The Investment Program in 2017
Rosneft’s 2017+ investment program was approved as part of the Business Plan for 2017–2018 at the Board of Directors meeting held on 23 December 2016 (Minutes No. 17 dated 26 December 2016). Rosneft’s 2018+ investment program was approved as part of the Business Plan for 2018–2019 at the Board of Directors meeting held on 18 December 2017 (Minutes No. 8 dated 21 December 2017).
The Company’s investment program reflects the continuity of our strategic priorities, macroeconomic developments, and integration of our Russian and international acquisitions.
Key investment program goals:
- Achievement of the Company’s key strategic objectives, including the increase of hydrocarbon production while maintaining a balanced financial structure and optimal leverage
- Implementation of high value-added projects by ranking the Company’s investment portfolio by cost efficiency and taking into account the importance and quality-at-entry of each project
- Establishment of partnerships to share risk, provide joint financing, and share technology to maximize R&D efficiency
Projects are selected against eligibility criteria to ensure performance under the investment program:
- Conservative macroeconomic planning
- Projects ranked strictly by investment efficiency
- Quality-at-entry checked
- Available financing options
In 2017, Rosneft’s capex totaled RUB 922 bln. Approximately 80% of the capex amount was invested into projects developing segments in Upstream, including Gas Projects, and Downstream. In total, 87% of the Company’s capex in 2017 was attributable to Upstream (including Gas Projects).
In 2017, the Company’s capital investments grew 30% year-on-year. Rosneft is increasing its capex as scheduled by investing in the highest value-added segments, optimizing less efficient and lower-margin projects, and closely observing macroeconomic and fiscal developments.
The Company increased its investments in:
- developing new and large-scale long-term oil and gas production projects in Russia
- expanding its drilling program to maintain hydrocarbon output at a steady level
- integrating new assets (the Erginsky cluster).
Despite its extensive investment program in 2017, the Company remained an undisputed leader in terms of return on capital investments in Upstream (USD 7.1 per boe) compared to key Russian and international players with unit capex in the USD 8–20 per boe range.
Rosneft’s investment program is a balanced portfolio of efficient investment projects streamlined across all business segments.
Mature fields are the main source of Rosneft’s current oil production, generating stable positive cash flow for the Company and contributing over 90% of its oil production. To maintain this share, the Company is investing in mature fields while continuously monitoring its investment efficiency.
During 2017, Rosneft invested approximately RUB 480 bln in mature upstream assets, over half of its annual capex.
In the medium term, the Company is planning to keep its capex at the current level of RUB 450–500 bln per year to maintain stable production by drilling new wells while continuing to make highly efficient investments in mature assets, which account for over 60% of upstream capex, including over 70% in development projects designed to maximize return on employed capital.
Rosneft’s Board of Directors approved (Minutes No. 8 dated 21 December 2017) the key parameters of its extended development program for the Samotlorskoye field, taking into account investment incentives for Samotlor in the form of annual MET reductions of RUB 35 bln over ten years.
The Company is implementing a number of major and new oil upstream projects currently in the active phase of development to increase and replace production at mature fields with cost-effective barrels and remain an industry leader by return on capital investments.
In 2017, the Company allocated approximately RUB 200 bln to large-scale and new projects, including over RUB 100 bln to projects in Eastern Siberia and the Far East, and close to RUB 55 bln in Western Siberia. Rosneft’s capital investments in major and new oil production projects grew by about 50% year-on-year.
Extensive development continues at the Suzunskoye and East Messoyakha fields following their commencement in Q3 2016, and comprehensive pilot operations of oil treatment and transportation facilities commenced at the Yurubcheno-Tokhomskoye field in Q3 2017.
In Autumn 2017, the Company launched start-up complex at Erginsky, a new large-scale oil and gas cluster in Western Siberia. The cluster was set up by integrating the infrastructures of the Erginsky license area, acquired at an auction in September 2017, and the previously consolidated Kondinskoye group of fields.
The Company also plans to commission the Russkoye, Tagulskoye, Lodochnoye, Kuyumbinskoye, and Srednebotuobinskoye (phase two) fields in the near future.
The Company implements offshore production and exploration projects in Russia to both replace and grow its resource base, with capex of over RUB 17 bln in 2017.
Development of the Sakhalin-1 project is continuing, including extensive development of the Odoptu and Chaivo fields. Production drilling was launched at the Odoptu field using Krechet, a unique onshore drilling rig. A well with a total length of 15 thousand meters was successfully drilled at the Chaivo field from the Orlan platform in the Sea of Okhotsk, surpassing the previous world record.
As the Company’s offshore exploration projects are being implemented in a sanctions environment, Rosneft commissions Russian and foreign subcontractors and partners who are able to provide their services under the circumstances.
Based on the drilling results from the Central Olginskaya-1 well, the first offshore appraisal well in the Eastern Arctic, Russia’s State Committee for Mineral Reserves confirmed the discovery of the Centralno-Olginskoye field in October 2017. The field lies within the Khatangsky license area in the Laptev Sea and contains over 80 mmt of recoverable C1+C2 oil reserves.
Capex for gas projects in 2017 was RUB 59 bln. The Company’s strategic objective is to bring production to exceed 100 bcm per year, supported primarily by the full scale development of the Novo-Urengoysky and Vostochno-Urengoysky license areas of Rospan International, the Kharampur project, production maintenance projects at existing fields and the Beregovoye field’s lower horizon development by Sibneftegaz.
In addition, Rosneft is involved in promising international projects.
In October 2017, Rosneft closed a deal to acquire from ENI a 30% stake in the Zohr gas field concession, one of the largest in the Mediterranean, located offshore Egypt.
In 2017, Rosneft invested over RUB 36 bln in the development of in-house oilfield services, as the Company continues to implement its strategy of promoting in-house oilfield services to improve upstream performance despite a challenging macroeconomic environment, while maintaining balanced internal and external supplies and robust competition in technological competence, prices, and quality of oilfield services. Among Russian companies, Rosneft’s drilling services are among the most advanced in the Russian market, with at least 60% of its drilling rigs in service for less than 10 years. The Company’s in-house services provide a testing and rollout platform for new, advanced technologies and best practices.
Rosneft’s investment in Downstream entities totaled RUB 87 bln in 2017, including ~ RUB 56 bln of capex toward upgrading its Russian refineries.
The main areas of development in the medium term include continued refinery upgrades, highly efficient debottlenecking projects, improvements upon base oil and bitumen production, existing facility maintenance initiatives, and continued import substitution activities.
- One of the world’s largest biological wastewater treatment plants at the Bashneft-Ufaneftekhim Refinery was commissioned, an addition to the framework within the Year of the Environment 2017 action plan approved by Decree of the Government of the Russian Federation No. 1082r dated 2 June 2016
- The Yaroslavl Refinery launched production of high-purity Group III base oils to supply feedstock for the manufacture of advanced synthetic and semi-synthetic oils
- The Ryazan Refinery refitted the feedstock blending unit at its bitumen production unit and launched higher value-added bitumen production that complies with intergovernmental standards
- The Angarsk Petrochemical Company completed installing core large-capacity equipment for the diesel fuel hydrotreater currently under construction
Rosneft’s investments in commerce and logistics amounted to RUB 22 bln in 2017, with a strong focus on maintaining and upgrading retail assets, oil depot facilities, marine terminals, and refueling facilities to match its competition. In 2017, Rosneft also rebranded its filling stations in the Moscow, Tula, Kaluga, and Ryazan regions, continued its compressed liquefied gas (CLG) sales program, and launched the construction of five Aframax tankers at the Zvezda Shipyard to transport oil and petroleum products.
A key objective in the Rosneft Strategy consists of building and improving investment management processes to increase value for both shareholders and the Company.
Key investment process objectives:
- Consistent improvement of Rosneft’s performance and maximizing the return on employed capital across all areas of its business by thoroughly identifying its investment requirements, building upon the knowledge and expertise of Company personnel involved in investment management, and providing efficient management, monitoring, and follow-up of projects
- Robust business growth through attracting investments to the Company’s competitive and high value-added projects, increasing investment returns, consistently optimizing the project portfolio, and mitigating investment risks
- A disciplined investment strategy through comprehensive project-screening and improving relevant identification and classification processes
- Compliance with the Company’s principles regarding its high social responsibility to environmental and industrial safety, safe working conditions, healthcare, a higher quality of life for employees and their families, educational support, and contribution to the social and economic development of local communities
Rosneft’s investment management is guided by best global practices, its improvement continuing throughout 2017 from a focus on higher investment maturity and maintaining a disciplined investment strategy:
- Business projects are approved through delegating the decision-making process within the authorized investment limits as per investment mandate following a regulated comprehensive due diligence
- The investment process is integrated into related processes of business planning, budgeting, management reporting, financial control, project management, and corporate governance
- In preparing its investment program, the Company relies on a balanced and flexible portfolio of efficient investment projects that enables a rapid response to macroeconomic developments based on a comprehensive project ranking and rating framework while optimizing or reallocating investments where necessary
- Rosneft implements a process for post project monitoring of development projects and acquisitions of core assets to assess performance against projected economics and other project objectives established during the project planning and approval phase by Authorized Investment Bodies of the Company. Each project’s performance forms the Company’s basis for identifying its lessons learned in preparation for future projects and developing best practices in project planning, assessment, and management, including designing initiatives aimed at asset development
- The Company consistently improves its processes and increases accountability to ensure that project delivery is on time, within budget, of appropriate quality, and meeting efficiency targets, while increasing focus on the financial performance of prospective projects, improving project management skills, and building a KPI framework for project managers
- In 2017, the Company introduced an automated multi-level solution designed to check for approved investment decisions, along with checking the business plan budget when making financial commitments, at more than 150 subsidiaries with a combined share of over 80% of the Company’s capex
- Rosneft has developed a company-wide WBS-based capex classification with breakdowns by facility and investment project for subsequent registration of planned, forecasted, and actual data on project execution. A pilot was launched. The system is to be rolled out in 2018–2019
- Rosneft is actively improving its reporting formats and visualization to promote timely decision-making and transparent management reporting, primarily for its most ambitious and crucial projects
- Regular training sessions are held for the Company’s employees to improve their investment management skills and discipline