6 Apr 2022

Natural Resources Minister Alexander Kozlov: Future of Russian exploration will become clearer in H2

Alexander Kozlov

Alexander Kozlov
Photo: Press-office

The first Sunday of April is Geologist Day in Russia, a professional holiday for those who ensure that minerals can be extracted in the future by exploring new reserves. But the escalating economic crisis threatens another reduction in exploration work, because the first area in which extractive companies make cutbacks in challenging financial conditions is exploration costs.

But the government does not intend to cut funding for exploration in 2022: all plans under the initiative "Geology - the Revival of a Legend" will be fulfilled. Natural Resources and Ecology Minister Alexander Kozlov spoke about measures to support the industry, about immediate, selective and long-term actions, as well replenishing the country's mineral resource base in an interview with Interfax on the eve of the Geologist Day.

Question: The government has approved measures to support industries during the crisis, including a relatively short list of measures for subsoil use. Are these the final measures or are some other options being worked out?

Answer: All the support measures that the government has already announced are to be implemented immediately when it’s a question of businesses preserving jobs, paying wages and continuing to function. Ministries then develop industry support packages. Interdepartmental groups are working, meetings are being held with key companies in the sector: in particular, it has been permitted to extend obligations under licenses for up to two years, divergence was allowed regarding the scope and types of work in exploration and production, and deadlines for eliminating violations of licenses were extended.

Financial measures also include a decision to reduce the tax burden on molybdenum miners. This, foremost, concerns Sorsky GOK mine and processing plant in Khakassia, which processes more than 80% of all the molybdenum in the country. Very soon the rent coefficient for molybdenum will be reduced to zero until January 1, 2025 and starting January 1, 2025 it will be one. This way the enterprise will be able to develop, improve efficiency.

The ministry has worked out a new method for one-off payments, foremost for development of lithium deposits and other strategic types of resources. The rent coefficient is now 3.5, but we need to make it 1. Here's a concrete example: in Murmansk Region there are two lithium deposits and under the current method the initial payment at auction for one of them is 13 billion rubles. Is this doable in the current situation? But if the coefficient is lowered, the payment will drop to 900 million rubles. There is a lithium deposit with an initial payment of 75 billion rubles, a completely unrealistic amount right now. But the one-off payment can be reduced by three or four times and then there will be hope that the auction will come off. The reduced amount for entry into the project will then be offset thanks to the creation of a new enterprise in the country, tax payments. I signed this method yesterday and gave instructions to send it for registration to the Justice Ministry.

The ministry has drafted another document on lithium, allowing for the possibility of closed-cycle operation of enterprises to extract strategic types of mineral resources from hydromineral resources, and it has been submitted to the government. Simply speaking, extraction of lithium from produced water. This initiative will simplify the process of extracting lithium by this method in the very same Murmansk Region, and companies from Irkutsk Region are also showing interest.

Regulatory measures of support include a recently passed law that allows foreign companies from friendly countries to enter into contracts on joint development of deposits with Russian oil and gas companies and share the risks of capital investment in exploration and production projects, he said.

"Secondly, we're working with regions on accelerating the launch of development of construction material quarries. The issue of accelerating the pace of construction projects is urgent, but it takes up to 235 days to process documents for aggregates in the regions. The objective is to bring this period down to 30 days with the regions, but of course while observing industrial safety and environmental standards. The fundamental thing here is to not allow the creation of 'monopolies' collecting licenses for aggregates. In every region there must be competition that makes it possible to lower prices for the product. This is key for the construction industry - reducing the costs of materials and accelerating document processing.

Q.: The Justice Ministry has registered a Natural Resources Ministry order to ban, until December 31, the re-export of exploration and production equipment to countries that have joined the sanctions against Russia. Have there been attempts to export such equipment?

A.: This concernsimport substitution. Yes, the first thing we did was to ban the export of foreign exploration, mining and laboratory equipment from Russia. And yes, there have been attempts at such exports I know about a hundred request from different companies to export this equipment. But it's one thing when the Russian Railways serves the railway in Armenia, and certain equipment is needed there - we will support this there. But if we see that some firm called, say, Romashka LLC, is exporting important, valuable equipment from Russia to unfriendly countries under an incomprehensible pretext, then there will be no agreement.

In terms of import substitution, we are working with the Industry and Trade Ministry on determining industry's needs for strategic raw materials. There are sufficient reserves in the country, but we need to understand what the economy needs and how much. Russia imported some types of mineral resources, [but] the situation has changed, the list of strategic raw materials is being updated. And along with this the Strategy for the Development of the Mineral Resource Sector to 2035 will also be updated.

The last version of the strategy dates from 2018 and it needs serious analysis. When updating the strategy with the Economic Development Ministry and Industry and Trade Ministry we plan to provide for three important elements: modeling the economy's mineral resource needs; a balance between necessary and sufficient consumption, exports and imports of mineral resources; and import substitution of strategic types of raw material.

The Natural Resources Ministry has already formulated the criteria and its vision of priority types of mineral resources. [Our] position has been submitted to the Industry and Trade Ministry and Economic Development Ministry and we're waiting for our colleagues' reaction. We're planning that the updated Strategy for the Development of the Mineral Resource Sector to 2035 will be ready no later than September of this year.

Q.: In crisis periods, mining companies reduce investment in exploration first of all. In which sectors have companies already announced a reduction in exploration? How significant might the reduction of exploration by subsoil users be in the current year?

A.: In 2021, with exploration expenditures of about 408 billion rubles, 37 new hydrocarbons deposits and 133 solid mineral deposits, of which gold - 104, non-metallic minerals - 20, coal - four, base metals - three, diamonds – two, were discovered. In 2022, mining companies are planning to spend about 450 billion rubles on exploration. At the moment, we see from meetings with companies that there are no plans to reduce investments in exploration. The 2023 forecast is also stable. And in case of difficulties for some companies, measures taken by the Natural Resources Ministry allow us to extend the period of exploration works.

Q.: What are the risks that reserves replacement will not be fulfilled in Russia in 2022?

A.: There is no risk. But first, let’s look at the results of 2021. The estimate is excellent. Reserves growth fully compensated for the extraction of the main types of minerals. Reserves growth for all categories was: oil + condensate - 614 million tonnes, with liquids production of 525 million tonnes, natural gas - 1.5 trillion cubic meters with production of 662 billion cubic meters. And 3.6 billion tonnes fuel equivalent Dl category raw hydrocarbons were localized. In 2022 we are planning to increase hydrocarbon resources by 4.3 billion tonnes of fuel equivalent at the expense of the budget. Replacement of oil and gas reserves in 2022 will also exceed production.

Planned targets are not being reduced in terms of solid minerals in 2022. We can even say that solid and rare earth exploration is getting a new chance - given the problems that have arisen in the markets, the growing need for reserves of some important minerals like coal, copper, molybdenum, zirconium, rare-earth metals, gold, platinum-group metals, uranium, etc. Reserves growth excluding write-offs due to mining, etc.: gold - 649 tonnes, silver – 5,500 tonnes, copper - 8.766 million tonnes, nickel – 911,900 tonnes and PGMs - 340.4 tonnes.

A deposit of federal importance containing 78 tonnes of hardrock gold was discovered with funding from the federal budget in 2021 and was named after the outstanding geologist Boris Mikhailov. Rosnedra, the federal subsurface resources agency, will soon prepare the necessary documents to put this gold deposit up for auction.

All the work done by geologists in previous years, their materials accumulated over the last decades, the studied regions in terms of most different reserves will now allow the country to quickly close the possible gap in volume of minerals. The results of geologists' work and geological discoveries will allow the country to launch new points of economic growth. And this means new projects, new jobs.

Q.: The Rosgeo state exploration company is one of the Resources Ministry’s key areas. The ministry has managed to secure the recapitalization of the state exploration company by 12 billion rubles over the next three years. How seriously will Rosgeo’s stock of equipment be updated? And what support can Rosgeo expect amid sanctions and the new economic crisis?

A.: We are intent on modernizing the state geological sector. We aim to reduce the depreciation of Rosgeo equipment from 77% to 73% by 2024 and to 40% by 2030. Twelve billion rubles have already been allocated for this. Equipment for doing geophysical work onshore and offshore will be acquired with this money in order to discover new oil- and gas-bearing structures in Western Siberia and Yakutia, as well as for exploration work on solid mineral resources, including import-dependent ones - uranium, manganese, chromium, titanium, bauxite, zirconium, beryllium, lithium, rhenium, rare-earth elements.

The results of government tenders for subsurface resource exploration will be announced in the next few days, in early April. Rosgeo will be represented here to the utmost, we'll try to give a significant portion of work to it. The company needs support, because its staff reaches 15,000 people at peak workload, it's a big company.

But Rosgeo does not only work for the state, it's a player on the geological exploration market, carries out commercial orders, and the number of private orders is at risk of decreasing as early as the third or fourth quarter. Obviously, the company's export orders will also decrease, but we're working with the near abroad - Kazakhstan, Belarus, Mongolia and other countries. We're expanding the sphere of Rosgeo's operations - for the first time, this year we brought it in on a government assignment to look for water in regions experiencing a water shortage.

The recapitalization of Rosgeo means that the state is starting to allocate money for it, and the practice of the company selling its assets is not continuing as it did in certain periods. Rosgeo considered selling some of its funds, even the core sample repository, thought about selling strategy types of vessels. Now we're sorting out documents from past years on these issues. We believe that some decisions on divesting property are wrong, inadvisable. Questions have been raised in various forums. I, as chairman of Rosgeo's board of directors, am devoting part of my work to this.

Q.: Auctions for hydrocarbons that have taken place since the beginning of the year will bring several billion rubles into the budget. Do you expect a big increase in auction revenue this year compared to 2021? And what large properties will be put up for auction before the end of the year?

A.: The indicative list of hydrocarbon licenses for auction in 2022 includes 68 subsoil plots. Three major auctions have taken place since the beginning of the year: two in the Orenburg region, one in Yamal. One-time payments amounted to 7 billion rubles.

Of course, now we are awaiting the Q1 results from Rosstat in order to understand what the economic situation looks like. Prices for all types of minerals are being updated, the financial component is changing. For example, five solid mineral auctions were due to take place at the most turbulent moment, when the Central Bank raised the rate to 20%. The bidding companies were unable to receive bank guarantees within the limits of the new rate, but they promptly brought this problem to our attention, we met them halfway, we waited for some time and announced new auctions, so that companies can get oriented and prepare.

Large solid mineral licenses that we plan to auction in 2022: Sopcheozerskoye deposit - chrome, Murmansk region, auction on April 14;, subsoil section of the Malaya Kuobakh-Baga river  - alluvial gold, Yakutia, auction on April 14; Utrenneye deposit  - hardrock gold , copper, zinc, Bashkortostan, auction in Q2; deposit B.K.Mikhailov deposit  - gold, Kabardino-Balkaria, auction in Q3; Polmostundrovskoe deposit  - lithium, beryllium, tantalum, niobium, Murmansk region, Q3; Tastygskoe deposit  - lithium, tantalum, niobium, tin, Tyva, Q3.

Auctions for three big hydrocarbon licenses in terms of starting price are being considered. They are located on the Yamal Peninsula. According to preliminary estimates, the total starting prices might reach 26 billion rubles. So far we are drawing up the paperwork for a government decision. The three are sections of the Nurminskaya group: Rostovtsevskoye with a starting price of 13 billion rubles, Nurminskoye - 11 billion rubles, and Sredne-Yamalskoye - 2 billion rubles. The Resources Ministry agreed to change the boundaries of the Yamal Reserve in order to license these sites, taking into account a request by the governor of the Yamalo-Nenets district, Dmitry Artyukhov, approved by the Russian president.

Gazprom Neft came up with the idea of licensing the Nurma Group and also asked for auctions with special terms. There are other companies that are geographically located in this territory, and these sites may also be of interest to them. The Resources Ministry’s position regarding special terms is as follows: it is necessary to take into account the capabilities of all companies, to give them opportunities. It is necessary to look at the deadlines proposed by companies for putting fields on stream, how it will look in the overall picture of the development of the Russian economy.

Q.: Do you anticipate problems with online mineral auctions over possible IT difficulties caused by sanctions?

A.: No, we don't anticipate any. Rosnedra did a large-scale test of the online auction procedure based on all scenarios in 2021, including crisis ones. There were 600 such tests, including for security breaches. And there were attempts at hacking resources on which online auctions were being carried out at the beginning of 2022, but they were unsuccessful.

The infrastructure being used by Rosnedra, the online platforms of Sberbank, Gazprombank and others, provides guarantees of information security during auctions. All these platforms and programs are Russian. And the government hasn't passed any additional acts in regard to holding online auctions under external sanctions pressure, as well as possible difficulties in the IT sphere.

We believe we'll cope with the task of carrying out auctions online. And we want to develop further. So, we see a great deal of activity from entities interested in commonly occurring mineral resources on our platforms. We're setting the task of selling off these mineral resources as much as possible at our online auctions.

Q.: Russia is working with the UN to agree on a sovereign audit of solid mineral reserves, trying to get rid of the influence of foreign auditors. Has Russia been able to prove its position at the UN commission?

A.: A framework classification of solid mineral resources is currently in effect at the UN. It was prepared by an international working group on mineral resources management, which includes Russian experts. This classification takes into account geological and economic parameters to assess solid mineral resources. The parameters of this international qualification are recommendations only. Accordingly, it doesn't imply any sort of restrictions on the sovereignty of countries in the area of managing their natural resources, including when using one's own standards to assess reserves.

The state expert evaluation of Russia's solid mineral reserves is as close to the international as possible. We presented our ideas on sovereign reserves, and this touches on both hydrocarbons and solid minerals, to the UN commission and got support there on the whole. However, the UN session planned for April, at which there were plans to issue a certain verdict on Russia's proposals, has been postponed. We can only wait for the next meeting.

For us, the mechanism of sovereign reserves is also interesting in terms of expanding the possibilities for working with other countries. There are agreements with a number of countries that this won't be an exclusively Russian model of reserves, but a unified mechanism that allows converting coefficients to the models being used in China, let's say, and other countries. We believe this will allow us to reach a new level in terms of assessing various types of reserves globally.

Q.: Has the proposed inventory of gas reserves announced last year been carried out?

A.: Any inventory is always useful, it's good to have counted reserves in hand.

For the Natural Resources Ministry, such an inventory would be important in terms of forecasting future production and revenues from it. But 95% of gas fields have been distributed, so companies have the source materials. We are prepared to organize this worth with companies. But the initiative did not come to us from companies, there was a proposal from the governor of the Yamalo-Nenets Autonomous District. So far this idea is not being advanced in any way by the initiator.

Q.: What is the Resources Ministry’s opinion - is the Yamal and Gydan resource base more suitable for LNG production or is it better to supply the gas through a pipeline?

A.: The Natural Resources Ministry believes that the resource base for Yamal and Gydan, which is 23.3 trillion cubic meters, makes it possible to implement both pipeline and LNG projects. The plus of a pipeline is low cost, while the plus of LNG is maneuverability in terms of sales, counterparties and so on. We also need to remember that the country has other important projects that are geographically located in this system of coordinates that Yamal and Gydan are in. I'm referring to the Northern Sea Route. This subject is being constantly monitored by the president, and the initiative of the NSR's development is not stopping for a minute, even in today's difficult realities. In this sense, it's simply criminal not to use LNG where there is access to seaports, especially since the implementation of LNG projects pulls along the development of other sectors.

But we also shouldn't forget that the gas supply system presumes, foremost, supplying the domestic market. At the same time, Russia must continue to remain a stable supplier of pipeline energy resources. The whole balance must be maintained.

Q.: Now, when the gas price in the world is so high, is the industry reconsidering its attitude to the development of shale gas reserves?

A.: Russia is not even keeping a detailed record of shale gas reserves on its territory, because there's no need for this. The country has a unique base of free gas, making it possible to cover the country's domestic needs and ship a large amount abroad. Free gas has big advantages over shale gas. It's cheaper and cleaner, which is important to people, savings and the environment. Geologists have done an excellent job - reserves of free gas will last for many years to come. I believe that this is the reasoning we need to go with.

Q.: Now regarding solid minerals. Were significant solid mineral licenses revoked as a result of massive inspections of licenses? Or were the main violators small companies?

A.: We've worked on pursuing solid minerals licenses since summer 2021, the result being detection of more than 1,300 licenses with violations. Rosnedra has already issued 801 notifications of possible early termination if rectifications aren't made. This list has Alrosa, JSC Susumanzoloto, PJSC Southern Kuzbass Coal Company and JSC Priisk Solovyevsky, and 83 licenses have been terminated early, including JSC YaregRuda (Komi), LLC Khemen Far East (Primorye), PJSC Southern Urals Nickel (Orenburg), LLC Kupol, and others.

Revoking a license is a last resort, which is used only when other measures don't work. A license isn't only a right, it's an obligation, as well. It's a responsibility to the country, whose economy counts on the resources divvied up between companies appearing on the market, rather than laying in someone's reserve stores. There is no goal to impose more fines or take away more licenses. A specific type of fuel and a specific range of solid minerals are needed.

Work with license inspection has acquired a certain systematic approach. We want to end the manipulations of local civil servants who endlessly extend licenses. Instances of groundless extension of licenses issued back at the beginning of the 2000s have been detected, while at these mineral sites, absolutely nothing has changed. It's possible that if the license had been pulled and issued to another company on time, the result would be different.

Q.: Environmentalists propose highlighting the declarative principle for alluvial gold. Rosnedra does not traditionally support this idea. Are there some sort of compromise options?

A.: The declarative principle, introduced in 2014, has demonstrated its effectiveness, it guarantees mineral reserves replacement, the creation of new jobs, tax intake. Instituting an unequivocal moratorium on the declarative principle for alluvial gold is the incorrect approach. The country is big, its geography is varied, and pinpoint and precise decisions are needed.

I would separate this subject into two parts. First of all, the problem is that when receiving a license, some colleagues violate operating procedure, pollute rivers, negatively impact the environment. There should be an element of control here on the part of relevant agencies. And second, work in every region separately. Everyone knows the example of the Kamchatka Territory, where there are a lot of important spawning streams. Ten years ago, licenses were issued for gold prospecting in spawning streams, which affected the territory's bioresources. After working with the governor, gold mining was prohibited in spawning streams. Because gold and Kamchatka aren't associated, but Kamchatka and fish are. Nature in this region is more important than gold mining.

But every region needs to be handled in a targeted manner. Completely excluding this activity in rivers is incorrect, people could lose their jobs, and the country could lose intake of a certain amount of gold into its reserves. Magadan, which is famous for gold mining, conversely, was the initiator of a bill to allow individuals to mine gold. All approvals, including the environmental agenda, were completed on this bill the other day. The document will go to the government next week.

Q.: Is it possible to establish some type of criteria for companies in order to prevent abuse of the declarative principle?

A.: Work is being carried out in this area. Companies applying for licenses should confirm their soundness of staff, technical ability, and financial solvency. Now, the updated Law on Subsurface Resources, in accordance with which every mineral developer is obligated to clean up after itself, even if their license has expired, went into effect at the beginning of the year.

Geological control over the scope of work of each license is also necessary. I've given that instruction to colleagues in Rosnedra. Loopholes allowing companies that receive a license to do nothing on site until it expires need to be closed.

We see stronger oversight control measures as a preventive measure against abuse. Rosprirodnadzor, Rostekhnadzor, the environmental prosecutor's office hold checks.

Q.: Is there any progress in the development of junior exploration projects in Russia? Have ideas like a venture fund to support these or a juniors exchange been discussed?

A.: I think we have made very good progress in the development of the junior movement. The declarative principle has contributed to the creation of a market for small companies. The full digitalization of all processes has been carried out, from filing an application to obtaining permits and starting exploration. If all issues are resolved directly with Rosnedra in electronic format, there is no need to run around local officials.

In 2021 amendments to the law were adopted and, beginning in 2022, permission to sell "pioneer" licenses went into effect: The topic was raised at the Eastern Economic Forum, and there were instructions from President Vladimir Putin to develop it further. Decisions have been made; the amendment to the law envisage that a company that has discovered a new mineral deposit may monetize the results of its exploration work by selling the 'pioneering' right to another company, which subsequently converts the prospecting license into a mining license.

The process will be organized as follows: the junior company conducts exploration, confirms the reserves, receives a certificate confirming the fact of field discovery, and then can sell this certificate. Then, a mining company, based on the certificate, gets a production license without bidding and pays a one-time fee for it.

Previously, subsoil users did not have the right to sell licenses, you could sell only the company owning the license. Now the rules of the game have changed significantly, and they can take the exploration industry to a new level. A small company due to its finances and competence cannot develop the field it has discovered, but it can sell the license and make money on its exploration. Those regions and subsoil areas that big companies don't want to spend time and effort on exploring will be actively explored by junior companies.

As for the idea of a venture fund, this was promoted by Rosgeo. As the chairman of the company’s board of directors, I have not yet received information about work done, but, as far as I understand, everything is still in the initial phase. We are in favor of any initiatives aimed at developing the economy. I think that this should be done, and if colleagues have any results, it would be good to hear them.

I also like the idea of a junior exchange. However, you’d need to go to that exchange with specific reserves. Today, everyone wants to participate in production, and few are interested in follow-up exploration. A gap arises: regional geological exploration has been carried out, but companies are not keen to do detailed exploration, they are waiting for deposits to be discovered. In this case, the question of the effectiveness of the junior exchange arises. First you need to accumulate a certain volume of reserves, and only then raise the issue of the exchange.

This is why the legislative amendments allowing the free sale of prospecting licenses are so important. The Natural Resources Ministry’s efforts in geological exploration are now aimed precisely at attracting as much private investments as possible to the regional stage of geological exploration, and to detailed follow-up exploration, and to the discovery of new deposits, and to close the existing gaps in the exploration sector, to make use of all means for activating exploration, and to provide the Russian economy with new mineral reserves.