Novatek OAO to Update on Urengoyskoye Field Conference Call
May 30, 2014 AM CEST
NVTK.MZ - Novatek PAO
Novatek OAO to Update on Urengoyskoye Field Conference Call
May 30, 2014 / 01:00PM GMT
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Corporate Participants
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* Mark Gyetvay
Novatek OAO - CFO
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Conference Call Participants
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* Oleg Maximov
Sberbank CIB - Analyst
* Alexander Nazarov
Gazprombank - Analyst
* Andrey Gromadin
JPMorgan - Analyst
* Ildar Khaziev
HSBC - Analyst
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Presentation
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Operator [1]
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Please go ahead.
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Oleg Maximov, Sberbank CIB - Analyst [2]
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Good afternoon and welcome. I'm Oleg Maximov from Sberbank. And this is the Novatek operating update call. With us today are Mark Gyetvay, the CFO of Novatek, and Alexander Palivoda, Head of Investor Relations.
Mark, please start with your presentation. Thank you.
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Mark Gyetvay, Novatek OAO - CFO [3]
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Thank you, Oleg.
Ladies and gentlemen, shareholders and colleagues, good evening and welcome to tonight's special events driven conference call to discuss the latest information on the recent fire at SeverEnergia's Urengoyskoye Field. I would like to thank everyone for joining this evening and again extend a sincere gratitude to Sberbank CIB for organizing and for hosting this conference call.
Before we begin with the specific conference call details, I would like to refer you to our disclaimer statement as is normal practice. During this conference call we may make reference to forward-looking statements by using words such as plans, objectives, goals, strategies, and other similar words, which are other than statements of historical facts. Actual results may differ materially from those implied by such forward-looking statements due to the known and unknown risk and uncertainties and reflect our views at the date of this presentation. We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events. Please refer to our regulatory filings, including our annual review for the year ended December 31 2013, as well as any of our earnings press releases and documents throughout the past year for more description of the risks that may influence our results.
During our recent first quarter 2014 conference call, I announced that we had a fire at the gas condensate de-ethanization facility at the newly launched Urengoyskoye field. I also advised the financial community that the fire was under investigation and that we would report back to our investors once we had a chance to assess the damages and determine our next course of action. As such, I'm here tonight to provide you with the latest update on the situation as well as to announce a revision to our production forecast for 2014.
We initially launched the first stage of production at the Urengoyskoye field on April 9, 2014 according to our work plans, and it was clearly evident to those analysts monitoring the production data provided by the central dispatch unit of the fuel and energy complex, or CDU-TEK, that Novatek increased its daily output of natural gas with the successful launching of the Urengoyskoye field.
Our operational plans for 2014 also included the field's second stage production launch to occur sometime during the fourth quarter. Our launch plans will need to be revised from those previously announced as a result of the fire at the gas condensate de-ethanization facility.
The development plan at the Urengoyskoye field targets the Achimov deposits, which are relatively deep at 3,700 meters, or approximately 11,000 feet, and are generally characterized by low permeability and high pressure. The Achimov deposits are also very rich in gas condensate measured as a percent of grams per thousand cubic meters in the wet gas stream, which ultimately explains why the Urengoyskoye field is estimated to be one of our main contributors to our forecasted gas condensate growth.
On April 28, there was a fire at the gas condensate de-ethanization facility, resulting in the shutdown of natural gas production at the Urengoyskoye field. The investigation of the incident is currently at its latter stages and we expect to receive a final expert report in the nearest future. However, we have enough information at this stage to assess the damage and provide some commentary.
As a background, the field's gas condensate de-ethanization facility includes two technical trains, which covers the needs of the two stages of field development. The fire damaged some of the equipment at the facility, like pumps and gas strippers, which will need to be replaced before we can fully restore the unit. We are currently placing the orders for the respective replacement equipment but the fabrication of these items takes a relatively long lead time to fabricate and we expect that the repair works will be finalized sometime toward the latter part of the fourth quarter 2014.
Once the facility is restored, we will be able to achieve full field production capacity quickly by accelerating the first stage production as well as concurrently launching the second stage development. 100% of the field's production capacity was planned to be launched in 2014.
Importantly, the gas condensate de-ethanization facility does not have any direct impact on our gas production and treatment and as a result, we started implementing a plan on partial restoration of gas production at the field until the repair works on the damaged unit are fully completed. We anticipate restarting gas production in July with additional ramp-ups in August and October. This essentially means that we will not lose 100% of the production volumes at the Urengoyskoye field this year, as we will slowly recover some of the volumes impacted by the fire. I cannot comment at this stage on the exact production numbers but we will provide this information on future conference calls.
When we provided the investment community with our annual production guidance for 2014, these plans were predicated on a normal operating environment and the successful implementation of our planned production launches for the year. Unfortunately, the fire at SeverEnergia will have a negative impact on our forecasted production plans for 2014 and it is the main contributor to the revisions in our production guidance that I will provide this evening.
To a lesser extent, the recently announced sale of a 9.8% stake in SeverEnergia to our partner, GazpromNeft, will also affect our production guidance for the year as we plan to achieve ownership parity in this joint venture. As of today, our equity stake in SeverEnergia has been reduced from 59.8% to 54.9% and we will continue to affect a series of restructuring initiatives throughout 2014 to reach parity ownership.
The original production guidance for 2014 called for an increase in natural gas by approximately 7% to 8%, which is consistent with the growth in our gas production for the prior year, but our forecasts for 2014 anticipated a significant 40% to 50% increase in our liquid outputs, primarily driven by the planned launches at SeverEnergia as well as continued production growth of crude oil from our East Tarkosalinskoye field.
We currently estimate that our production of natural gas, including our share of production from our joint ventures, will increase by approximately 2% to 3% as compared to 2013. Excluding our share in gas production Sibneftegas, which was divested in December 2013, and to make the analysis comparable, our planned increase in our natural gas output will effectively increase by more than 10%.
The negative impact on liquids production as a result of the fire is more pronounced but we will still demonstrate relatively robust growth year on year. Our new production guidance for liquids will be in the range of approximately 20% to 30%, down from the 40% to 50% range as previously mentioned.
If all of our remediation plans at SeverEnergia are finalized by year-end 2014, there will be no impact on our 2015 production plans. All of our other development plans are currently on track so essentially, the lower expected growth for liquids production in 2014 will translate into higher production growth rates in 2015.
The fire at the de-ethanization plant at SeverEnergia's Urengoyskoye field and the corresponding revisions to our production guidance is clearly a major disappointment to us and our joint venture partners GazpromNeft. We were thankful that no fatalities or injuries occurred from the fire and we are confident that we can restore normal production levels at the field during the fourth quarter 2014, based on the scope of repair work that needs to be done and the timely receipt of replacement equipment.
We will keep everyone apprised of this situation on future earnings calls, but we felt it was necessary to provide you this evening with a status update as well as the revisions to our full-year production guidance. We are committed to continue growing our production in a sustainable manner but unfortunately unexpected events like this fire that derails all of our good intentions.
I would like to now open the session to brief questions and answers.
Thank you very much.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Alexander Nazarov, Gazprombank.
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Alexander Nazarov, Gazprombank - Analyst [2]
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Good afternoon. Thank you very much for this call and for presentation, Mark. It's Alexander Nazarov from Gazprombank. The pretty straightforward question in this situation, will the new production guidance and the restoration of the field demand additional CapEx? And do you have any assessment of this additional CapEx number right now? Thank you.
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Mark Gyetvay, Novatek OAO - CFO [3]
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Thank you, Alexander. We do. We have a general number of approximately RUB1.5b to RUB2b, in that order of magnitude for the repair. So it's relatively immaterial to the whole Group as a whole.
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Alexander Nazarov, Gazprombank - Analyst [4]
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Okay, thank you.
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Mark Gyetvay, Novatek OAO - CFO [5]
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Okay.
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Operator [6]
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Andrey Gromadin, JPMorgan.
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Andrey Gromadin, JPMorgan - Analyst [7]
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Hello. Could you please repeat what kind of equipment you need to replace, basically? And is it -- is there 100% certainty that -- it could be transported to the site by fourth quarter? And how long do you estimate will it take to replace -- to reconstruct, basically, I suppose, some of the parts? Thank you.
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Mark Gyetvay, Novatek OAO - CFO [8]
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Okay, I said that we need to replace some pumps and the gas strippers. According to the information that I received from our technical and operational people is that, yes, it will be done by the fourth quarter.
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Andrey Gromadin, JPMorgan - Analyst [9]
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Okay, thank you.
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Operator [10]
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(Operator Instructions). Ildar Khaziev, HSBC.
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Ildar Khaziev, HSBC - Analyst [11]
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Good evening. Just one clarifying question about the -- your new guidance for the liquids production this year, you mentioned 20% to 30% increase. Is this simply year-on-year increase or the organic growth which you calculate excluding the impact from Sibneftegas disposal? Thank you, Mark.
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Mark Gyetvay, Novatek OAO - CFO [12]
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Yes, it's organic growth.
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Ildar Khaziev, HSBC - Analyst [13]
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Thank you.
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Operator [14]
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(Operator Instructions). As there are no further questions at this time, I will now hand you back to the host for any additional or closing remarks.
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Mark Gyetvay, Novatek OAO - CFO [15]
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Okay, well, thank you very much for the short notice on this call. And we look forward to address you again after the release of our second quarter earnings.
Thank you very much.
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Operator [16]
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Thank you. Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation and you may now disconnect.
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