. Victory at any cost is senseless - then you have to fulfil the order. I'm sure that here the winners will have difficulties.

Q.: Is your company working on any government contracts right now?

A.: We won one good contract. The customer was the [All-Russian Geological Oil Research Institute (VNIGNI)]. The contract is for conducting regional work in Timan-Pechora, RS-32. We're already doing all the work on preparation. Generally speaking, we don't see risks on this contract. Moreover, we're considering options, including doing part of the work on this contract with the help of our new technology - Otkritie telemetry.

Q.: Do you plan to continue to bid in such tenders for government contracts?

A.: Yes, but all the good contracts have run out. Simply inadequate contractors have claimed many contracts. We realize that one should not expect quality when prices at tenders fall below the logical cost.

Q.: State company Rosgeo earlier proposed granting it the status of sole contractor for geological exploration work on the shelf, in the transit zone and geophysics onshore as a measure of state support. How do you feel about this?

A.: A company's fight to survive is understandable. I don't want to comment on individual players, that's not my job. But I believe that, in any case, work should be competitive. The only guarantee of quality is competition of the equal. This is why there should be very clear, correct prequalification of bidders.

Right now, what is being offered is work on 2D seismics, for which players bid who are not taken on anywhere else, organizations with the corresponding tools, with the objective of victory at any cost.

Q.: We're seeing that the Federal Subsurface Resources Agency is offering fewer and fewer properties at auctions every year and, as a rule, they are becoming increasingly lean in reserves. What, in your view, are currently the most promising regions for discovering fields? Is it still Western Siberia?

A.: Foremost this is Western Siberia. Points of growth in the economy need to be strengthened, created where there are genetics and infrastructure. I am convinced that Tyumen is our Texas, our Houston. Human resources, preparation, production need to be brought together in the region with the maximum productivity. Tyumen is the most prepared and productive. We need to work with what we have. The Tyumen cluster, by virtue of its location, human resources, education and production capacity, existing infrastructure, excellent living and climatic conditions, is ideally suited for technological, evolutionary expansion as regards hydrocarbons.

Our company's headquarters are actually located in Tyumen, and companies with initially rich genetics - Tyumenneftegeofizika, Naryan-Marseismorazvedka, Khantymansiyskgeofizika, Orenburggeofizika, PetroAlyans, Integra, TNK-BP, Schlumberger and others became the foundation of the organization.

Our exploration competencies are huge in terms of skills and understanding. But right now there are no opportunities and no set objective to conduct large-scale work in Eastern Siberia or some other prospective regions. We are now working according to the coordinates of vertically integrated oil companies. Geotech, unfortunately, is forced to do additional exploration of the boundaries, the edges of fields, meaning look for what was missed. Seismic surveys are the mother of exploration and they are not being fully used here, unfortunately. New methods of exploration, technologies, equipment have been developed.

Q.: Companies have also taken an increased interest in the Arctic recently. The Far East Development Ministry forecast that the Arctic zone will account for 89% of gas and 25% of oil in Russia in 2035. What do you think this region's chances are in the next few years?

A.: The Arctic is a very promising, but vastly underexplored region. It's possible and necessary to work there. In this case, the key question is in the economic viability of this work at present. In future, if, for example, such a management decision is made, Geotech will be able to do exploration work there.

Q.: Does the company already have everything it needs to work there?

A.: As a matter of fact, we are the only ones who do. Our crews, the legacy of Naryan-Marseismorazvedka, Yamalgeofizika and Polyarex, have been working in the north of Timan-Pechora, Yamal, Gydan and Taimyr for more than 40 years. We have all the data and trained people. I'll respond immodestly, Geotech is the most prepared for conducting work in the conditions of the Far North. Our skills, the genetics of the organization, people and equipment make it possible to meet such challenges.

Q.: What new projects do you plan to join in this region?

A.: We never left there. All together, we have five to ten of our crews working in the Arctic zone every year. Last season, for example, we studied the Schuchyinskaya zone on Yamal under a government contract, did a high-density survey in the area of Tazov Bay for Lukoil. In the near future, [we will do] transit work on the coast and shallow waters of the Barents Sea and several projects using relatively standard technology in the Yamalo-Nenets Autonomous District, the north of Krasnoyarsk Territory.

Q.: As regards, international projects, Geotech began working in Uzbekistan in March. What difficulties has the company faced there due to the closure of borders amid the coronavirus lockdown?

A.: Our foreign, Kazakh company Azimuth Energy Services is working in Uzbekistan. We can say that, in terms of the fulfilment of the contract before the start of the coronavirus and the drop in oil prices, we mobilized and carried out work absolutely normally. Thereafter it's already a matter of contractual relations. We overcame the situation with the coronavirus and all the restrictions, the company carried out everything according to plan. Now we are discussing the amount of work on this contract with the customer taking into account their changed priorities, and how we will develop the project further amid low prices for oil.

Q.: As I understand, no other foreign projects are being considered at the moment?

A.: We are intentionally not taking on foreign projects anymore. Just like we, not happily but regretfully, are not working with small oil companies. First of all, the number of such companies is growing smaller and, secondly, they are insolvent, just like foreign companies. They constantly invite us - the Middle East, India, Iraqi Kurdistan, Venezuela. But abroad, the difficult issue of payment, the issue of guaranteed receipt of payment always arises in one aspect or another.

Q.: Tell us about the company's long-term business plan to 2024, which was approved last year. What does it entail? Will you revise it given the current economic situation?

A.: We are not reconsidering the model to 2024 at this point. We have now approved a revised budget factoring in an average oil price of $40 per barrel for the year. And in general, so far we're proceeding within this model on the whole.

For 2020, we plan to increase consolidated revenue compared to the fact of 2019 and ensure the fulfilment of the plan to pay down obligations to our shareholder bank.

Q.: What is Geotech's current debt to Otkritie Bank?

A.: About 17 billion rubles, of which 5 billion rubles is our working capital and about 12 billion rubles is the constant part of the debt, which is amortizing precisely on the horizon of our long-term model.

Q.: When do you plan to fully pay off this debt?

A.: On the horizon of our long-term model we will reach a comfortable level of debt burden that will ensure the company's financial stability and make it possible to invest in new projects and technologies. Again, this is on the condition of the preservation business drivers, the strategy in investment activities and macroeconomic stability.

Q.: At the end of last year, the Federal Subsurface Resources Agency and Natural Resources Ministry supported the creation of projects to develop hard-to-recover reserves in the form of an "investment partnership" that will include the owners of licenses and service companies in the line of geophysics. When do you think this system can get up and running?

A.: You can't achieve anything, solve anything with an order. There won't be enough people or money. Conditions need to be created so that it makes sense for a private initiative to develop in this direction.

All of America is drilled through, there's a well every few kilometres, the country is all known and understandable. This is the doing of private initiative. Why are we talking about hard-to-recover reserves, shale oil, shale gas? Because the geological risk of not finding is 1%. When you produce shale gas, it is guaranteed to be in the places where you are exploring. In the best case scenario, you'll also get a liquid phase and you'll also have shale oil. That's the whole initiative. Yes, hard-to-recover reserves are more expensive, but there's definitely no gap, virtually zero misses.

The problem of replacing hydrocarbon reserves can be solved by involving the maximum number of participants in the process. A new model for organizing exploration work - multi-client exploration - is being proposed for this. The essence of the multi-client exploration idea is to give resource users, oilfield service companies, the scientific community and financial investors a single platform for joint work on prospecting for, assessing and exploring high-order geological structures.

These decisions could offset a whole range of negative factors: limitation by specific licensed blocks, the absence of detailed studies at the properties of the 'unallocated fund,' the significant number of 'speculative' licenses removed from prospecting. Multi-client exploration could become a link between the regional and exploration-and-appraisal stages of the study of subsoil resources, financed, respectively, by the budget of the Federal Subsurface Resources Agency and license owners.

Q.: Companies are now trying to move in the direction of information technology. Can one already say that exploration is high-tech?

A.: Geotech is already virtually an IT company. The final data that we obtain is pure digital. That is, we're already virtually one step away from the IT business. The data arrays that we have, this is what artificial intelligence works with, based on this information it is possible to conduct any kind of exploration work according to already worked out arrays of previous periods.

Q.: Are you planning any new technology partnerships in the near future?

A.: Of course, yes. We have now essentially put together a whole line of our own developments that cover all exploration technologies. A geophysical engineering center is being created in Tyumen, together with the administration of Tyumen Region. We are now working out the issue, so that our own oil and gas cluster is formed in the Tyumen region, which is the oil and gas producing Russian Houston. Our operating capacity will be concentrated in Tyumen.

In partnership with the region, it is possible to continue to implement investment projects to develop engineering with respect to drilling rigs, impulsive sources and production of telemetry, develop our heavy-duty vibrators, create competition for both Chinese and European producers, not limit ourselves to the Russian market, but try to also carve out international marketplaces. The geophysical recording equipment we now have, in principle, has no equal analogues in the world at the moment. The existing analogues that we have studied are either twice as expensive or do not meet the necessary technological characteristics.

Q.: Are Russian oil companies interested in your own equipment solutions?

A.: Historically, our customers, unfortunately, really like foreign products. When you bring some kind of equipment from America or the UK, it generates some sort of fascination. But we have genuine import substitution. We, by the way, are working with federal agencies so that they conduct a kind of standardization, so that Russian solutions are used as much as possible in exploration, because sanctions could also be expanded in regard to processing and interpretation. Access to certain software, to updates could be prohibited and closed off at some point.

It's important to us that oil companies recognize our equipment. Then we can manufacture it in the necessary amount. I am opposed to buying expensive Western equipment on a massive scale, particularly considering the fact that there will be a substantial evolutionary technological change in the near future. The existing prequalification procedures at companies spur service companies to constantly update and buy foreign equipment and software, which is particularly illogical against the backdrop of intensifying external restrictive sanctions.

Q.: What equipment are you referring to specifically?

A.: We have already made an automated, small drilling rig that is ideal for maneuvering within the context of 'green seismics.' But we can't put it on the assembly line yet, because we don't know if the customer will want it. The same with our impulsive sources - we made it in the Abakan heavy-duty version, but we also can't use it on the scale we planned from the very beginning. It's first-rate in and of itself, everything works, but there probably has to be some kind of government will in exploration that is now insufficient. The same goes for our Otkritie cordless recording station with high-molecular sensor, the precision and range of which exceed all existing analogues.

Q.: How can the government help here?

A.: The government sets the rules, puts together the system. An understanding of the economic model is formed, state-owned oil and gas powerhouses are invited, a comprehensible, effective, doable five-year program is put together and away we go. We need to create regional points of growth, where the regional economy acts as the driver of growth.

Only market-based, personal initiative can solve the problems of finding cheap oil. The fight for production costs is intensifying throughout the whole world.

Q.: You said that Geotech has very large amounts of geological data. Are you working with any data centers?

A.: There are a huge number of data centers in the Russian Federation that were at one time set up to mine bitcoins. Mining bitcoin is unprofitable and uninteresting and these facilities are now sitting idle and growing old. But we need these facilities, it is computing capacity that we are physically lacking.

One option is to store data in the cloud, Amazon, Google. But the problem is that we don't know where specifically these data will be located. In which country, on which server in the United States or somewhere else will the information be? Yes, one can form such a partnership, but if you know for sure that the data will be physically located on the territory of Russia. It's senseless and foolish, irrational to build it ourselves. But if it's already built, at some educational institution or somewhere else, then why not?

Q.: There has been increasing talk recently about environmentally-friendly renewable energy sources. Do you think renewables will see widespread proliferation in our country?

A.: This reminds of how, similarly, a person consciously becomes a vegetarian despite the fact that meat, of course, is good for them. There's no explanation for this - if a person wants, he makes a decision to become a vegetarian. He restricts himself in something in terms of building the body, but this benefits him spiritually, is interesting for various practices. It is the same thing with alternative energy. People want to be vegetarians.

But the widespread proliferation of alternative energy will absolutely certainly not happen soon. When we see that tanks, heavy machinery, ships, airplanes have switched to electric fuel, solar batteries, and wars are fought with the aid of hardware that runs on electric motors, then we'll certainly understand - that's it, the era of hydrocarbons has ended. But right now we see that hydrocarbons are still involved everywhere, and internal combustion engines are used everywhere, but this has become unfashionable.

Studying the science of hydrocarbons is already considered unfashionable, irrelevant, uninteresting. This has become a fragmented science, and it is no longer on the agenda of the world's intellectuals and investors.

With the development of secondary specialized technical education in the world, the simplification, accessibility of oil production technologies, national economies rushed into hydrocarbon production. There was a change in demand and supply, plus the coronavirus, the presidential elections in the United States, expectations of a global economic crisis. But the world lived and continues to live on internal combustion engines and turbines.

I am confident in the inevitable growth of hydrocarbon prices. One cold winter, six months of active consumption of accumulated stocks and the pendulum will swing in the other direction. Oil and gas are commodities, global commodities and they are, of course, influenced by external factors, but their importance and value in the global economy remains unchanged.