Rosgeologia CEO: geological exploration needs state stimulus

Roman Panov has spoken about the special status which is soon to be bestowed on Rosgeologia, and shared his vision of the sector’s further development.

Moscow. December 10. INTERFAX.RU - The government of the Russian Federation, concerned at the slow rate of replenishment of the mineral resource base, has recently paid special attention to developments in the country’s geological exploration sector. According to state institutions involved in the sector, Rosgeologia could well become the driver for growth in Russia’s geological sector.

It is notable that after the consolidation under Rosgeologia of state geological and geophysical enterprises, the holding can now provide a full range of practically ‘turnkey’ services in geological prospecting and exploration. Granting a special status to Rosgeologia, as has been under consideration for the last few months in Minprirodi (Russian Ministry of Natural Resources and Environment), should provide an impulse to growth in the sector.

Rosgeologia Director Roman Panov spoke in an interview with Interfax about the special status in question and the preferences which the company would enjoy, and also discussed his vision of the sector’s further development in the current macroeconomic situation.

— Roman Sergeyevich, in recent times there has been active discussion of granting Rosgeologia a special status, and perhaps turning it into a state corporation. At what stage is the decision-making process?

— The Ministry of Natural Resources and Environment, in accordance with the Prime Minister Dmitry Medvedev’s order, has prepared a proposal to determine the optimal legal status for Rosgeologia and for transforming the company into a special-status operator. Several options are under consideration. These proposals have already been put before the government.

— What is your opinion of the Ministry’s proposal — is it actually necessary to change Rosgeologia’s status? What would this bring the company, and the geological exploration sector as a whole?

— We have had a lot of discussions on this issue with experts, and with the Ministry of Natural Resources and Environment, and also with the Federal Subsoil Resources Management Agency. On the whole, the geological sector community are in agreement that such a transformation would be a boost for the development of Russian geological exploration and prospecting for a host of reasons.

Geological exploration and prospecting is the foundation for the replenishment of the mineral resource base. However, in the current economic situation, the early stages of prospecting are costly and science-intensive, and thus require large investments, as well as a holistic approach towards implementing projects which are at the greenfields exploration stage. The situation today, when the market is populated by a large number of exploration and prospecting organizations with different goals, and with differing principles governing their management, planning, finances, production, and strategy, has led to a de-concentration of financial, scientific, and management resources. Therefore, the creation of a sector leader in the form of Rosgeologia, a leader which would consolidate the necessary state assets and restore the previous scientific-production chains, is a much-needed task.

— Will Rosgeologia get extra preferences as a result: tax breaks, prospecting and evaluation licenses for mineral resources without public tenders, increased capitalization?

— I do not support such systems of tax breaks to selected companies, and that includes Rosgeologia. I believe that tax incentives should be proportionally extended to all mineral resource users, be it to prospecting, mining, or scientific-technical activity. This is much more important than providing a tax incentive to a single participant.

While we are on the topic of licenses — did you know that from this year a new system of issuing prospecting and evaluation licenses for mineral resources has been put into place, working on the application principle? In truth, for now it is still only available for Category P3 solid mineral resources. Rosgeologia, along with other mineral resource users, is taking advantage of such opportunities.

Rosgeologia’s advantage lies in our ability to carry out higher quality processing of primary geological data, analyzing it and determining the most readily available for subsequent capitalization.

At present we are considering those aspects of Rosgeologia which will facilitate its role as an instrument for attracting investment in greenfields exploration. I would note here that the insufficient financing of this stage of geological exploration is having an impact: the government cannot single-handedly finance mineral exploration, and mineral resource users are not prepared to invest large amounts in high-risk projects. Rosgeologia’s task is the stimulation of investment from non-budget sources in the greenfields exploration phase. And this may be not only from mineral resource users, but also from venture funds, banks, finance companies, and foreign investors. Rosgeologia could guarantee investors potential reserves within the limits of certain fields, and could also share the investment risk in these projects.

— Roman Sergeyevich, you have said that tax incentives must be applied proportionally to all mineral resource users. What incentives, in your opinion, do our resource prospecting companies need now?

— Geological exploration must not be viewed as a standalone element, disconnected from the economic process. We are involved in practical applications. The study of fields is undertaken to prepare reserves for recovery and processing. Therefore the benefits must have a systemic basis. In this I see two elements which will facilitate the attraction of investments to the sector and, as a result, make the replenishment of the mineral resource base more effective.

The first is the provision of incentives for operations involving hard-to-reach deposits, and with small and medium deposits which are currently unused because the recovery is currently uneconomical or because they are on the periphery of larger projects. This tax incentive would be extended to small and medium businesses of the sector, as well as companies involved in high-tech and science-intensive projects. All developed countries have followed this model, and its proper application would be an excellent boost for intensifying mineral resource extraction in the Russian Federation.

The second element, in my view, which could be realized here is the formation of special zones, following the examples of the rapid development zones created in the Far East. They could be named differently, but the idea is to implement integrated infrastructural projects which allow investors to invest in exploration, recovery and processing of different kinds of resources. If to this we add tax incentives, this will facilitate the following: major attraction of funds to geological exploration; a boost in the speed of mineral resource base replenishment; and accordingly, an impulse to the development of the mineral resource recovery complex and to related sectors of the economy.

— Will Rosgeologia appeal to the government for funds from the National Wealth Fund? Or are there alternative channels for financial support?

— We have no such plans today. Rosgeologia undertakes geological exploration at the early stages under government contract, and thus receives funds from the federal budget. We have plans, as I have mentioned earlier, to intensify work towards attracting investment from non-budget sources. Rosgeologia also has the ability to attract credit funds for implementing its projects. The holding’s debt to EBITDA ratio stands at approximately 1, and the company’s financial standing is stable, and no foreign exchange debt exists.

— Roman Sergeyevich, won’t the current macroeconomic situation lead to lowering of costs of geological exploration or to a reduction in its volume? How will the reduction in client orders from the oil and gas companies be made up?

— Indeed, there will be a reduction. Among mineral resource users, the first investment program to suffer in a crisis is geological exploration, as it has the smallest direct impact on operational capacities and the volume of resource recovery. This is the nature of business.

On the other hand, in a situation of falling commodity prices, investment funds and new companies become more active. They invest in new projects in order to prepare them for implementation upon restoration of higher prices. Now we already see that after the introduction of the application system by the Ministry of Natural Resources and Environment, the demand for solid mineral resource fields has multiplied. This points to the fact that the selected stimulus is effective, and that investors who understand the current market situation are interested in investing in long-term projects.

— Do I understand correctly that you plan to compensate for the reduction in volume of geological prospecting and exploration from large companies by working with smaller players?

— Yes, and also by concentrating resources in Rosgeologia. At present, taking into account the decision on additional capitalization via state companies, our company is able to offer a full range of geological prospecting and exploration services. The concentration of resources in Rosgeologia and the holistic modernization of production capacity will allow the holding to assume the role of technological leader in the market for early-stage geological prospecting and exploration.

— Within what time frame is Rosgeologia to become this “technological leader”?

All our milestones are laid out in our strategy which has been confirmed by the board of directors. We have set the goal of completing this task in 5 years. This is a short time, and demands intensive and exacting work. It is, however, a realistic time frame with a proper approach and planning, if there is no serious budget sequestration as a result of canceling geological subsoil research projects. Today we have a 10% budget reduction which has, of course impacted geological prospecting and exploration(GPE), but this is not yet critical. Of course, if there is sequestration two or three times, then this will undoubtedly have an impact.

— Roman Sergeyevich, since we have moved into discussion of the technical re-equipment of Rosgeologia, could you elaborate on what has already been done in this area and what will be accomplished in the next five years?

— Altogether 22-24 billion rubles have been allocated to the technical re-equipment of the holding. The main issue concerns the replacement of the drilling equipment stock and the seismic equipment.

Over the past two years we have replaced critical equipment, additionally equipped three seismic prospecting crews with new seismic sources, and have replaced parts of our drilling equipment. The total volume of investment over the past year has been within 1 billion rubles.

— By how much has the equipment deterioration been reduced during the program?

— I wouldn’t say that it has significantly reduced, as intensive re-equipment is set to be implemented from 2015. This is linked to the concentration of financial resources. We have set ourselves the goal of reducing equipment turnover from the present 78% to 50% by 2020.

— How do you deal with inadequate equipment for continental shelf operations?

— This market has potential — the number of orders today, due to license obligations, is quite high. We are also working actively in this area.

Today Sevmorgeo is part of the holding. We plan to further consolidate within Rosgeologia the Polar Geological Exploration Expedition and Yuzhmorgeologia which are currently under Rosnedra’s(Federal Subsoil Resources Management Agency) purview, as well as Dalmorneftegeofizika and Sevmorneftegeofizika which fall under Rosimuschestvo(Federal Property Management Agency). This group of five assets should form a unit which can tackle tasks of complete seismic exploration of all levels of difficulty on the continental shelf with the exception of high-tech 3-D and 4-D seismic exploration at large scales.

— And what of equipment which Russian companies did not and do not possess, such as marine vessels for 3-D seismic exploration? Is the possibility of leasing or purchase from foreign concerns being examined?

—We are currently in talks with Russian and foreign partners about organizing such operations, keeping in mind the current conditions which exist due to foreign policy. Actual agreements have not yet been reached.

Furthermore, we are considering the option of building such 3-D seismic exploration vessels at Russian shipyards. This will require the integration of engineering technologies and experience of Russian shipbuilders, but this task can be accomplished.

— Was Rosgeologia’s inadequate equipment for shelf operations the reason that Gazprom has recalled the tender for conducting seismic exploration in the Ludlovsky field of the Barents sea?

— The issue is connected to the limited access to imported equipment in the Russian market. That is to say, there were no guarantees that the vessels and equipment we required would be available. The client considered the situation, and with the addition of certain technological parameters, the composition of the second tender participants changed. After the change in the tender conditions, we chose not to put in an application.

— How will sanctions affect the re-equipment program?

— The sanctions will definitely serve as a technological challenge to Russian industry. On the other hand, today we are concentrating internal resources more than ever. I can say that we have not had such interest in solidarity within the sector for a long time.  And if today we do not accomplish this task of restoring Russian industry, it is possible that we will not have a second chance.

There is not a single segment in which we could not fulfill the market demand. There are elements which we acquire from abroad, but we are not critically dependent on any of the countries leveling the sanctions. Alternatives to American and European equipment can be found in Southeast Asia and Latin America. We ourselves are well able to establish manufacture of the needed equipment quite quickly, but this is not instantly possible; it may require 2 to 5 years. Most importantly, we must focus Russian buyers’ attention on the Russian manufacturer.

— And is there such a plan? How can Russian oil companies be brought to focus on Russian service companies, including geological exploration companies?

— This is a task, above all, for the Russian oil-and-gas service sector. Its services and level of provided solutions must correspond to the client’s requirements. To this end it is crucial to intensify R&D operations. Today, not one Russian geological company can invest significant funds in research and development. At the same time, in the US for every dollar invested in the field, two are invested in research and development. Schlumberger alone spends over $1 billion a year on R&D, which facilitates the introduction of new geological exploration methods, new deposit recovery efficiency improvement techniques, and so on. One of Rosgeologia’s key tasks is to create conditions for technological improvement and high-tech Russian geological exploration and services through increased investment in R&D.

— How much does Rosgeologia invest in R&D now?

— Today we invest 0.2% of our turnover in R&D (for now modernization of equipment is a priority). By 2020 we plan to reach at least 6%. For instance, with a 40 billion ruble turnover we will direct about 2.5 billion rubles to scientific research operations. This is not a lot, but it is already tangible. Few Russian geological exploration and service companies have any R&D investment at all, with the result being dependence on foreign licensed products and imported equipment.

— What financial results does Rosgeologia plan to receive at the end of 2015?

— Next year’s budget is still being determined; just now we are in the midst of budget committee deliberations. We are very particular about those projects which are to be realized in the coming year; we are working on increasing operational efficiency, as well as reducing administrative and other costs within the holding. We expect that our consolidated turnover next year will be 5-7% higher than 2014’s, not counting the holding’s newly-included companies. At the same time we plan to maintain our profit growth and our EBITDA.

— Considering Rosgeologia’s expectations of reduced prices and volume of geological exploration in 2015, is the growth of financial indicators to be achieved via the holding’s additional capitalization?

— As I said earlier, we have set ourselves the goal of improving financial indicators by improved operational efficiency of the business and by expanding our portfolio, by developing new directions within the holding which offer technologically superior solutions, and by working more intensively with the private sector. Of course, as a result of the inclusion in the holding of new state enterprises, the increase in turnover could significantly exceed the afore-mentioned 5-7%.

— President of the Russian Federation Vladimir Putin has requested an import substitution plan for the fuel-energy complex by November 1. What proposals on this issue has Rosgeologia put forward?

— We see four key directions which require close attention in the issue of import substitution: seismic exploration equipment, drilling equipment, shelf operation equipment, and software for integrated data processing, interpretation, and storage.

We consider these blocks to be top priority, and a plan has been developed for measures towards import substitution. Rosgeologia is able to take on the role of coordinator for these activities. The company has established the post of Deputy Director for Technological Development, which will allow us to work daily on tackling these tasks.

— Could you state the deadlines for these four import substitution aspects which you listed?

— One cannot say that we will have it all in a year. However, on the whole we believe that in three years we can replace the critical equipment for our main geological exploration operations.

— Roman Sergeyevich, are there any developments in the talks between Rosgeologia and Gazprom Neft regarding hard-to-recover deposits? What fields are under consideration? What sort of collaboration could be expected?

— Collaboration may be in the form of a joint venture. Negotiations are quite active at present. We are studying several fields with our colleagues: in Tomskaya Oblast, and in other fields (I will not go into detail for now). This work is being conducted not just with Gazprom Neft, but with other major oil companies too. Hard-to-recover deposits are among Rosgeologia’s priorities.

— Besides collaboration with oil companies on hard-to-recover deposits (HTR), Rosgeologia had planned to create testing areas for recovery of these ‘difficult’ hydrocarbons. What steps have been taken in this direction?

— We have determined the number of these testing areas, and have presented our justifications for their creation to the Ministry of Natural Resources and Environment. We plan to implement them in the coming year.

We have also determined the number and appropriate degree of qualification for the experts and managers who will be involved in this project. I can say that the holding is prepared for this task. We must strengthen the scientific component, as working effectively with HTR without quality scientific foundation is impossible.

— In what regions will these testing areas be set up?

— The testing areas will be created across the entire territory of the Russian Federation, as they will cover various types of hard-to-recover reserves. This includes Bazhenov formation, and coal bed gas, and others. The goal is to try different technological solutions in different geographical and geological conditions. There will be a total of 8 such areas, as earlier planned.

— What are the prospects for the coal industry, according to Rosgeologia, in the Far East, specifically in Amurskaya Oblast and Sakhalin? Will the holding be participating in the coal prospecting tender for these regions?

— We regularly apply for tender participations, and our companies are working on creating a coal resource base for these regions. As for Sakhalin, there is a stable demand for coal there, an effective market for coal due to the proximity of Southeast Asia. Amurskaya Oblast has great potential with respect to reserves, but the infrastructural obstacles must be overcome, and the possibility of expanding the region’s throughput capacity by rail and production capacity must be exploited.

— Rosgeologia is also developing projects abroad — collaboration with Mongolia and South Africa have been mentioned. What other countries is Rosgeologia interested in? Why are you expanding into the international market?

— We are talking about the Southeast Asian markets (Vietnam, Indonesia, Mongolia), the African continent (Algeria, the Sudan, South Africa), about Latin America (Chile, Ecuador, Venezuela), and the Middle East. Russian geologists are demand in these countries. We are in talks about collaboration with the authorities in each of the countries which hold priority interest for us, with varying degrees of success. We are in contact with all key state institutions, or sector-related organizations, with state geological services and large companies; we regularly take part in tenders; we work with Russian companies which are active in the international market.

Foreign operations are attractive to Rosgeologia for three reasons. Firstly, working within just one country does not allow us to monitor and analyze new technologies being put into use across the globe. In order to meet technological demands and be competitive, it is essential to understand how the foreign market is developing, what equipment is in use, what cutting-edge experience is being applied. Operating in the international market will facilitate the introduction of new technologies in our own country.

Secondly, it is a chance to study the perspective mineral resource base, especially for those raw materials the recovery of which is not economically feasible, or which simply do not exist in Russia. The creation of such capacity for realization in future projects by Russian companies, including state-owned firms, is standard practice, and has been formed by leading countries of the world.

Thirdly, it is definitely diversification in the use of equipment. Russia has difficult climatic conditions, and the field work season in many regions is no longer than four months of the year, and we need to understand where to send our equipment in the remaining eight months. Without such international integration, it is very difficult to achieve high levels of machine utilization. Geographical diversification aids in reducing operating costs and improves profitability.

— Roman Sergeyevich, how would you assess the current state of the geological prospecting and exploration sector of Russia today?

— I would give the sector a ‘satisfactory’ grade. There is potential for growth.  At the same time, if a serious effort isn’t made today, the sector may lapse into an unsatisfactory state.

We have all we need to restore the previous strong position of Russian geological prospecting and exploration: from personnel training to experience to technological development. However, we have problems in management, strategic planning, and investment, which is insufficient.

If we are able to take advantage of the state support being provided today to geological prospecting and exploration, Rosgeologia could become a driver for the sector’s growth and bring technological development.