A new vision for the development of Naftogaz's resource base: great challenges and opportunities

A new vision for the development of Naftogaz's resource base: great challenges and opportunities

On May 18, 2020, a citizen of Kazakhstan, Sanzhar Zharkeshov, joined the Naftogaz Group as Deputy Director General for Exploration and Production of UkrGasVydobuvannya JSC. His task is to increase the efficiency of the oilfield geology and development. For the last 10 years Sanzhar Zharkeshov worked for ExxonMobil in Kazakhstan (Kashagan), the United States (California, Colorado, and Texas), the Russian Federation (Sakhalin Island), and Iraq (Erbil, Mosul). He also led a team of field supervisors, and was a chief drilling engineer at the Merlin ERD Company. In 2018-2019 he was a consultant at McKinsey and Company. In 2019 Sanzhar was appointed Deputy Minister of Ecology, Geology and Natural Resources of the Republic of Kazakhstan. ExPro talked to the new top manager and learned about his vision of the company transformation, his personal functions and tasks in the Naftogaz Group. In addition, Sanzhar Zharkeshov told how the world's standards for oil & gas asset management will be introduced in Ukraine’s largest state-owned oil & gas company.

What are your first impressions of Ukraine?

In general, people in Ukraine are very friendly. Ukraine and Kazakhstan are fraternal nations. We have a lot in common: a common history and the destinies of people. Citizens of Kazakhstan worked here - in Shebelynka and Poltava. In Soviet times they gained solid experience. Even the first President of Kazakhstan, Nursultan Nazarbayev, studied and “first saw fire” at a factory in Dniprodzerzhynsk [Kamyanske – Ed.]. In general, I have very pleasant impressions of Ukraine.

You have recently joined the Naftogaz Group team. How did you start working?

In general, the Naftogaz Group, and UkrGasVydobuvannya JSC in particular, is a large company. My role is to manage the entire Group's geology and oilfield development. I needed to meet all the managers: the employees of the head office and the regional offices. Trips to the regions took a while: I managed to visit Poltava and Shebelynske gas fields, workshops, UkrNDIGaz, other branches and field facilities. I saw that they perform a very large scope of work, including research activities. I will note that such a large scope of work is performed by a rather small number of people. Among other, it is important to understand business processes, see how the company works at all levels, how decisions are made. The Oilfield Geology and Development function, speaking in international language, is a subsurface function. Based on this function, the key geological, technical, and investment decisions are made in any oil & gas company. Therefore, it was important to understand, who make decisions in the company, what those decisions are based on, and how business processes are structured. We understand that the Naftogaz Group is in the process of transformation, which goal is to improve all stages: departments’, head office, and branches’ interaction and, most importantly, to improve operational efficiency. My task is to improve the efficiency of the geology and oilfield development, i.e. subsurface. It is clear that the tasks set for us large-scale. I would like to start from the four most important tasks, set by the Government of Ukraine, and directly influenced by our oilfield geology and development function:

1. Reducing dependence on gas imports.

2. Increasing the resource base.

3. Preparing the company for the IPO.

4. Increase in payments to the State Budget.

My team and I worked out the ways to achieve those goals, which can be outlined  in four points:

1. Introduction of a clear vision and improvement of the business processes.

2. Creation of the World's most-admired subsurface team, i.e. transformation into the best geology and oilfield development function. This task is set for us by Oleksandr Romanyuk, Director of the Exploration and Production Division, and Otto Waterlander, Chief Executive Officer of the Naftogaz Group. Therefore, it is important for us to transform the team to such vectors as competencies’ improving, recruiting people with international experience, organizational structure improving, and reorganization - the function of the oilfield geology and development has to be monolithic.

3. The frontier tasks, as I call them, comprise the third direction. This is the newest direction, the new horizons, where we have little experience, such as tight gas, offshore, and deep drilling. There are some developments in each of these directions, but in general, this is a new challenge for us.

4. Geologic data digitization and management. The first thing we started with was the elaboration of a Strategy for Resource Base Development. The first draft is already there. To do this, we had to carry out in-depth analysis of the direction the oilfield geology and development would move to. It consists of three parts:

1. First is to understand where we are now: in terms of resources, the geology function and its impact on production.

2. Second is where we want to be: short-term, medium-term, and long-term tactics.

3. Third is how we want to achieve results.

We are in the process of this strategy verification with international experts now, and plan to complete it in a couple of months. The second direction, which we launched in parallel, is to improve the business processes. Our Company is large, and we have already started to implement clear and effective business processes’ methods to improve the performance of various company functions at all levels. In particular, we have started to use the Monte Carlo probabilistic method, applied in various fields, and especially in the oil and gas, to assess the appraisal and exploration assets’ risks. The second is Opportunity Realization Standards, a process that allows effective technical, geological, financial, and investment decisions planning production projects. We are already introducing those approaches, and expect a significant effect, as those are the best world practices that proven efficient. We employ the best specialists in Ukraine, with deep experience and knowledge, as we are a national company. They know geological cross-sections better than anyone in Ukraine.  I have seen, and we must pay tribute to it, the great work done to support production in mature fields over the last years. However, the next breakthrough requires new directions and strengthening of the existing team with international expertise. In addition, the world's best practices are required for this breakthrough.

You’ve mentioned three promising areas for the UGV: tight gas, shelf, and deep drilling. Which one is the most interesting for the company?

We are now evaluating the assets in our portfolio and analysing the new promising areas that will form the basis of a new Strategy. The prospects and efficiency of each area depends on macro- and micro-factors. Macro-factors are the price of natural gas that impacts everything, and directly - the profitability of any asset or project. This factor is determined by the situation in the world hydrocarbon market, it changes monthly. We have no influence on it. These areas are important, but we have a production plan and a goal set by the government - Ukraine's energy independence. Therefore, we will move towards a balanced portfolio in terms of timing. Now, it is necessary to crystallize and approve a new Strategy for the development of the Company’s resource base.

You have already started talking about digitalization. Can you tell us more how it could apply to geology?

Of course, we are talking about 3D modelling and digitization of the databases. The 3D modelling is critical today. Speaking in common language, we try to "digitize Mother Nature", and this is not easy. Our division has already launched a large-scale of 3D field modelling  program. Using modern software, 3D models of over 30 fields have been built, of which 12 are permanent hydrodynamic models. We plan to complete 8 more hydrodynamic models by the end of the year. This is a very labour-, capital-, and knowledge-intense process. Recently, in the GeoTransformation paper, we highlighted a formidable practical outcome of our 3D modelling investments. This was the Well No. 71 at the Hadyatske field, where based on a three-dimensional model we chose the right drilling point and received an impressive inflow rate, which once again proved the great potential of 3D modelling.

Digitization of geological data is also a large-scale project. Data have been collected for years, but they are mostly analogue. It is now important to preserve all geological data, so we have started a joint project to digitize them with the market leader, the Schlumberger Company. Our goal is to digitize all geological data to have an integrated database.

You said that you have 12 hydrodynamic models and by the end of the year there will be another 8. The UGV has 202 licenses. How long will it take you to complete this process?

Having a large number of licenses does not mean that we need to digitize everything, as the degree of development and the size of the field are different. We use the Pareto principle - 80/20 ["20% of the effort gives 80% of the result, and the other 80% of the effort - only 20% of the result" – Ed.] - we focus on the most promising fields. It is not a matter of speed or terms, but quality. It is difficult to say now when we will complete this process, but the quality of models as our top priority should be stressed.

Are there any plans to strengthen the team with Western experts? It's no secret that we do not have that many specialists in this area.

We are reviewing the organizational structure, strengthening the team to bring the function of oilfield geology and development to a new level. But, I would not say that there are no such specialists in Ukraine. The Naftogaz Group has top-ranked specialists, who need to be promoted to a higher level on meritocracy principle. This is very important, because it motivates employees. Giving local professionals additional opportunities for internships, training, seminars and workshops, including abroad, can significantly increase their professional level and improve performance. Yes, there are niche areas, such as the development of unconventionals, and we will have to look for appropriate specialists. Or, for example, the offshore. Naukanaftogaz has experienced specialists, but it will still be necessary to attract top-ranked specialists from abroad. We will make a mix of local expertise and world experience.

You visited the UGV’s production facilities. What is your assessment of the situation? What is missing?

We have, as I said, a large business, a large scale. As I understood, the procurement has improved significantly in the recent years, especially in the areas of geology and development. For example, we would like to use modern software not only in the head office, but also in our divisions. We are currently actively training people working at well sites. These are our most valuable staff. We have significantly modernized UkrNDIGaz and attracted leading specialists there. In addition, we have invested into the core storages - the largest in the Eastern Europe. In addition to the core storage, there will be a R&D Centre for oil & gas industry.

And what about the well No. 888? It is complex and very expensive, so everyone is concerned. What is its condition?

I will not talk about it, because in my own experience I have seen that it is better to do and then talk. We need to wait for the results.

Could you tell us if you have the right to hire people and form a team, say, as Andriy Favorov had a carte blanche in terms of staff appointments?

In any company, including ours, there is a principle of checks and balances, and the meritocracy principle, used in personnel matters. Division Director Oleksandr Romanyuk has a carte blanche with the personnel decisions. For example, I was invited to the company as a specialist with international exposure, with an expertise in specific issues, after my competence was assessed in a series of complex interviews. This is the general approach to team building.

Have you worked with Otto Waterlander in the past?

Yes, I used to work with him while at the McKinsey, and helped to transform one of the Naftogaz Group's directions.

That is, before working at Naftogaz, you did work for Naftogaz?

Yes, I managed to prove my competence, and I was noticed.

You were at the McKinsey in 2018, working with the Naftogaz Group. Were you engaged in the development of the 20/20 Program or in the Naftogaz Group’s Corporate Strategy?

I was not involved in the 20/20 Program, but worked in the drilling direction with Ukrburgaz division. It was a job to improve drilling efficiency, because I have experience in drilling of complex wells on Sakhalin Island and California. The McKinsey Company invited me to assess the efficiency of drilling at Ukrburgaz [at that time Ukrburgaz was headed by Andriy Dubyk – Ed.].

You have worked around the world on many interesting projects. Tell us, for example, about a well you drilled on the Sakhalin Island. What was the drilling term, what was the cost?

This was a unique project. The cost is confidential information. The well was 13,000 m long and it was a world record as of 2014. I designed it from scratch. We used the most powerful drilling rig in the world, the Parker Drilling’s Hawk (3000 HP). Drilling began on land, on the island, and the field itself was located under the Sea of ​​Okhotsk. Extended-reach drilling (ERD) technology was used. All-in-all it took 90 days.

You came to the Naftogaz Group from the Ministry of Ecology, Geology and Natural Resources of Kazakhstan. What prompted you to come to Ukraine. Salary, or you just missed oil & gas?

Everyone asks me this question. I worked as a Deputy Minister in a newly created Ministry. Yes, it was a significant experience nationwide, we achieved good results. But the transition to the Naftogaz Group is the next step. I realized that I prefer to work closer to the well and production. Civil service is, rather, a political activity, paperwork. When choosing, a kind of company, its management its leader were important for me. I saw that key leaders have big-picture thinking in the right direction, and that we are like-minded. This was important to me, because one soldier does not make a battle. It was an honour for me to join this team. Ukraine boosted in the oil and gas sector during the Soviet era. Now, there are many challenges, new opportunities, and I like it.

A simple, perhaps naive question, but still: how to increase gas production amid low natural gas prices?

I would not say that it is a simple question, rather a difficult one. I have already talked about macro-factors. We have depleted fields. There are no quick victories in geology. We face difficult tasks. Now, the goal is to maintain production. We are working to reduce and compensate the production decline. Even keeping the current production level is a great achievement. To increase it the foundation shall be laid - increase the geological basis, obtain the new licenses, and convert resources into reserves. That’s what we are now investing into.