Alexey Vashkevich: “Investments in new technologies are beginning to pay off!”
Alexey Vashkevich, Director of the Gazprom Neft Technology Development Directorate, spoke about the new version of Gazprom Neft’s technology strategy and why an oil company should not only buy but also sell technologies
— What are the main differences between the new technology strategy of your company and the one adopted in 2014?
— Keeping any strategy updated, including technology strategy, is an integral part of a development process. Changes take place in the external environment and business context as a whole; changes also take place within the company: in particular, we are facing the need to revise the company’s operational and organizational model. Over the years, we have gained new experience and knowledge. Our maturity in terms of technology management has increased significantly which has translated into the changes of the technology strategy management and implementation tools.
Though we cannot draw a clear line between the old and the new technology strategy for it is an evolutionary process which never stops, we can still note a number of important changes. In the first version of our technology strategy the key word was ‘involvement’. It was important for us to involve our business units, asset managers and the entire production team in the process of finding ways to meet the challenges that seemed unsolvable, to move away from the model of a smart buyer who picks and chooses ready-made solutions in the market to the model that assumes that the solution needs to be created.
This is why in our first technology strategy we put emphasis on the quantitative coverage and the degree of staff involvement. From this point of view, I think, we have exceeded our target: more than 100 projects are now running; our people have become willing to contribute ideas and formulate proposals, the whole company has become involved in the technologies creation process. As a result, we have completed 27 projects out of which 16 were successful. This is a very high level for the technology startup area, but it also shows that so far we have been collecting low-hanging fruits, with not very high risks and good prospects for a quick victory.
— What projects have become most successful?
— One of the examples is the software system for engineering of hydraulic fracturing (hydrofrac) operations. This product has no comparable counterparts not only in Russia but in the whole world. Moreover, it is one of the first examples of successful commercialization: today this solution is already replicated across the industry. Many companies make hydraulic fracturing simulators: they take average values of reservoir rock properties, simulate one fracture and replicate these data to the entire wellbore. In contrast, we have created a very complex mathematical algorithm which gives dynamic (not statics) representation of the processes in each subsequent fracture formed during the hydrofrac operation. In other words, it allows us to understand how each fracture created in hydraulic fracturing affects the entire system. This is a truly unique program across the industry. Another successful project is well drilling supervision at the Tsarichanskoye field in the Orenburg Oblast, Russia. Thanks to the optimized well design, we could drill our wells about 17-20% faster and cheaper compared to conventional methods. According to our estimates, the replication of this technology will bring the company about 860 million rubles of NPV. The third project is development of tools to model geomechanical complications in a well. This technology has been implemented at the Urmano-Archinskaya group fields operated by Gazpromneft-Vostok. In this project, a 3D numerical geomechanical model helped us choose the best technology solutions and drilling trajectories thus significantly reducing the well drilling time. This project is expected to bring the company about 400 million rubles of NPV. Overall, financial result of our technology strategy projects, net of costs, amounted to about 2.5 billion rubles, so we can say that investments in new technologies have already become a highly profitable business for our company.
— If the first version of your technology strategy was focused on involvement, what is the key word for technology strategy 2.0?
— I would say it’s ‘value’. We need to look at the technology creation process not as a supplement to our core business that allows us to improve efficiency but as a process of developing products that have their own value.
In the second version of our strategy, technologies are not just a set of responses to certain challenges but also a separate investment portfolio which is an asset requiring proper management.
We started taking a closer look at our projects from the added value standpoint. It goes without saying that first of all we measure the immediate effect: incremental production or extra reserves that we obtain from a particular solution. But we also think about what other effects are possible. For example, bringing a product to the market and making it used by other companies will speed up its learning curve and let it be improved faster. Or, perhaps, the fact that we have a certain technology makes us an attractive partner to work on projects with new types of reserves. Or, finally, the very process of developing a technology from an idea to a sought-after product may be valuable to the industry. Having assessed the contribution of each of these elements, we re-structure our project portfolio and even at the entrance to the project understand what final value we want to obtain and with what tools.
— How can you make it work?
— One of the important challenges for us is the development of high-tech hydraulic fracturing. If we proceeded from this challenge only, we would, first of all, be engaged in the creation of a high-tech hydrofrac fleet with increased pumping capacity, injection rate, flexible digital control, etc. We really lack all these things. But let’s try to anticipate what will happen to the fracking and well completion industry in Russia in 15 years from now. According to some forecasts, this market segment is expected to show a seven-fold growth; however, there will be a serious redistribution of margins between sectors. The hydrofrac fleet is already a highly competitive market, ready to take the next step in technology upgrading on its own. All we have to do in this market is to become a long-term partner for hydrofrac companies which will give them a guaranteed number of purchase orders and the opportunity to attract financing for the re-equipment.
A very important role will be played by the hydrofrac fluids and proppants segment. Today, these services are provided as part of general hydrofrac service contracts, on a turnkey basis. This means that a dedicated service in this area is yet to emerge in Russia. However, all the necessary conditions for it to take root are already there: the production of chemicals, the fundamental science, the business environment. Keeping this in mind, our strategy should be to give the industry a signal that such a service is in demand, and this market will start developing rapidly.
However, the last segment — the market of software products and engineering supervision of hydraulic fracturing operations — is just beginning to form, and this sector will have the highest margins in the longer term. Here Gazprom Neft has a clear competitive advantage thanks to the software products that already exist (ROST, CyberFrac). And this is a strategic opportunity to commercialize the products created by us or with our participation.
— Gazprom Neft focused on creating software for hydraulic fracturing from the very beginning. Does it mean that the way to move forward was chosen correctly?
— Yes, and this project has really become one of the most successful and promising. Now we are looking at our entire portfolio of technology projects from the same angle. In order for a product to be in high demand by the business at the stage of replication, we should think very well from the very beginning what value this product will create for the end customer. Customer-centered approach is also necessary when dealing with internal customers: the fact that the product is created for internal use does not automatically make it the option of choice.
— What plans do you have to put the making of sought-after products on stream?
— Usually the companies that we associate with high technologies, digital leadership, successful launch of products to the market, such as Google or Amazon, pursue the so-called survival strategy. They have no choice: if they do not make a better product, if they do not use new digital technologies they will simply seize to exist. For a number of industries, be it telecom, banking, retail, this order of things has become a reality. The oil and gas industry is still far from that. In this industry you can still develop economically through the use of available tools. For this reason, the survival model is not applicable for us yet. We exist in a model of opportunities where new technologies are an opportunity to get additional business effect.
We decided that, if we fail to put the entire company into the survival model, but we can still set such ‘survival’ conditions for at least part of it, for which the development and commercialization of new high-tech products would become not just an extra but the core business, the main source of income.
At the same time, we decided to split the technologies creation process both operationally and organizationally. The first part is related to analysis of existing challenges, search for new ideas, testing of hypotheses, development of prototypes; the second part is about creation and commercialization of end products based on the above. These tasks require different competencies: it is not very often that the same people have the ability to generate new ideas and efficiently manage projects.
At the Gazprom Neft Science and Technology Center, we have established the new technologies unit that is responsible for identifying business challenges, finding potential solutions, mobilizing teams to develop and test them in order to quickly identify viable hypotheses and cut off faulty ones. This is a kind of a ‘technology anthill’ which is in constant creative search. Once the idea has reached the stage of the prototype and we understand that everything is in place for it to become a product we transfer it to the commercialization unit. The task of this unit is to take a good and proven idea and develop it into a finished product or service for a business customer. This unit will set up partnerships, attract financing from different sources, and its main source of income will be commercialization of the product.
— Are we talking about selling outside?
— In fact, there is no fundamental difference between selling inside and outside. We want the product to be created so that it is not imposed in any way, that the internal consumer wanted to buy it just as much as anyone else. Of course, such internal customer will be able to get the product at cost. Besides, we want to work out a mechanism that the business customer who initially came up with the idea and accompanied the product creation process along the way would receive a free license. This is an additional motivation to take part in the launch.
Perhaps not all of the products we create will be free to go to the foreign market: some of them may be related to our unique know-hows. In this case, commercialization is ensured not through direct sales but through the fact that thanks to these products we become an attractive partner — for example, in working with unconventional reserves in Russia.
— What is the difference between this model and the one used by oilfield service companies?
— The difference is that when shaping up our technology portfolio, we primarily focus on meeting the strategic objectives of Gazprom Neft. The company’s development strategy till 2030 assumes technology challenges that we must meet if we want to achieve our goals. This is why the new structure is not separated from our main production activities but is fully integrated into their business context.
— And what is in highest demand in the foreign market?
— Some of the key challenges and tasks that our technology strategy is intended to solve are the development of hard-to-recover and unconventional reserves, oil recovery enhancement methods that can be applied to mature fields, operations in the Arctic region… But the challenges that Gazprom Neft faces in terms of the character of resources and geography coincide, to a great extent, with what the global petroleum industry as a whole is facing. Deterioration of the quality of reserves, decrease in reservoir productivity, attention to low-permeability reservoirs are important trends these days. Therefore, our experience of working with the Bazhenov formation is interesting to the market. As for the Achimov formation, we already are actively working with our partners in joint ventures on these kinds of reserves.
If we talk about the market demands, today there is an increasing need for an approach where the provider does not only provide a product and related services but is ready to participate in the development of a solution for the customer’s specific task, support its implementation and share responsibility for the final result. This is the model we seek to develop in working with partners who will further undertake to commercialize products created through joint efforts.
— What effect do you expect for the company from implementation of the new model?
— We expect that implementation of the new technical strategy will give our company a financial effect of about 130 billion rubles by 2025. If we talk about the direct effect in the Gazprom Neft perimeter — it is about 110 million tons of incremental production and 600 million tons of incremental resources to be developed.
— To meet the technology strategy objectives, an innovative ecosystem is needed. What tasks are associated with the development of such an ecosystem?
— In many respects it has already been formed. Today we have a clear understanding of whom we should cooperate with and in what areas, where we can find the knowledge, competence and technology. We already have a lot of good technology partners, and we see that the interest in working with us is growing. What remains to be done is to identify the essence of the value that each of these partners can add so that the work could be arranged in the most efficient manner and our innovation environment structured properly.
— Can Gazprom Neft create new high-tech products on its own from scratch?
— Yes, often we do, especially if we are talking about products for internal use only. However, if there is potential for introducing the technology outside, even at the early stage of its development we need to think about additional characteristics and processes related to keeping the product in the market: technical support, feedback, updates, and so on. And development of these competencies is always more reasonable to ensure by means of resources of specialized partners.