TO THE ATTENTION OF SHAREHOLDERS of Open Joint Stock Company “Surgutneftegas”!
(Location: Russian Federation, Tyumenskaya Oblast, Khanty-Mansiysky Autonomous Okrug - Yugra, Surgut, ul.Grigoriya Kukuyevitskogo, 1, bld. 1)
The Board of Directors of OJSC “Surgutneftegas” notifies shareholders that the Annual General Shareholders’ Meeting in the form of a meeting (joint presence of shareholders to discuss issues on the agenda and adopt resolutions put to vote) is to be held on June 29, 2012, 10:00 a.m., at the address: ul. Gubkina, 13, Surgut, Khanty-Mansiysky Autonomous Okrug - Yugra, Tyumenskaya Oblast, Russian Federation, 628415. Registration of the participants of the meeting starts at 8:00 a.m., June 29, 2012, local time.
In order to be registered as participants, OJSC “Surgutneftegas” shareholders are requested to provide their passports. Shareholders’ proxies shall have a Power of Attorney entitling them to participate in the meeting. Such Power of Attorney shall be issued in compliance with Paragraph 1, Article 57 of the Federal Law “On Joint Stock Companies” and Paragraphs 4 and 5 of Article 185 of the Civil Code of the Russian Federation. Shareholders may exercise their right to participate in the meeting by sending completed ballot papers by mail (or delivering them in
person) to:
ZAO “Surgutinvestneft”, ul.Entuziastov 52/1, Surgut, Khanty-Mansiysky Autonomous Okrug - Yugra, Tyumenskaya Oblast, 628415. Ballot papers received by the Company by June 26, 2012 at the latest will be taken into account to determine a quorum of the meeting and count the votes.
The date when the list of persons entitled to participate in the Annual General Shareholders’ Meeting of OJSC “Surgutneftegas” is compiled is 14 May 2012.
Agenda of the Annual General Shareholders’ Meeting:
1. Approval of the annual report of OJSC “Surgutneftegas” for 2011.
2. Approval of the annual accounting statements of OJSC “Surgutneftegas”, including profit and loss accounts, for 2011.
3. Approval of distribution of profit (loss) of OJSC “Surgutneftegas” for 2011, including payment (declaration) of dividends, approval of the size, form, period, and procedure for dividend payment on shares of each category.
4. Election of members to the Board of Directors of OJSC “Surgutneftegas”. 5. Election of members to the Auditing Committee of OJSC “Surgutneftegas”. 6. Approval of the Auditor of OJSC “Surgutneftegas”.
7. Approval of interested party transactions which may be conducted by OJSC “Surgutneftegas” in the course of general business activity (as stipulated by Paragraph 6, Article 83 of the Federal Law of the RF “On Joint Stock Companies”).
8. Amendments to the Regulations on the Auditing Committee of OJSC “Surgutneftegas”. Shareholders may review the information (materials) subject to presentation to shareholders while preparing for the annual general shareholders’ meeting at: ul.Entuziastov 52/1, Room No. 152, Surgut, Khanty-Mansiysky Autonomous Okrug - Yugra, Tyumenskaya Oblast, 628415, starting from June 08, 2012, every working day from 09:00 a.m. till 12:30 p.m. and from 14:00 p.m. till 17:00 p.m. Telephone in Surgut: (3462) 46 27 64.
Shareholders entitled to reduced tax rates, or exemption from corporate profits tax on income in the form of the dividends, shall submit prior to the dividend payout date to OJSC “Surgutneftegas” the documents confirming the applicability of tax benefit, or exemption from the tax.
A list of the documents and documentation requirements stipulating the application of reduced tax rates, or exemption from corporate profits tax on income in the form of the dividends, are available at the website of OJSC “Surgutneftegas”: www.surgutneftegas.ru/ru/investors/info/.
The documents shall be submitted to: ul.Grigoriya Kukuyevitskogo 1, bld. 1, Surgut, Khanty-Mansiysky Autonomous Okrug – Yugra, Tyumenskaya Oblast, 628415, Securities Division of OJSC “Surgutneftegas”.
All the submitted documents shall contain relevant and accurate information and shall meet the requirements available at the website of OJSC “Surgutneftegas”.
Unless the shareholders submit the aforementioned documents within the specified period of time, OJSC “Surgutneftegas” will apply general taxation procedure to dividends paid to such shareholders.
2 APPROVED
by the Board of Directors of Open Joint Stock Company “Surgutneftegas” Minutes No. dtd “___” _____________ 2012
ANNUAL REPORT
OF OJSC “Surgutneftegas”
FOR 2011
Director General V.L.Bogdanov __________
(signature)
Chief Accountant A.V.Druchinin _____________
(signature)
3
TABLE OF CONTENTS
THE COMPANY AND THE OIL AND GAS SECTOR 4
BUSINESS PRIORITIES 10
KEY RISKS RELATED TO THE COMPANY’S OPERATIONS 12
Industry risks 12
Country and regional risks 15
Financial risks 15
Legal risks 17
REPORT OF THE BOARD OF DIRECTORS
OF OJSC “SURGUTNEFTEGAS” ON THE COMPANY’S
PERFORMANCE AND BUSINESS PRIORITIES DEVELOPMENT PROSPECTS
19 Production operation
Resource policy 19
Oil and gas production 25
Oil refining and gas processing 31
Sales of petroleum products 35
Power generation 38
Research and technology 40
R&D profile 40
Innovations 41
Information technologies 43
Social responsibility 47
Environmental industrial safety 47
Personnel development 53
Charity and social activities 57
CORPORATE GOVERNANCE AND SECURITIES 66
The Company’s compliance with the Code of Corporate Behavior 66
Board of Directors 66
Individual executive body 67
Remuneration paid to the Company’s executive bodies and members of the Board of Directors
67 Report on declared dividend payments 68
ADDITIONAL INFORMATION 69
A list of the Company’s transactions carried out in the reporting year
69 The energy resources utilized by the Company 70
4
Full Company name
Open Joint Stock Company “Surgutneftegas”
Address: ul.Grigoriya Kukuyevitskogo 1, bld. 1, Surgut, Khanty-Mansiysky Autonomous Okrug - Yugra, Tyumenskaya Oblast, Russian Federation, 628415
Representative office
Moscow representative office of Open Joint Stock Company “Surgutneftegas” Address: ul.Myasnitskaya 34, Moscow, Russian Federation
Representative office
Saint Petersburg representative office of Open Joint Stock Company “Surgutneftegas”
Address: ul.Podkovyrova 37, St. Petersburg, Russian Federation
Representative office
Yakutsk representative office of Open Joint Stock Company “Surgutneftegas”
Address: ul.Ordzhonikidze 36, Yakutsk, Republic of Sakha (Yakutia), Russian Federation
5
THE COMPANY AND THE OIL AND GAS SECTOR
Development trends in the sector in the reporting year
In 2011, the global economy continued its recovery although the revival of the economic growth is still unstable. The global economy grew by 3.8% against 5.2% in 2010, with both developed and developing countries affected by the slowdown. While China and India remained the driving forces behind the growth of global GDP, Brazil lost this status. Emerging markets mostly demonstrate fast economic growth but there is a growing concern about the “overheating” of some of these economies due to increasing inflation. Many advanced economies continue to show relatively weak growth limited by high unemployment rates, poor financial conditions, and the concern about the future of the national budget and the financial sector. A number of European countries are facing serious difficulties as a result of the outstanding debt problems.
The Arab revolutions and instability involving Syria and Iran amplified the fluctuations in the global oil supply and demand even more: the increase in the global oil demand in 2011 was a mere third of the 2010 figure (1% vs. 3%, respectively).
Prices for most exchange commodities in 2011 went down on the back of a weaker world demand. On the contrary, crude prices were pushed up, mainly by geopolitical risks: the annual average Brent price soared by 40% to 111 USD/bbl; the average Urals price, by 39% to 109 USD/bbl. In 2011, price volatility remained quite high: minimum Brent price was 93.7 USD/bbl and maximum price was 126.6 USD/bbl.
Higher oil prices and the growing demand led to an increase in hydrocarbon exploration all over the world. In 2011, global oil reserves increased by 7 bn tons (+3.2%) to 223 bn tons. The top ten countries with the largest oil reserves were the same; their share in the world reserves remained at the same level (85.3%), with Saudi Arabia still leading the field.
Global production in 2011 totaled 3.6 bn tons of crude oil, which is slightly less than in the previous year. Global production of liquid hydrocarbons amounted to 3.9 bn tons, including liquid hydrocarbons from gas processing. Just like before,
6 ten oil producing countries account for more than 63% of the global crude production. Despite the production decline in Libya by 70%, OPEC increased its oil output by 11 mn tons, although the available OPEC production capacity decreased to 3.8 mn bbl/day in 2011. The output from the North Sea continues to fall, with UK and Norway fields suffering from the largest decline.
The world gas demand in 2011 rose by 3%. In the year under review, global gas reserves increased by 1.5% to 191 tn cub m, with Iran, Indonesia, and the USA demonstrating the highest growth in gas reserves (mostly thanks to shale gas). The top ten countries with the largest gas reserves remained the same; their share in the global gas reserves at 2011 end exceeded 79%. Russia is still the first in the world in terms of gas reserves: it accounts for over 25% of the world reserves.
Gas production in 2011 totaled 3.1 tn cub m. The rate of production growth has slowed to 3% compared to 5% in 2010. The USA (+40 bcm), Qatar, Russia, Turkmenistan, and China were the leaders in production growth. The accelerated growth in shale gas production in the United States was the key contributor to the record-high increase in gas output in this country. Natural gas prices in 2011 continued their recovery but are still below the pre-crisis level.
Demand for all sources of energy is on the rise, though the share of fossil fuels in global energy consumption has been gradually (yet slowly) shrinking. Renewable energy growth is driven by subsidies granted for alternative energy projects by governments of different states (US, EU, China).
Alternative sources of oil are gaining wider presence in total fuel production. The development of shale oil fields is currently gaining momentum in the United States. According to some estimates, by the end of this decade its output may grow by 25%, to approximately 2 mn bbl/day. An increasing number of companies acknowledge the potential of this market and start investing more heavily in unconventional oil sources. Oil sands production also has great potential and sees higher rates year on year in Canada.
Russia leads the world in crude output. In 2011, crude and gas condensate production amounted to 511.4 mn tons, up by 6.3 mn tons from 2010. Rosneft and Surgutneftegas were the major contributors to the production growth. As in the previous year, Eastern Siberia and Far East projects became the key growth drivers
7 adding 8.5 mn tons (+17.8% to the 2010 level). Non-VIOC companies also contributed to higher output by increasing their production in 2011 by 3.2 mn tons (+7.7%).
At the same time, the output in 2011 grew more slowly compared to the previous year (1.2% against 2.2% in 2010). Lower production growth is mostly due to natural depletion of major fields coupled with higher costs of production and poorer quality of new reserves. Above all, it affects the key producing regions, including Western Siberia which brings almost 60% of oil produced in Russia.
The number of fields put on stream in 2011 was also on the decrease: 16 fields in Russia compared to 23 fields the year before. The share of new fields in the total Russian output was down to 7.7% (8.2% in 2010), which is another proof that the quality of new reserves is getting poorer.
Meterage drilled by Russian oil companies in 2011 was 18,742 thousand m (+8.8%). As a result, the number of wells brought on stream in 2011 went up by 5.9% to 6,146 wells. At the end of 2011, the number of oil producing wells in operation increased slightly to 160.4 thousand wells (+0.6%). The companies continue optimizing the structure of their well stock; as a result, the number of idle wells in the industry decreased by 937 wells (-3.8%) to 23.5 thousand wells.
Over the last years, transport infrastructure has undergone a rapid development. In 2011, the Purpe-Samotlor pipeline came onstream; the first oil was delivered by pipeline to China; the Baltic Pipeline System-2 project approached its final stage; the construction of the Zapolyarye-Purpe pipeline was approved for financing.
Russia is the second largest exporter of crude oil in the world accounting for 12% of the international oil trade. Most of the Russian hydrocarbons are supplied to Europe where Russia has a 30% market share.
In 2011, crude supplies to non-CIS countries decreased by 3.9% to 212.2 mn tons due to a decline in supplies to Europe. However, the ESPO pipeline made it possible to increase export supplies to the Asia-Pacific Region to 30 mn tons, with supplies to China many times larger than before because the Skovorodino - Daqing pipeline received the first oil after the Chinese section was commissioned. Exports to CIS countries went up by 3.6 mn tons (+13.7%) to 29.9 mn tons, primarily driven
8 by a 40.8% increase in supplies to Belorussian refineries. In total, Russia exported 242.1 mn tons in 2011, which is 2% less than in the previous year.
Russian refineries increased the volume of primary crude oil distillation: crude oil refining and condensate processing in 2011 reached 257.9 mn tons, which means that Russia refines more than half of the produced oil. In 2011, oil was refined by 29 major refineries and several dozens of mini refineries in Russia.
As in the previous year, the oil conversion ratio in 2011 decreased slightly to 70.8% vs. 71.1% in 2010. Diesel fuel and fuel oil still account for a large share in the output mix: their production in 2011 rose to 73.3 mn tons (+4.9%) and 70.6 mn tons (+0.3%), respectively. The bulk of these petroleum products is exported as fuel and feed stock for further processing. Gasoline production reached 36.6 mn tons (a 1.7% increase) but this growth was not enough to meet the needs of the domestic market. Despite the protective export duties, there were times when the regional markets experienced the shortage of gasoline. Over the last years, higher quality of gasoline reflected a positive trend in the industry. As a result, high-octane gasolines accounted for 89.6% in the total gasoline output in 2011 compared to 84.8% in the previous year. During the year, the country produced 9.3 mn tons of jet kerosene (+2.3%). The domestic consumption of jet kero was at an all-time high: air transportation in Russia has expanded significantly, which led to the shortage of this product on the domestic market in late 2011.
In recent years, the government has been paying closer attention to the Russian refining sector, in particular, to the quality of the product output. This led to the applicable Technical Regulations on oil products, differentiated excise duties on gasoline and diesel fuel based on their environmental class, and more stringent control over refineries upgrades. As a result of these processes, oil companies increased their investments in re-equipment of their production facilities.
In 2011, the industry made a transition to a new model for calculation of export duties equalizing duty rates for light and dark oil products (the 60-66-90 system), which also provides for an increase in export duty rates for dark oil products to 100% of the crude oil duty from 2015. The duty rate on mogas was increased (90%) to restrict the export of mogas which was in deficit in 2011. As a result, gasoline export in 2011 remained limited (less than 3.1 mn tons), diesel fuel
9 export decreased from 40.6 mn tons to 35.4 mn tons, and fuel oil export was at the same level (71.7 mn tons).
In 2011, Russia produced 687.5 bcm of gas (+3.3%) setting a new record after the breakup of the Soviet Union. NOVATEK, the second largest gas producer in Russia, was leading the upward trend. PSA operators also did well (+8.3%) whereas Gazprom increased gas production by 0.2% only, which is well below the general industry performance. Vertically integrated oil companies boosted gas output by 9.2% bringing their share in the total gas production from 10.7% in 2010 to 11.4% in 2011. Gas production by oil companies totaled 78.1 bcm, including 58.9 bcm of associated petroleum gas (APG). APG utilization remains one of the most sensitive issues for vertically integrated oil companies: while APG production grows, the level of its value-added use at year end dropped to 76%.
In search of lower transit risks, the industry continues expansion of gas transport infrastructure. In 2011, the first line of the Nord Stream gas pipeline connecting Russia and Germany through the Baltic Sea was commissioned with a throughput of 27.5 bcm/year. The commissioning of the second line which will double the pipeline throughput is scheduled for October 2012. Export supplies of Russian gas in 2011 increased by 6.7%; supplies to the domestic market, by 2.9%.
Therefore, the main development trends in the oil and gas industry in the reporting year were:
higher hydrocarbon prices;
increased oil and gas production;
increased exploratory and development drilling;
continuing development of transport infrastructure;
expanded Russian presence on the Asia-Pacific market and increased oil supplies to China.
The Company among its peers
OJSC “Surgutneftegas” is the fourth largest oil producing company in Russia. In 2011, the Company increased crude oil output to 60.8 mn tons, which is more than 12% of the domestic oil production. Gas production totaled 13.0 bcm (more than 20% of all gas produced by Russian vertically integrated oil companies).
10 In 2011, the Company increased production by 2.1% (outperforming an industry average) and commissioned 5 new fields.
The Company pioneered the full life-cycle for APG processing and APG-based energy production in Russia. As a result, for many years Surgutneftegas has maintained the highest ratio of associated petroleum gas utilization in the sector, which reached its record high of 97.8% in 2011.
Traditionally, Surgutneftegas is far ahead of its industry peers in terms of development and exploratory drilling. In 2011, development drilling amounted to more than 4,530 thousand m (or over 25% of the meterage drilled in the sector); exploratory drilling, to 216.3 thousand m (or 29% of exploratory drilling in Russia). Accordingly, the Company accounts for over 46% of all exploration wells constructed in Russia.
The Company has the smallest number of idle wells. The share of idle wells in the total operating well count was 6.8% at year end. For years, Surgutneftegas has kept the ratio of idle wells below 10%.
Refining throughput at LLC “KINEF”, the Company’s refinery, amounted to 21.1 mn tons, or 8.2% of the domestic throughput. The refinery is the largest one in Russia in terms of throughput. Annually, the Company maintains 100% utilization of its capacities.
The Company’s marketing units, with their network of 298 fuel stations, are leaders in the north-west of Russia. In 2011, the Company sold 1,600 thousand tons of oil products.
11
BUSINESS PRIORITIES
Oil and gas production:
to replace and improve the quality of mineral resources on an expanded
scale through geological exploration in existing license areas and acquisition of new promising areas;
to develop and apply innovative solutions and introduce advanced field
development technology and equipment in order to enhance efficiency of oil and gas exploration and production;
to maintain the existing level of production in the traditional area of operations
(Western Siberia), increase crude output in Eastern Siberia, and develop Timano-Pechora extensively;
to take a comprehensive approach to gas sector development: to provide for
a high utilization level and maximize efficient use of associated petroleum gas;
to control costs.
Oil refining and gas processing:
to improve the quality of products and ensure compliance with Russian and
international quality standards;
to enhance refining and processing efficiency through modernization and
reconstruction of production facilities;
to extend the range of products.
Marketing:
to diversify product supplies by entering new markets and developing
Russian transportation infrastructure;
to expand petroleum products markets through construction and
modernization of gas stations;
to boost sales of associated goods and services.
Power sector:
12
to develop small-scale power generation by expanding in-house generation
capacity for reliable power supply to production facilities, efficient utilization of associated petroleum gas, and additional technological and economic benefits;
to introduce energy-saving and energy efficient solutions and technology.
Social responsibility:
to mitigate the environmental impact of production facilities and use natural
resources in a responsible and rational way;
to assure high industrial and occupational safety standards;
to contribute to the social and economic development of the areas where the
Company operates;
to offer extra social benefits and guarantees for the employees, their families,
and retired employees.
13
KEY RISKS RELATED TO THE COMPANY’S OPERATIONS
In the course of its activities, OJSC “Surgutneftegas” is exposed to different risks, including industry, country, financial, and legal risks, which may adversely affect the Company’s operating and financial performance. In line with its operating principles, the Company seeks to minimize the risks under the Company’s control and mitigate any negative consequences of the risks in cases when the Company’s ability to control is limited.
Industry risks
The most substantial risks for OJSC “Surgutneftegas” are industry risks that include the following: changes in prices for the Company’s products, materials and services used in the Company’s operations, as well as technological and environmental risks related to specific production processes and industry competition.
The Company’s operating results depend on hydrocarbon market condition to large extent. Lower hydrocarbon prices may deteriorate the Company’s financial and economic performance.
Crude oil and petroleum products, the source of the Company’s primary income, are exchange commodities. The world prices for such commodities are affected by a great number of global economic and political factors including global and regional economic growth, balance between the global and regional demand and supply, geopolitical situation in oil and gas producing regions, as well as development of alternative energy sources. Besides, the pricing environment is vulnerable to long-term market speculations.
In 2011, we saw the risk of economic slowdown, especially in euro-zone countries which are the main consumers of the Russian energy resources. Many of them are facing budget deficit and suffering from a heavy debt load. Recently, the credit ratings of some of the countries have been lowered and one may expect the crisis of the banking sector in the euro region. Moreover, such factors as the US budget deficit and risks related to the economy slowdown in China and other oil consuming countries are still a matter of concern. The economy recession may
14 bring forth an oil price drop. The current prices for energy resources include a significant premium for political instability in the Middle East region which also may negatively affect oil prices in the future.
As for the long-term perspective, the prices can be impacted by development of unconventional oil reserves, advanced technologies, and wider utilization of the alternative energy sources. Currently, we see the continuous investment being made in solar and wind energy projects. Shale oil production technology is under development, which is expected to enable the USA to stop almost all crude oil imports in the near future. Other countries may start developing shale oil as well. The same changes occurred on the North American gas market where the oil prices slumped due to a sharp increase in shale gas production.
Prices for crude oil and petroleum products in Russia are set under the influence of the global prices for hydrocarbons and internal factors including, firstly, tax policy in respect of the oil and gas industry and energy resources export regulation.
The risk of changes in energy prices is beyond the Company’s control. At the same time, Surgutneftegas is quite flexible in terms of target market outlets and its production structure as well as able to optimize operating costs and capital investments in response to continuous price reduction. In case of a short-term drop in oil prices, the Company is financially stable and has sufficient reserves to meet its obligations and maintain the necessary investment level considering industry specific long-term production cycle.
Surgutneftegas applies a wide range of materials, equipment and facilities. Therefore, any increase in prices for such products may considerably impact the Company’s operating costs. Surgutneftegas is striving to mitigate these risks through tenders for supply of equipment, direct contracts with manufacturers, and long-term contracts with suppliers. Besides, the Company is implementing programs aimed at better use of resources and lower operating costs, which make it possible to reduce materials consumption and enhance energy efficiency of its operations.
Expenditures for products and services of natural monopolies account for a significant part of the Company’s operating costs; the tariff policy of such
15 monopolies can be regulated by the state. Any further increase in tariffs may negatively affect the Company’s financial results. The Company is unable to influence the pricing process in these industries, but it mitigates risks by developing in-house facilities with due account for investment effectiveness, including construction of energy supply facilities, communication lines, and data transmission lines.
Surgutneftegas is limited in terms of selection of the service companies engaged in transportation of crude oil and petroleum products. The bulk of the Company’s products is transported via the main trunk pipeline system of OJSC “AK “Transneft” and ОАО “AK “Transnefteproduct”. Cargoes are delivered by the railway system of OJSC “Russian Railways”. Underdevelopment of transportation systems in outlying regions, operational failures, and other infrastructure breakdowns and technogenic disasters may result in disruptions and extra costs for supplies of the Company’s products, as well as make oil field development more expensive and time consuming.
Surgutneftegas is exposed to the risk of increased competition among its peers in terms of access to hydrocarbon fields, pipeline systems, refineries, and markets. The most critical issue for the oil companies is competition for oilfield development and production licenses, which results in reserves and production decline and deterioration of economic efficiency of projects due to higher license costs. Today, this type of risk is becoming more crucial due to reserves deterioration and a decreased number of licenses put up for tenders and auctions for oil fields with proved hydrocarbon reserves.
The Company’s exploration activities are linked to uncertainty involving probabilistic assessment of quantitative and qualitative characteristics of petroleum reserves, reservoir structure and properties, and a potential failure to discover commercial reserves. These factors may result in additional costs, revision of the projects investment efficiency, and abandonment of unpromising license areas.
Complex production processes of reservoir management, oil and gas processing and transportation are fraught with technological and environmental risks. Severe weather conditions of the regions where the Company operates and the need to develop hard-to-recover reserves are driving the growth of these risks.
16 However, Surgutneftegas manages to mitigate the impact by strictly adhering to the industry-related requirements and standards, monitoring production facilities, applying cutting-edge techniques and technologies, and improving the competence of personnel in the area of industrial and environmental safety.
Country and regional risks
The Company carries out its core business in the Russian Federation, and the Company’s country risks therefore include political, economic, and social risks existing in Russia.
Political risks in Russia depend on changes in the country’s foreign and domestic policy and the government’s strong impact on the industry, including energy strategy, tariff formation, asset nationalization, or economic liberalization.
The economic situation in the country is relatively stable but at the same time high oil price volatility creates significant risks for the Russian budget as its considerable part is formed from oil and gas revenues. Therefore, long-term price reduction may cause budget deficit and deterioration of the country’s macroeconomic indicators.
The risks connected with worsening of the economic, political and social situation in the regions of the Company’s presence may impact its economic performance. Being a responsible operator, Surgutneftegas duly fulfils its obligation on salary and tax payments and other binding payments. As the Company is focused on sustainable and planned development of the territories of its operation, regional risks are considered to be low.
Surgutneftegas operates mainly in Western and Eastern Siberia, and its refinery and marketing divisions are located in northwestern and central parts of Russia. Traditionally, the Company does not operate in regions prone to earthquakes or natural disasters. However, hydrocarbons production is carried out in regions with harsh climatic conditions which may adversely affect the Company's performance. Products are exported through ports on the Black Sea and the Baltic Sea, which may be closed because of storms or difficult ice conditions. One may also expect material delivery interruptions to territories with limited access.
17 Surgutneftegas sells its products on foreign and domestic markets. The Company earns a significant part of its revenue from its operating activities in foreign currency while its production costs are denominated mostly in rubles. In addition, investments in foreign currency form a large part of the Company’s financial reserves. Therefore, any fluctuations in the ruble exchange rate create risks for the Company. These risks may to some extent be mitigated through multi-currency investment of the Company’s financial reserves and multi-currency risk assessment and accounting when planning its activities.
The Company also incurs moderate inflation risk since inflation growth may result in additional expenses and reduction of profits, as well as loss of actual value of its accounts receivable. Although unable to influence the inflation rate, the Company is striving to optimize consequences of inflation risks through regular evaluation of possible price fluctuation scenarios and their impact on the operating activities and investment projects. Moreover, the Company focuses on production cost optimization, tenders, development of in-house and auxiliary services, suppliers’ diversification, and long-term cooperation with its contractors.
Fluctuations in the market interest rates do not have a significant impact on the Company’s financial performance since the Company does not raise borrowed funds and finances its activities itself. Changes related to bank interest rates may create the risk of lower rate of return on deposits. To manage the risk, the Company monitors and reviews the current interest rates, implements maturity diversification of its monetary funds, and conducts business transactions at a fixed deposit rate, which results in mitigation of interest risks.
The Company also incurs moderate risks of lost profit since most funds are deposited in bank accounts and the Company may earn less profit due to fluctuations in exchange rates and deposit interest rates.
Surgutneftegas manages credit risks which mostly affect the accounts receivable via their monitoring and assessment. To this end, the Company takes into account the financial position of the buyers and their credit history, controls the contracting process, and forms reserves for accounts receivable depreciation.
The Company’s liquidity position remains strong. Surgutneftegas takes a well-balanced approach to current capital financing and controls planned cash flows and
18 payments on a regular basis. The Company’s short-term liabilities mainly involve accounts payable. Thus, Surgutneftegas is able to settle its liability in a timely manner, and the value at risk is minimal.
The Company does not hedge financial risks but indemnifies some of its assets and transactions against obligation risks.
Legal risks
The Company’s development prospects may be limited by changes in the legal and regulatory system for the oil and gas sector. Such changes may result from major events in the political, economic, and social spheres.
The Company’s legal risks include risks in the area of exchange, customs and antimonopoly regulation, tax risks, and possible changes in licensing requirements for core operations. Substantial risks for the Company also include changes in the forestry, water, and land law and more stringent environmental regulations.
Surgutneftegas earns a significant part of its revenue in foreign currency from foreign trade transactions. Therefore, any changes related to currency control may adversely affect the Company’s financial performance. However, the recent initiatives of the Russian Government towards currency control liberalization mitigate these potential risks.
The Company is exposed to the risk of possible changes in customs and tax regulation. For example, the decree of the Russian Government dated 1 May 2011 increased the export duty on gasoline (to 90% of the crude oil duty) to boost deliveries to the domestic market, which made gasoline exports less profitable. The taxation system is not stable enough, with various modification options discussed from time to time, which affects the reliability of the Company’s plans and estimates. Surgutneftegas closely follows all changes to the customs and tax legislation, evaluates their possible implications, and adjusts its operations as appropriate.
The Company runs the risk of increasingly stringent competition law with regard to sales of oil products, which may undermine the performance of the Company’s marketing sector. In an effort to develop market pricing mechanisms,
19 the Company is taking an active part in trading of oil products on St. Petersburg International Mercantile Exchange.
Surgutneftegas operates on the basis of subsoil licenses; therefore, any changes in licensing requirements and procedures may have adverse consequences for the Company.
When carrying out its operations, Surgutneftegas complies with the requirements of the applicable law and license agreements, fulfills its obligations to partners, and minimizes the risk of early termination, suspension, or restrictions on subsoil rights, as well as the impact of other legal risks. Moreover, the Company takes part in discussing proposed legislation concerning its business and includes any prospective changes in its plans and estimates.
20
REPORT OF THE BOARD OF DIRECTORS OF OJSC “SURGUTNEFTEGAS” ON THE COMPANY’S PERFORMANCE AND BUSINESS PRIORITIES
DEVELOPMENT PROSPECTS
PRODUCTION OPERATION
RESOURCE POLICY
Extended reserve replacement creates sustainable growth for the Company. Our unrivalled operational experience in Western Siberia allows us to succeed in reserve replacement in the region and consider it as the basis for future development. Moreover, Surgutneftegas steadily keeps extending its license portfolio and is engaged in geological exploration in Eastern Siberia and Timano-Pechora oil and gas provinces to implement its strategy in terms of geological diversification of production assets.
As of the end of 2011, the Company’s license portfolio comprised 153 licenses for subsoil use, including 53 licenses for exploration and production, 60 licenses for geological survey, exploration and production of oil and gas, and 40 licenses for prospecting and evaluation of hydrocarbon fields.
In the reporting year, the Company carried out geological exploration in 102 license areas within three regions of its operation – Western Siberia, Eastern Siberia and Timano-Pechora.
In 2011, the Company obtained 6 licenses for the right to produce hydrocarbons, including 4 licenses gained on tender basis and 3 licenses acquired for the fields discovered earlier, and 2 licenses for geological survey, prospecting and evaluation of fields, including 1 license gained within the government contract.
Regional breakdown of OJSC “Surgutneftegas” licenses
Region Number of licenses
Western Siberia 118
Eastern Siberia 26
21 To enhance efficiency of prospecting and exploration of hydrocarbon reserves and mitigate geological risks, the Company applies cutting-edge seismic techniques. In 2011, 2D seismic acquisition increased by 30% and reached 6.5 thousand linear km and 3D seismic acquisition grew by 78% to 1.2 thousand sq km. Six wells underwent vertical seismic profile survey. Based on the survey results, 114 sites in 19 structures with 49 mn tons of recoverable oil reserves were prepared for deep exploratory drilling.
In the year under review, prospecting and exploration drilling reached 216.3 thousand meters with 84 wells completed. Due to high quality of exploration works, the exploratory drilling efficiency accounted for over 70%.
In 2011, Surgutneftegas discovered 2 oil fields in Khanty-Mansiysky Autonomous Okrug – Yugra, as well as 33 oil deposits including 29 in Western Siberia, 3 in Eastern Siberia, 1 in Timano-Pechora and 1 gas-condensate deposit in the Eastern Siberian region.
Exploration is a complex production process involving highly qualified personnel and teamwork, as well as innovative solutions and technologies. To support and analyze its exploration activities, in 2011 Surgutneftegas established the Geological Support Center. The mission of the Center is to support and assess the exploration works that have been performed by the Company, estimate hydrocarbon reserves, carry out detailed survey of geological structure of oil fields to determine resource potential of residual oil and gas zones and further design geological and engineering operations to enhance production efficiency.
The Company places great emphasis on research and development activities. In 2011, we performed more than 80 appraisal surveys on geological structure of areas and fields, gained expert review of the State Reserves Commission on our reserve estimation reports for 3 oil and gas fields, and submitted materials for on-going estimate of 35 fields.
As a result of the activities, in the year under review recoverable C1+C2 oil reserves increment reached 136 mn tons including as much as 95 mn tons of C1 reserves. To this end, commercial reserve replacement allowed the Company to replenish its annual production output by 1.5 times.
22 For the last 5 years, the Company has increased remaining recoverable reserves of ABC1 categories by 9% and produced over 300 mn tons of oil.
WESTERN SIBERIA
Western Siberia remains the key area of the Company’s operation. Surgutneftegas is further engaged in exploration activities in the region aimed at stable reserve increment able to replenish current production level. In 2011, exploratory drilling operations reached 150 thousand meters, which translates into almost 70% of total meterage of exploratory drilling.
In the reporting year, 52% or 111.6 thousand meters of total exploratory drilling were performed in Khanty-Mansiysky Autonomous Okrug – Yugra. The operations covered 59 license areas including 19 exploration areas. The Company completed 36 wells, discovered 2 fields, the Khoshiplorskoye field and the Logachev field, and 29 new oil deposits at the fields discovered earlier. We are following our program for additional exploration of underlying beds by sidetracking from wells under development due to which 4 oil fields yielded commercial inflow. Thus, the cumulative C1+C2 reserves growth in the Okrug exceeded 93 mn tons.
Surgutneftegas owns 8 licenses for the right to use subsoil resources sites within Yamalo-Nenetsky Autonomous Okrug. In the year under review, prospecting and exploratory drilling reached 20.8 thousand meters with 9 wells completed. Surgutneftegas performed field seismic surveys of 990 linear kilometers, as well as office study involving data obtained from the Soimlorsky, Severo-Soimlorsky, Vostochno-Soimlorsky and Maloperevalny license areas.
In 2011, prospecting and exploration drilling in other West Siberian regions exceeded 17 thousand meters with 6 wells completed. To keep reserves geological structure current, we carried out reprocessing and reinterpretation of the seismic data of past years, and obtained detailed specification of the structures which had been discovered earlier.
In the reporting year, due to the results of exploration activities within a number of license areas, the Company resolved to terminate the right to use subsoil resources earlier and transfer the areas at which further exploration had been found inexpedient to non-licensed stock of areas.
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EASTERN SIBERIA
Surgutneftegas owns 26 subsoil licenses in Eastern Siberia. The Company is striving to increase exploration to develop the resource potential of the region and create sound foundation for future production activities.
In 2011, prospecting and exploration drilling grew by 14% vs. 2010 and totaled over 50 thousand meters. Meanwhile, 2D seismic surveys rose by 34% and covered almost 5 thousand linear kilometers and 3D seismic surveys increased by 3.5 times to 840 sq km.
Surgutneftegas owns 19 licenses for use of subsoil resources in the Republic of Sakha (Yakutia). In the year under review, prospecting and exploratory drilling within the region amounted to 43.6 thousand meters; 13 prospecting wells and 16 exploration wells were completed. The drilling efficiency reached 79%. The Company carried out 2D and 3D seismic surveys covering 4.8 thousand linear km and 840 sq km, respectively. Besides, 2 wells underwent vertical seismic profile survey. Two new oil deposits were discovered at the Talakanskoye field, 1 oil deposit at the Severo-Talakanskoye field and 1 gas condensate deposit at the Vostochno-Alinskoye field. The cumulative growth of C1+C2 reserves including oil and gas condensate amounted to 41.7 mn tons that is 7.7 times higher than annual crude output in the region.
Surgutneftegas owns 5 licenses in Irkutskaya Oblast acquired to explore and produce crude hydrocarbons. In 2011, exploratory drilling meterage reached 6.4 thousand meters. Seismic surveys of the Pilyudinsky, Ichersky, Nizhnenepsky and Rassokhinsky license areas, allowed the Company to ensure increment of prospective oil reserves. The seismic survey program was completed at all Company’s licensed areas in the Oblast.
In Krasnoyarsky Krai, we own the Studeny and Agapsky license areas. In the reporting year, the Company performed analysis of G&G data and revised seismic profiles of the Studeny license area to make the research more study and discover new oil deposits. As for the Agapsky license area, in 2011 Surgutneftegas covered 100 linear km of seismic profiles being well ahead of the schedule specified in the licensing agreement for seismic surveys.
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TIMANO-PECHORA
Timano-Pechora oil and gas province is the Company’s promising area. Thus, our main objective for today is to discover, assess and prepare reserves for hydrocarbon production in the area.
Surgutneftegas has 9 licenses for use of subsoil resources. In the year under review, prospecting and exploration drilling reached 16.4 thousand meters with 2 wells completed. As the result of its prospecting and exploration efforts, the Company discovered 1 oil deposit.
As part of R&D program, Surgutneftegas reprocessed and reinterpreted primary seismic data obtained from the Nenetsky and Korobkovsky license areas and created 3D geological models of 7 productive formations. The Company continued to perform core treatment, feature composition and properties of formation fluids and justify reserve estimate parameters.
INTERNATIONAL PROJECTS
OJSC “Surgutneftegas” participates in the project of the development of Junin-6 block located in the Orinoco Oil Belt in the Bolivarian Republic of Venezuela.
The Company is the owner of 20 per cent stake in LLC “National Petroleum Consortium” (LLC “NNK”) which promotes interests of the Russian oil companies within JV “PetroMiranda” established to develop Junin-6 block. Forty per cent of PetroMiranda belongs to LLC “NNK” and 60 per cent is owned by Corporacion Venezolana del Petroleo S.A., a subsidiary of the state-owned oil and gas company “Petroleos de Venezuela S.A”.
The block is located in the central part of the Orinoco Oil Belt within the territory of 447.85 sq km and has estimated reserves of 10.96 bn barrels of recoverable heavy oil.
In 2011, the joint venture continued implementing the first phase of the project related to the seismic surveys and design studies. The joint venture was also engaged in preparation of strat well drill sites, at one of which it lunched assembling of a drilling rig at the end of the reporting year. The project participants
25 are considering options of oil production acceleration in the northern part of the block to be started in as early as 2012.
Plans and prospects
In 2012, OJSC “Surgutneftegas” will continue its additional exploration operations in the existing license areas, as well as acquiring new reserves in every region of its presence to expand its license portfolio and ensure long-term sustainability.
Prospecting and exploratory drilling is expected to grow by about 4% to 224.7 thousand meters and the main scope of operations (67%) is to be performed in Western Siberia. 2D seismic surveys are planned to cover over 3.1 thousand linear km. The Company intends to increase detailed 3D surveys by 1.6 times to 1.9 thousand sq km.
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OIL AND GAS PRODUCTION
In the upstream sector, Surgutneftegas follows balanced development policy based on complete resource extraction possible and advanced technologies of hydrocarbons production and EOR methods.
In the year under review, the Company increased its oil production by 2.1% against the previous year to 60.8 mn tons and produced 13.0 bcm of gas.
The investments in oil and gas production amounted to RUB 142.8 bn with 5.8% of organic investment growth. The remaining increase relates to the 2011 year changes in accounting of sidetracking operations.
As for the investment structure, the largest part of investment (85.6%) was made in the core region of Company’s operation – Western Siberia, 13.7% - in Eastern Siberia and 0.6% - in Timano-Pechora oil and gas province.
Crude oil production
In 2011, OJSC “Surgutneftegas” was engaged in development of 60 oil fields including 57 fields in Western Siberia and 3 fields in Eastern Siberia.
Over 66% of the total production output come from the Company’s ten largest fields many of which are mature, with hard-to-recover reserves and high water cut, which requires secondary and tertiary stimulation as their production rate is declining. However, the Talakanskoye, Severo-Labatyuganskoye and Rogozhnikovskoye fields which have been commissioned recently make a significant contribution to the Company’s oil production.
We are striving to develop new hydrocarbon reserves on a stable and continuous basis. To this end, in the reporting year, Surgutneftegas commissioned 5 oil fields including the Vostochno-Studenoye, Zapadno-Sukuryaunskoye, Losevoye and Suryeganskoye fields in Western Siberia, and Severo-Talakanskoye field in Eastern Siberia. For five last years, the Company commissioned 13 new oil fields.
27 Fields Output, thousand tons Fedorovskoye 8,457 Talakanskoye 5,271 Severo-Labatyuganskoye 4,952 Lyantorskoye 4,950 Zapadno-Surgutskoye 3,349 Bystrinskoye 3,235 Rogozhnikovskoye 2,767 Konitlorskoye 2,581 Vachimskoye 2,406 Russkinskoye 2,226 Other 20,587
In 2011, the Company’s production increased by 1.2 mn tons mostly due to production growth of 62% in Eastern Siberia. The Company showed minimum decline of production rate (less than 1.5%) for the last 5 years in Western Siberia, a traditional region of its operation, mostly by virtue of expanded exploration drilling scope and various EOR methods.
In the year under review, exploratory drilling exceeded 4,530 thousand meters (a 7.9% increase vs. 2010). The Company commissioned 1,403 new oil wells with average daily well flow rate of 26 tons. The Company’s drilling divisions which have both extensive experience and developed material and technical base, and are able to perform drilling operations promptly and to a high standard contribute greatly to oil production growth. Thus, in the year under review, 26 drilling crews drilled over 100 thousand m of meterage.
The average active well count increased by 4.0% and amounted to 18,668 wells. Inactive well count accounted for 1,372 wells or 6.8% of the operating well stock. In 2011, the Company kept maintaining the stock utilization at high level of 0.934 due to better efficiency of the operating conditions and methods. As part of efforts to enhance reliability of oilfield and pumping equipment, and introduce new facilities and technologies, in the year under review, average time between maintenance of the Company’s producing wells reached 827 days.
To enhance oil recovery, we implement workover programs to stimulate productive formation taking into account geological structure and physical parameters of every deposit. In 2011, the Company performed 693 sidetracking
28 maintenance operations (a 5% increase vs. 2010), 736 hydraulic fracturing operations within its operating stock (a 17% increase vs. 2010) and commissioned 156 horizontal wells. The cumulative effect from the program made it possible to produce over 13 mn tons of additional oil.
In 2011, the Company was making efforts to reduce unwanted fluids production as part of its program on periodic operation of highly watered well stock and targeted implementation program on operation of idle and non-commercial wells. To mitigate water injection amount, we applied the improved secondary production system and water flooding program which are aimed at water cut reduction.
Surgutneftegas actively develops and applies in-house EOR technologies, as well as cooperates with the leading service companies to improve geological modeling process and choose the best development techniques.
Field development in Eastern Siberia made it possible to compensate for declining oil output in traditional regions of the Company’s presence. Today, we operate 3 fields in the region: the Talakanskoye, Alinskoye and Severo-Talakanskoye fields where the production output reached 5.4 mn tons in 2011.
Continuous development drilling expansion allowed the Company to drill 207 thousand m in 2011 (a 23% increase vs. 2010) resulting in 121 new wells with high performance of as much as 55 tons of oil daily.
Proper infrastructure created by the Company in the region ensures success development of new fields under difficult production conditions of Eastern Siberia. In the reporting year, Surgutneftegas continued developing the infrastructure. To this end, the Company completed construction of oil and gas pipelines and power supply lines at the Severo-Talakanskoye field, as well as launched construction of the Company’s airport to reduce costs and delays and improve material supply in the region.
Gas production
On the gas production side, OJSC “Surgutneftegas” is striving to enhanced gas use efficiency and maximum utilization rate. Every year, the Company makes planned actions to improve existing gas gathering infrastructure and commissions new facilities to enhance transportation capacity.
29 Surgutneftegas produces mainly associated gas, therefore its production amount directly depends on the Company’s oil output. Declining oil production from the fields with the highest gas ratio is accompanied by lower associated gas production. In 2011, the Company produced 12.9 bcm of associated petroleum gas and 11.4 mn cub m of natural gas.
In the year under review, gas utilization rate hit 97.8% reaching a record high among the Russian oil companies.
We are striving to effectively utilize produced gas. Thus, in 2011, the major portion of gas produced (55%) was delivered to the Company’s gas processing plant, 21% was sold domestically, over 11% was supplied to the Company’s gas turbine power plants (GTPP) and gas piston power plants (GPPP), and 13% was consumed as fuel and used for process purposes.
In the reporting period, Surgutneftegas delivered 1,473 mn cub m of gas to its power plants. As of the end 2011, the Company operated 8 transport compressor stations, 1 compressor station for reservoir repressuring by gas injection and 17 compressor stations of low-stage separation at its fields.
In the year under review, Surgutneftegas upgraded the operating equipment, expanded gas utilization capacity, mounted 19 gas distribution units of two stages of separation, performed maintenance overhaul within 22 transport compressor stations, as well as commissioned 3 compressor stations of final separation stages, a gas processing unit of the compressor station at the Talakanskoye field, a gas compression and processing unit of the central oil gathering unit at the Rogozhnikovskoye field, and built nearly 170 km of gas pipelines.
Cost control program
Year after year, OJSC “Surgutneftegas” implements its complex cost-cutting program designed to ensure control and mitigate expenditures within the Company’s business. The program is aimed at improvement of the technical and organizational levels of production, enhancement of efficiency of production capacity and key assets, saving of raw and other materials, import substitution and reuse of equipment.
30 In 2011, the economic benefit of the program totaled RUB 5 bn or RUB 82.7 per ton of oil produced, including 44% for auxiliary operations, 26% for core operations, 14% for drilling and capital construction, and 2% for social sphere.
Energy saving is considered as one of the principal priorities within the Company’s cost saving program. As the result, we are actively engaged in implementing energy-efficient technologies, optimization of electric system performance and regulation of power consumption. As part of the program, in the year under review, Surgutneftegas focused on increasing capacity utilization of the existing gas turbine power plants at the Konitlorskoye and Rogozhnikovskoye fields, decommissioned highly watered and non-commercial production wells and classify them under different categories, as well as replaced its pumping equipment and implemented electric motor converters of various units. As part of the program, in the year under review, Surgutneftegas focused on increasing capacity utilization of the existing gas turbine power plants at the Konitlorskoye and Rogozhnikovskoye fields, decommissioned highly watered and non-commercial production wells and classify them under different categories, as well as replaced its pumping equipment and implemented electric motor converters of various units. In the reporting year, the economic benefit reached over RUB 718 mn, power savings amounted to 573 MW and energy consumption was reduced by 343 mn kWh.
Reuse of production materials and implementation of special equipment and technologies allow Surgutneftegas to reduce materials consumption and production time when performing specific types of operations. In 2011, the materials reuse program brought as much as RUB 1 bn of the economic benefit.
As part of the import substitution initiative, the Company cooperates with domestic equipment manufacturers and R&D centers to search opportunities to make the equipment identical to that produced abroad. Such cooperation provides significant economic benefits and makes it possible to build long-term relations with the partners, as well as drives scientific and technical development of the Russian economy. In the year under review, the economic benefit of the program amounted to RUB 916 mn.
Due to its well-organized service units, the Company is able to perform cost control within the whole production cycle in line with high quality of the works
31 performed. High-tech equipment of the service units together with experienced and highly qualified personnel contribute greatly to fulfilling the Company’s tasks.
Plans and prospects
Surgutneftegas is planning to follow its strategy to expand oil production in new regions of its operation and stabilize the production rate in Western Siberia using its strong ability to perform considerable volumes of expedite and quality exploration drilling and accumulated experience of geological and engineering operations.
In 2012, the Company intends to produce 61.3 mn tons of oil and 12.5 bcm of gas. Oil production in Eastern Siberia is expected to grow by 22% to 6.6 mn tons (over 10% of the Company’s total output).
In upcoming year, we are to bring into development 2 new oil fields in Western Siberia: the Vostochno-Sakhalinskoye and Soimlorskoye fields, commission 1,295 wells; meanwhile, development drilling is projected to reach 4.3 mn meters including as much as 200 thousand meters to be drilled in Eastern Siberia.
To maintain its oil output, the Company will continue implementing the EOR workover program which comprises more than 6,800 well-operations of physicochemical effect on an oil reservoir.
As for the gas production, Surgutneftegas is to further improve the associated gas gathering system via designing and launching construction of a compressor station at the Muryaunskoye field and facility complex of external gas transport from the Rogozhnikovskoye field, commissioning two GTPPs at the Vachimskoye and Vostochno-Surgutskoye fields, laying almost 116 km of gas pipelines. The Company’s gas utilization rate is expected to reach 97.9%.
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OIL REFINING AND GAS PROCESSING
Oil refining and gas processing sector is one of the key elements of the Company’s production chain. To this end, our priority area within the sector includes higher conversion ratio and better quality of the products meeting the world standards through the maximum efficient utilization of the existing business assets, revamping of the operating facilities and construction of new ones.
Oil refining
The Company’s refinery, KINEF Ltd., is the largest Russian refinery in terms of throughput allowing for refining as much as 35% of oil produced by Surgutneftegas. The refinery has been successfully operating in northwestern part of Russia for already 45 years and has became a high-tech and constantly developing company which incorporates which incorporates the complexes LAB/LABS and IzoFlex producing waterproofing and roofing materials and feedstock for detergents.
In 2011, refining throughput totaled 21.1 mn tons of hydrocarbons, including 2.3 mn tons of mogas, 5.0 mn tons of diesel fuel, 0.8 mn tons of jet kero, 10.9 mn tons of mazut, as well as a wide range of other petroleum products.
In the reporting year, the Company enhanced quality of motor fuels, lowered production of the AI-76 gasoline and increased production of the AI-95 gasoline which corresponds to Class 4 and Class 5 standards under the Technical Regulations. This became possible due to commissioning of a benzene extractive distillation unit, higher yield of dissolvent (nefras), maximum use of an isomerization unit and a catalytic reformer, as well as inclusion of isopentane into gasoline production.
Steady operation and maximum utilization of diesel hydro-treaters, as well as use of the second block of the L-24/6 hydro-treater for diesel winterized fuel conversion allowed the Company to improve its environmental product profile. As a result, since October 2011, Surgutneftegas abandoned production of diesel fuels with sulfur content of 0.2%.
Along with continuous throughput KINEF Ltd. is persistently revamping and upgrading its production facilities and overhauling the equipment. In 2011, Surgutneftegas invested RUB 4.2 bn in retrofitting and upgrading of the refinery.
33 As part of its scheduled overhaul program, the Company maintained the ELOU-AT-1 crude oil distillation unit, performed final testing of the AT-6 unit and put into production run the modernized process control system which proved its value at the ABT-6 unit and ABT-2 unit. The system is equipped with “virtual sensors” (quality analyzers) which make it differ from other systems. The program is able to perform real-time assessment of the product quality parameters from available technical data, forecast the parameters for the nearest hours and execute feed forward operations to support set-up mode. The system is distinguished by its auto optimum mode selection which is applied after the unit reaches target values, and makes it possible to save energy and enhance topping processing.
In 2011, the Company began using natural gas as fuel for some of the units to enhance production energy efficiency and mitigate air emissions. Commissioning of new facilities at the refinery will trigger a rise in natural gas consumption. Surgutneftegas will deliver natural gas to the deeper refining complex which is expected to become the Company’s primary gas consumer.
Since the Company is planning to increase production of light oils, it was decided to launch construction of an automated on-spot unit which will meet today’s environmental requirements having hermetic loading arms and tank vapor recovery system. Daily estimated output of the unit will amount to 19.8 thousand tons of commercial yield.
Currently, we are finishing construction of the deeper refining complex based on residue hydrocracking processes which is considered as the largest one in Europe. The complex will produce up to 4.9 mn tons of mazut, as well as high-quality diesel fuel and jet kero. At the end of 2011, Surgutneftegas carried out comprehensive testing of a hydrodewaxing unit (with 2 mn tons/year capacity) constructed within the complex and obtained first end products required for production of hydrotreated diesel fuel with ultra-low sulfur content and enhanced low-temperature properties. The Company performed commissioning and start-up of an elemental sulfur unit and load-center substation No.2 which will deliver energy to the complex facilities, as well as completed and put into operation the extractive distillation unit which enables to reduce benzene content in gasoline as required by
34 Euro-4 standards. Meanwhile, we will increase production of benzene to meet demand of chemical industry.
Thus, in the reporting year, the Company’s investment in oil refining totaled over RUB 27.8 bn.
Plans and prospects
In 2012, Surgutneftegas is expected to refine as much as 20 mn tons of hydrocarbons with investments to be maintained at the level of 2011.
The Company intends to continue technical upgrading of the existing facilities involving scheduled replacement of the outdated equipment.
The deeper refining complex is to be commissioned on a phase base within the next year. The first startup phase will include commissioning of the L-24/10-2000 hydrodewaxing unit, second line of the elemental sulfur unit and load-center substation No.2. The Company is expecting to commission the complex by the end of 2012, as well as complete construction of the on-spot system for loading light petroleum products.
In 2012, KINEF Ltd. is projected to produce 0.8 mn tons of diesel fuel of Euro-4 and Euro-5 standards.
In the short term, Surgutneftegas is planning to construct the LK-2B-95 complex which will make it possible to produce gasoline under Euro-5 standard.
Gas processing
Gas processing is a fundamental part of the Company’s integrated system of gathering and utilization of associated petroleum gas. After its purchase in 2002, the gas processing plant has underwent a large-scale development resulting in higher processing capacity, upgraded technological infrastructure and application of new automated process unit control systems. In 2011, the Company processed 7.4 bcm of gas.
The gas processing plant is equipped with the cutting edge and high-tech facilities. Surgutneftegas puts much effort into upgrading and revamping of its production facilities. To this end, in the year under review, we replaced durable equipment during the turnaround maintenance of gas compression and processing units No. 1 and No. 2, put into operation waste and dry gas return pipelines in gas processing shop No. 1 and gas storage facilities, and set variable frequency drives
35 for the delivery pumps and ventilators of boiler house No.1. These measures allowed the Company to enhance technical process efficiency, reduce energy consumption, as well as ensure trouble-free operation of equipment. Thus, in 2011, the Company’s capital investments totaled RUB 138 mn.
Surgutneftegas produces a wide range of marketable end products. In the reporting year, the Company produced 7.1 bcm of dry stripping gas and as much as 760 thousand tons of liquid hydrocarbons (a 5.3% increase vs. 2010).
In 2011, a significant change in the Company’s product output structure took place: share of natural gas liquids (NGL) in the total output fell from 69% to 12%, whereas production of propane-butane grew and reached about 70%. It was mostly due to commissioning of a propane-butane block, since the product has great value added and is in sustainable demand in the market.
Gas processing is controlled in real-time by automated control system “OKO TsITS” allowing for gas processing control and operational decision making in case of emergency equipment shutdown.
Plans and prospects
In 2012, our projected investments in gas processing are to amount to RUB 715 mn. To this end, the Company will be focused on construction and revamping of facilities, as well as supporting its key assets.
In the upcoming year, Surgutneftegas expects to process 7.2 bcm of gas and produce over 670 thousand tons of liquid hydrocarbons.
