THE COMPANY’S INVESTMENT PROGRAM BASED ON CONSERVATIVE SCENARIOS IN CONDITIONS OF HIGH VOLATILITY IN MACROECONOMIC GEOPOLITICAL INSTABILITY IMPLIES THE IMPLEMENTATION OF THE COMPANY’S LONG-TERM DEVELOPMENT PROGRAM.
Rosneft’s Investment Program is approved as part of the Company’s business plan for the relevant period. Therefore, the Investment Program for 2015 and thereafter was approved as part of the Company’s 2015/16 Business Plan at the Board of Directors’ Meeting on December 18, 2014 (Minutes No. 15). Taking into account the significant changes in the macroeconomic conditions in December 2014 and Q1 2015, the Board of Directors approved the adjusted 2015/16 Business Plan on April 23, 2015 (Minutes No. 29). The Investment Program for 2016 and thereafter was approved as part of the Company’s 2016/17 Business Plan at the Board of Directors’ Meeting on December 18, 2014 (Minutes No. 10).
TOTAL INVESTMENTS* IN 2015
*CAPEX and capital investments to joint projects.
LOWEST UNIT CAPEX AMONG MAJOR COMPETITORS
The Company’s Investment Program based on conservative scenarios against the backdrop of macroeconomic and geopolitical instability implies the implementation of the Company’s long-term development program approved by the Russian Government. It includes the achievement of Rosneft strategic goals related to an increase in hydrocarbon production with a balanced financial structure and the optimal involvement of external financing driven by the faster start-up of new oil and gas fields.
Based on the 2015 results, the Company scaled up by 11% its investment to RUB 629 bln, including: CAPEX of RUB 595 bln and financing of joint projects at RUB 34 bln. The Investment Program was financed with own funds and long-term borrowings.
With higher investments driven also by the development of new projects and the expansion of production drilling in at brownfields, upstream spending on per boe of output decreased from $ 5.3 to $ 4.3 / boe in 2015. This helped the Company to keep its leading position as compared to its key competitors with capital investment efficiency ranging between $ 10 and $ 30 / boe.
The Company’s 2015 Investment Program is a balanced portfolio of efficient investment projects aimed at the fulfillment of the Company’s strategic objectives in the following key areas.
BROWNFIELDS
Over half of the investment, about RUB 334 bln, was allocated to support production in the Company’s upstream brownfields containing over 3.5 bln tons of proven PRMS-classified reserves available for development for many years to come. Top-5 mature assets based on investment amount include the assets of RN-Yuganskneftegaz LLC, OJSC Samotlorneftegaz, OJSC Orenburgneft, OJSC Samaraneftegaz, and a group of assets managed by OJSC Varyeganneftegaz. The investment in final stage of infrastructure development in the earlier started Verkhnechonskneftegaz, Uvat, and Vankor fields amounted to RUB 63 bln in 2015 with a production increase from 45 mmtoe
to 49 mmtoe.
Rosneft’s key objective in brownfields is a stable and financially viable long-term operations with slower rates of natural production decline by implementing modern technologies, developing hard-to-recover reserves, and implementing the program aimed at enhancing drilling efficiency better working with existing well stock.
Brownfields support stable production in the short- and mid-term range and generate a significant free cash flow, which is to be used for financing new field development, primarily in the east of Russia where the Company plans to develop new oil and gas production clusters.
GREENFIELDS
The sustainable mid-term growth of oil and gas production by the Company is supported by tlaunching new fields with persistently increasing investment, reaching RUB 93 bln in 2015, including RUB 60 bln in East Siberia and the Russian Far East and RUB 24 bln in West Siberia.
The Labaganskoye field was launched up in 2015. The Northern Tip of Chaivo was developed further with production up from 0.3 mmtoe to 2.5 mmtoe in 2015 vs 2014. Srednebotuobinskoye field was also further developed (including design works of Stage 2 to increase production capacity from 1 to 5 mmtoe a year).
The Company continues to develop a unique field cluster around the Vankor field using its transport, energy, and gas infrastructure. The total recoverable reserves at its Suzunskoye, Tagulskoye, and Lodochnoye fields are estimated at over 400 mmtoe1. The investment in 2015 amounted to RUB 17 bln2.
The start of commercial production is expected in 2016 at the East Messoyakha field together with the start-up of main oil treatment and export facilities in the Suzunskoye field.
The Company plans to accelerate the active development of its large oil and gas production projects based on the large-scale preparation in previous years (including design and purchasing) (Russkoye, Urubcheno-Tokhomskoye, Tagulskoye, and Lodochnoye fields).
ONSHORE AND OFFSHORE EXPLORATION
Investment in onshore exploration projects (RUB 4 bln2) and offshore exploration projects (RUB 8 bln from the Company) support Rosneft’s long-term production growth. The Company is consistently increasing its onshore exploration activity license, also by actively participating in auctions entitling to subsoil use and expanding its license area portfolio. The Company invests in exploration of promising offshore areas independently and jointly with its strategic partners Statoil, Eni, and ExxonMobil.
IN-HOUSE SERVICES DEVELOPMENT
The investment in the development of in-house oil field services amounted to RUB 11 bln in 2015. The Company continues to implement its oil field services strategy to improve performance of the production segment even in the challenging macroeconomic environment. The share of development drilling using own rig fleet exceeded 50 %.
GAS BUSINESS
Rospan International, developing Achimov deposits (3,600–3,900 m deep) is a key gas project of the Company. The project is the key driver for gas production growth in the nearest future. In Q4, 2015 we launched a pilot complex start-up of the second section of the Novy Urengoy gas and gas condensate complex treatment unit which become a major event for gas future production. Gas production plateau is to be reached in 2018. Around RUB 23 bn were allocated for Rospan financing in 2015, is 50% above 2014 level. We continue developing the Khadyryakhinskoe field and low layer of the Beregovoye fields of PJSC Sibneftegas, providing extra production of 0.8 bcm in 2015. Investments to Sibneftegaz amounted to RUB 5 bln in 2015.
OIL REFINING AND PETROCHEMICALS
Investment in oil refining and petrochemicals in 2015 totaled RUB 109 bln and mainly covered the fulfillment of requirements under the quadripartite agreement aimed at producing different motor fuels with their quality compliant with the requirements of the Technical Rules of Procedure. In 2015 the Company completed transition to the production of Euro-5 gasoline and diesel fuel for the Russian market as required by the Technical Rules of Procedure. Other projects included the start-up of the isomerization units at Kuibyshev and Novokuibyshev Refineries and at Ryazan Oil Refining Company, start-up of the MTBE unit at Angarskaya Petrochemicals Company, and complete rebuild of the catalytic reformers at Syzran and Kuibyshev Refineries.
PURCHASE AND DISPOSAL OF ASSETS
Throughout 2015, the Company was consistently implementing its strategy aimed at the efficient portfolio management and optimization of Group assets.
Rosneft acquired CJSC Novokuibyshev Petrochemicals Company in order to increase the synergy in oil and gas refining and petrochemicals and purchased a 16.67 % stake in Schwedt refinery (Germany) to expand its presence in the European market and improve its value added chain.
Moreover, the Company acquired logistics assets in Georgia and a gas station network in Armenia. The Company acquired the assets of Trican Well Service LLC to implement its strategic goal of developing its own oil services. This acquisition provides an access to accumulated experience in production intensification, well completion, and well intervention while developing conventional oil and gas reserves.
In December, 2015 Rosneft and Alltech Group established a joint venture to develop production projects in the Nenetsk Autonomous District. Gas reserves monetization shall be performed by constructing a LNG plant. The Company’s share in the joint venture makes 50.1 %.
The Company acquired 55 % stake in Solimoins project , raising its interest to 100 %, ensuring control and the status of hydrocarbons development project operator in Solimoins basin of the Amason River (Brasil).
For accelerating development of the East Siberian fields and attracting new technologies with later localization the Company partnered with BP for the development of the Srednebotubinskoye field by selling it a 20 % share in Taas-Yuryakh in 2015. A 50 % share in Polar Lights Company was sold in order to optimize “tail assets”. Another example of a highly profitable transaction is the sale of a 8.99 % share in Saras S.p.A. (Italian refinery).
INVESTMENT PROCESS
The main focus during the investment process is the efficient use of capital aimed at improving performance of individual investment projects and initiatives and business growth driven by the formation of the best portfolio, optimal balance between the Company’s profitability and unlocking its long-term potential by financing the investment programs of its businesses. In 2015, the Company continued to improve its investment process based on the best investment management practices both by developing regulations and methodology framework and improving the investment discipline.
Investments supervision is an integral part of financial statements and management accounting. We carefully review investment program implementation and performance efficiency both for the Company in general and its key business segments and projects in particular.
The Company has a well-aligned expert review and investment project approval process in place involving its authorized investment bodies with Rosneft key executives included. The authority system applies to business projects ranging from the Board of Directors to business area levels.
A series of improvements were implemented with preserving the main investment focus:
- We enhanced investment process integration with coinciding strategic and business planning, efficiency management, financial discipline and corporate management processes.
- We continuously develop portfolio analysis tools. The developed system allows promptly deliver different scenarios for investment portfolio performance on the basis of the set criteria rating, which provides investment program flexibility to external changes, as well as strategic and current priorities of the Company set by its shareholders and approved by the Board of Directors.
- The Company made certain steps to reinforce the investment discipline by introducing the “two key” approach with spending authorized only if a project is included in the approved Business Plan and subject to an approval from approporiate investment authority.
- For ensuring prompt management decisions and enhancing control over the Company projects implementation efficiency we launched constant monitoring of the approval from appropriate investmnet authority.
- For introducing automatization into investment projects accounting and control, we launched the Investment Projects Database.
- The Company Policy for increasing investment and operating efficiency was developed and introduced to comply with par. 2 of the Instruction of the President of the Russian Federation No. Pr-3013 of December 27, 2014 and the Directive of the Government of the Russian Federation No. 3984p-P13 of 24.06.2015.
- Training sessions were held to improve the investment competency and discipline for the Company’s central office and subsidiaries.
In 2015, in accordance with investment discipline, the Company’s authorized investment bodies approved about 280 projects with total investment amount of over RUB 700 billion in line with the Company’s ROI standards in all areas. As a result, investment decisions were made by the end of 2015 with regard to over 83 % of capital investments proposed for 2016.
Investment decision quality is supported by the detailed analysis of every investment project using a common approach within a wide scenario and risk assessment range, covering financial, commercial, technical, environmental, and other risks.