Head of RosGeo: prospects in the Arctic and the company development plans

Would RosGeo become a Russian Schlumberger

— You plan to gain 70% of earnings from intellectual services. Do you want to make RosGeo a Russian Schlumberger?

— The increase in the intellectual services share up to 70% is not an idea of Schlumberger in nature. There are many companies who have shifted from tangible services to added value works in the intellectual sphere. Today, such works make 3-5% in RosGeo earnings but we need more. As far as we don’t take up intellectual services, we have a rather low margin.

— Would you rebuild the whole structure?

— Complete rebuilding. But 70% is the goal we try so far in the framework of building a long-term development strategy until 2025. It’s quite possible that at some point we will say: no, 70% is not achievable but we can get 40% and that is much, by the by. For example, I will also set the goal to increase earnings from the international activities up to 30%. But this is just a thesis for analysis.

— How much does international business yield?

— 8%, mainly, it is marine work. This is not enough and it is realistic to get 30% over five years. Now we are trying whether this result is achievable proceeding from our groundwork in Azerbaijan, Indonesia, the Persian Gulf and other regions off the country.

— What are the total earnings you count for by that date?

— The earnings may double (in 2018 they were RUB 28 bln – RBC). But it is not our task to raise the aggregate indicator. Our goal is to get earnings by markets. And what it will be in future is the question of a lesser importance; the effectiveness is of importance rather than volume.

— Are you going to mine mineral resources?

— Only in partnership, we are not a mining company.

— With whom?

— We discuss it with various companies; what projects could they be and what form would they have. So far, we are interested in projects related to extraction of solid commercial minerals.

— What foreign markets are promising, do you think?

— We look at South-East Asia, not only at Vietnam, at ASEAN countries generally where there is a demand for marine works our vessels are capable to do. On the whole, we look at two types of markets: seismic offshore operations and for Zarubezhgeologiya, which has traditionally mines solid commercial minerals in both the Asian and African continents. In the Persian Gulf we have a contract with Bahrain which we are completing now. But we are interested in this market as a whole: Emirates, Oman and Saudi Arabia. Therefore, now we carry out a series of negotiations on operations there. Basically, it is about shallow water operations rather than deep water operations; since we have world level competences there. Traditionally, large world companies did not operate in shallow water but focused on deep water shelf or onshore. Shallow water is attractive by the fact that you can extract from the shore, not from a drilling rig. And this is more cost-effective.

— Do you negotiate with Saudi Aramco?

— We do not negotiate with Saudi Aramco; we negotiate with its affiliates.

— What is profitability of these operations?

— It is very high, up to 40%. Part of our fleet can effectively do these tasks; vessels can operate not only in summer or winter season depending on the geography of operations but all year round.

Speaking about exploration of solid commercial minerals, the earnings are small there; they are about US $ 1.5 mln. This is precious few and mainly relates to information processing and analysis operations.

Zarubezhgeologiya had a vast experience in soviet time. It was a giant company which operated abroad. Actually, only archives left from it. And these archives are passive mainly, not active; they are on paper and require keeping. Now, we want to convert them in an asset by translating them in the digital format.

— Do you want to gain from this information?

— Often, there were no geological surveys in the African continent and in some Asian countries. The geological information has been lost due to various conflicts occurred over 30 years but we do have it. It is clear that it is necessary to interpret, analyze, and thus, make it a product. We are actively doing it now.

We are interested in African countries but only those who can pay. For example, we actively work with Algeria. There are some countries that show interest. We have signed a contract with Angola exactly in this field.

We can offer, among other, hydrogeological services which were rendered well historically by our companies in soviet time. For Africa, the search for water and aquifers is a very important issue. We proposed to work with Saudi Arabia as well. The country strives to diversify its economy, to shift from oil and natural gas to mining. The geology is rather interesting there, not only oil and natural gas but phosphates, gold etc.

— Will you go to Venezuela?

— No, we have not had the traditional experience in Venezuela.

— Is there a shallow water there?

— Yes, there is a shallow water but this is very far and any operations at such distance are costly mobilization. We are happy with of hemisphere. Therefore, the Persian Gulf and South-East Asia markets are nice for us.

— Do you have enough machinery to do new contracts?

— We have plenty of machinery by leasing, up to 30% of the fleet, and we continuously optimize our leasing portfolio.

— It is difficult to buy new equipment because of sanctions and you can repair the old one not in every instance. Where do you plan to buy?

— Firstly, some equipment is made in Russia, we make some. For example, we make vibrating machines. There are drilling rigs made in Russia and we are happy with them. Besides, it is not only the issue of benches and drilling rigs but also bulldozers and excavators and cargo transport. This machinery is made in Russia and other countries and it is not under sanctions.

— You asked for RUB 300 bln from the budget for geologic surveys in the Arctic?

— I did not put this issue in a way that RosGeo needs this money. I say that if we want to approach the Arctic development in a systemic way, to explore deposits there, we need about the same investments from the State for the period of 25 years.

— What a share of RosGeo may be?

— It depends on what work volume we will be ordered.

— Now only Rosneft and Gazprom can operate on the Arctic shelf. Should other Russian and foreign companies be allowed to operate on the Arctic shelf?

— The limitation is for the shelf only. It’s better to have a competition but you should consider that the shelf can be explored by major players only. Therefore, it is insensible to let any companies compete; one drilling rig costs thousand millions of dollars and this means serious spending if you count in infrastructure. Small companies inevitably appear in the open competition conditions, which would have no experience, resources, and responsibility.

— In your estimate, for how many years Russia will have enough resources of hydrocarbons and solid commercial minerals?

— It is a senseless estimate because we don’t have a notion of economically recoverable resources as in the western classification. Maybe, there are resources but they may be there where their extraction may not be possible. In Soviet time, deposits were discovered which then were not explored for decades. What is the sense in discovering them? Therefore, we see our strategic task as forming marketable categories of reserves and their expedite involvement into economy.

— In your estimate, for how much the state financing of geologic survey should be raised? Now Russia spends RUB 30 bln a year and is RUB 100 bln. — a reasonable figure in the current version of the strategy?

— We are trying this figure. For example, now it is RUB 30 bln and, as we think, it is not enough for replenishment of the mineral resources. In our estimate, about RUB 100 bln would solve this task. With this, we see a model where a share of the State funds will be 50%, our own funds will be 25% and the remaining 25% is borrowed funds.

— This RUB 100 bln is not for one year?

— For three-year period. RUB 30 bln is general costs which the State is bearing now. In our budget, the State funds are about RUB 15 bln today, not RUB 30 bln.

— Do you want the State to double financing for you?

— It is real to replenish resources in a more or less knowing way when the funding is doubled, not just gain on unseized opportunities. The resources have worn out greatly over the post-soviet period: many operations were not carried out, and in geologic surveys have lost decades. If we were not to replenish resources expeditely, the increase in funding should be tripled, not doubled.

— How much will be required for full implementation of your future development strategy until 2025?

— We have not completed the calculation so far. Our task is to build up an efficient and high quality company, to make RosGeo profitable that it could invest a rather large amount of funds.

— You speak about growth of spending for geological surveys but NWF contains now about 6% of GDP. Could you ask for the money from it for geologic surveys? And how much would be needed for these purposes then?

— The country’s government makes decisions on appropriating funds from NWE. This fund is built from earnings from sales of resources. But the resources should be replenished. Therefore, we believe that, perhaps, it would be logical if some NWF resources is sent to ensuring wellbeing of future generations. We don’t know how much it can be since the sources of financing geologic surveys may differ. But if the question arises about a possibility to use the NWF funds as a whole, why not to use them in a good cause: the creation of geologic amount in hand.

— How would you change the drawing program?

— This year we pulled in the debt by RUB 1 bln, from more than RUB 10 bln down to RUB 9 bln. It is acceptable load but we decided to pull in and restructure it in terms of drawing sources.

— You say the company need additional capitalizing. How much additional funds will be needed?

— If you look at the cost of fixed assets and their conditions, it is about RUB 10 bln.

— Do you have plans of involving a partner for it or go to the exchange?

— There is no sense to think of attracting money from selling stock because it won’t be priced much. At another stage, when RosGeo will be qualitatively in a different stage, financially and managerially, perhaps this can be discussed. But in three-five-years horizon it is hardly likely to discuss. We see the sense in partnerships in projects and areas. For example, we signed partnership agreements with Zarubezhneft and Gazprom Neft to study non-traditional types of oil.

— In the framework of the strategy development, you have nonorganic growth. What assets you may be interested in? Maybe, you are already negotiating on buying something in Russia or abroad?

— We don’t have possibilities to buy something now; therefore, we focus on partnerships. We would show interest in an integrated offer. For example, we specialize mainly in the 2D seismic survey. There are companies like GeoTech which are specializing in the 3D seismic surveys. We have a possibility to qualitatively supplement each other. There are plenty of potential partners in terms of solid commercial minerals.

— You also see the tokenization of subsoil resources as a way to attract risky financing. In what time can it be made?

— The tokenization does not have dates; we just study the issue in the framework of the strategy development. Maybe, we reject it or change, as many other initiatives in the strategy. So far, we study this area and do a pilot project. It is virtual yet; we want to understand whether it is possible or not.

— If you develop this area, what cryptocurrency it will be? Would you issue something special or chose already existing tokens?

— We know yet because nobody do it before us. Today, it is mainly a research project and our task is to understand in fall whether it is interesting for us or not.

— What did you include in this virtual model? Precious metals, diamonds or both?

— Gold, so far.

Digitalization in geologic survey

— Your large part of the strategy is linked with digitalization. Would RosGeo create a blockchain department as in VEB; will you involve Vitalik Buterin?

— We cannot call for Vitalik Buterin to work; he is independent and wealthy person. He did not work for VEB but he was our partner.

We are building up RosGeoLab jointly with MIPT and our subsidiary – Central Geological Expedition – where our specialists in mathematical methods main.

The key goal is to cut time and operation costs of geologic surveys, reduce many-fold the time of processing the geological data and in the end to substantially increase the efficiency of minerals replenishment.

— How will you capitalize the big data?

— What does the main law of the big data say? Don’t think about the law the correlation goes, follow the correlation. This is the main principle which has changes the entire system. Previously, the entire institutes work to determine the dependence of what happens and why.

And the geologic information contains a lot of signs which fit in or don’t fit in. For us, it is exactly the fitting in of the correlation allows scheduling the work in seismicity and geologic survey of solid commercial minerals while giving an opportunity to shorten the path of determining and setting survey tasks and determining the dependence.

— Under the previous management of RosGeo there were complaint that the company did not do governmental contracts on time. What heritage have you got on the whole?

— I receive the new business not for the first time, and in such cases I have one comment: never look back, look forward. I don’t want to evaluate the work of the previous management. To evaluate the management is the jurisdiction of the Board of directors and shareholders.

The evident problem is that the contract with RosGeo as the sole contractor for the governmental order [for geologic survey] was signed on July 3; though, in easy way, it might be signed in December last year. Today, we have to cope up for this half a year. To fulfill contracts in time is not an easy task, since the work is seasonal. You need to procure, supply equipment to the Far North etc. The summer works [in the Sea of Okhotsk and the Arctic] were compromised. Certainly, we made serious steps and now we are on the schedule, on the whole.

— Before the company management changed, the law enforcement did a massive inspection. What did it reveal? Are criminal cases be filed?

— The law enforcement makes decisions on criminal cases. The inspection revealed a number of violations which were mainly related to delays in fulfilling the governmental contracts.

— Have you improve your relations with Rosneft when you come to RosGeo? For example, now, RosGeo’s chief geologist is on the Board of Governors of Rosneft.

— We are happy with that.

— What will it do for you company? What function this new member of the board can perform?

— For us, Rosneft is one of the largest and key clients for operations on shore and off-shore; therefore, we unconditionally interested in good working conditions with the company. Why the chief geologist of Rosneft was taken on board? Because Andrey Lazeev is a high-quality specialist, and we consider the involvement of the best professionals in the sector as one of the main priorities.

— Will you extend the staff schedule?

— We will be flexible considering demand in each area of activity and specific projects. We cut in some areas, and extent in some.

— Will new structural divisions appear?

— RosGeo structure changes radically. We have now business blocks on hydrocarbons, solid commercial minerals and science. But they are not formed as business units so far but their structure is formed already. Previously, it was shallow but now is linked with the areas.