Head of RosGeo: geologic survey does not work in “on/off” mode

The coronavirus which has barred in everybody in their homes also has sent into a tailspin the oil industry. The demand has dropped, oil prices go negative and oil companies reduce oil extraction and investments, including in geologic survey. Head of RosGeo Sergey Gorkov told Interfax about what the state-owned company entered the crisis with and how it overcomes the crisis, possible changes in the board of directors and why it has no sense to refuse from investments in geology and new technologies even in such period of time.

— In 2019, RosGeo should work out and adopt the new development strategy. Why the work on this document delayed?

— The RosGeo’s board of directors took as the basis the long-term development strategy in last December. In February the expert group approved the finalized document. The strategy is ready for the final approval; we wait for the sitting of the board of directors.

— Wouldn’t the strategy target indicators be revised because of the crisis?

— We made provision for several scenarios in the strategy. The first one provides for sustainable development of the geological prospecting and exploration market, capital increase of the company and a rather high rate of earnings growth. The second scenario provides for lack of capital increase. The third one provides for lack of capital increase and reduction of the market volume.

It often happens that you have worked out the strategy and shelved it because of the crisis. We initially made our strategy consisting of many scenarios and even were criticized for it by some experts. But I always explain to critics that many scenarios or multi-modality, as I call it, is a very right approach. After all, if an irregular event happens, you would need to recalculate the entire strategy. In current conditions, it turned out that we were right.

Certainly, the strategy did not foresee that two “black swans” – dropping oil prices and coronavirus epidemic – occurred at the same time. It cannot be forecasted. But we envisaged in the strategy the scenario of slow, recessionary development.

— How did the coronavirus affect the geologic survey on the whole?

— Today, we see that coronavirus did not affect the geology greatly so far, but the sector can feel the effects later. The reason is the seasonal nature of our business. Geologic parties which work in the winter season have gone in field in November-December already. The coronavirus situation in March and April coincided with the end of the winter work.

Unfortunately, the unfolding pandemic can affect spring-summer and fall works. For example, a possible stiffening of the quarantine can make it difficult to move people, machinery, materials and affect time of work performance. But so far, RosGeo, which operates in the entire territory of Russia, has not faced serious problems in any region.

In Moscow we have rendered the central office to operate remotely very promptly and in headquarters we left just several dozens of employees who support critically important functions and, therefore, cannot work remotely. Technologically, we coped with this task very well, and I can state that the operating efficiency of the corporate center has not dropped but it increased.

If we take the oil crisis, this is another story. There is a large number of orders in our portfolio: geologic survey for hydrocarbons. Now, the oil companies- small, medium and large – have started rejecting some geologic survey projects, marine works in the first place.

— Can you tell what are these companies?

— I cannot name them but they are Russian and international oil and gas companies which bids are tied to both marine operations and onshore geologic survey. On the whole, in our estimate, since the beginning of 2020 subsoil resources users cancelled or moved to the end of the year the bids for geologic surveys which totally cost about RUB 30 bln. Of this amount, RUB 4 bln are the bids of Russian oil and gas companies we planned to participate.

— Does it mean the proportional decrease in the planned earnings of RosGeo in 2020?

— No, it doesn’t. I tell about a drop in the total volume of geologic surveys, i.e. prospective contracts. Our business model already accounts for effects of the coronavirus epidemic and reduction of geologic surveys volume in the market. At this, the business model of RosGeo is conservative: already today we see that our expected earnings under already concluded contracts in the first half of the year several billions higher the indicator of the business model.

— If are there sectors in the geologic survey market which can compensate, at least partially, reduction of order volumes of oil and gas companies?

— Certainly. For example, there are solid commercial minerals. The field season just has started there and we don’t see reduction of geologic survey volumes in the SCM sector. Just otherwise, field works for gold grow, we note peaking interest to geologic survey in the segment of non-ferrous metals. It is also important that if we speak about surface seismic acquisition, we have just ended seasonal winter works and here neither of the crises affected us so far.

— What about international contracts?

— This year, we have more expectations from the international market. In the strategy we largely staked at the operation outside Russia but a number of interesting for us international bids have been moved to a later date.

We participated in bids in India and had good chances to win. Unfortunately, these bids were moved to the end of the year because of the coronavirus. At this, we continue field works under the contract with ONGC, the largest international contract in the history of RosGeo which we signed in the end of 2019.

Two bids in the Persian Gulf works were shifted but because of the oil crisis. We also were going to participate in them. The bids in Kazakhstan were moved to the second half of the year because of the same reason. We cannot also start field work under the contract with Mongolia on the solid commercial resources; the country has closed its borders because the coronavirus. We hope to start this work in September.

— What will be the 2020 earnings projection in this regard now?

— According to the plan composed in the beginning of the year, we expected the earnings of about RUB 30 bln in 2020 as compared to RUB 27 bln last year. It is prematurely to make forecasts for this year, since many things depend on oil prices and plans of subsoil resources users for funding the geologic surveys.

As I have said earlier, we try to compensate with the work on SCM where growing is seen the lack of contracts with the oil industry. But so far it is unclear how powerful it will be. Now there is the moment when everything is frozen. And if the situation ends in fall, we could compensate for some contracts with foreign contracts, if we lose them in summer, for example, in the Arctic where the work is seasonal.

— Does RosGeo have an anti-crisis plan?

— We worked out this plan in March already. Moreover, we have an anti-crisis plan for each company and each production unit.

Our anti-crisis plan includes optimization of nonproduction costs as well. For example, we totally excluded procurement which do not relate to provision of the continuous process. We implement a program of selling non-related assets cost more than RUB 2 bln.

Against all the odds, we try to invest in new technologies, since we believe that the crisis gives opportunities for such investments. We see several technologies which will be in great demand even the oil prices stay low. Mainly, they are linked with the search for overlooked oil layers. This summer, we plan to carry out the pilot tests of these technologies.

— What does RosGeo plan to do with its problematic affiliates? Do you plan to optimize the holding’s structure?

— The company’s restructuring has started last year when the business block were formed on hydrocarbons and solid commercial minerals. Today we understand that the challenges of 2020 require us to build more efficient managerial structure.

For example, take the SCM block. In Siberia we operate URANGEO and Siberian PGA (production geological association) which are interacting but with that Siberian PGA operates in Chita and URANGEO operates in Irkutsk. In other words, the companies do not use the territorial principle. We decided to create PGA URANGEO in Irkutsk.

Besides, we see the necessity of creating PGA at the Urals because it is a big territory with a high potential for commercial orders but today we don’t have units there except for a small company “Votemiro”. It is very important to consider a role Central PGA which now is engaged in water mainly, but these work volumes are decreasing.

We have started making changes in the UVS block as regards our institutes. Now we join VNIGRI, the oldest institute of the Soviet Union and Russia for oil and gas sector, and RosGeo. This merger will not allow us to economize on spending but also to build up an entirely new competence.

Also, we think about transformation of the marine cluster because with a trend of reduction of 2D and 3D volumes of shelf seismicity we don’t need these numbers of vessels. With that, part of our vessels is obsolete and we need to build up a fleet which would be mobile and of high quality. But its sizes should correspond to the market demand.

Today, there is one more main tasks for us is to build the production system which will allow us to qualitatively change the work even in spite of the fact that RosGeo needs additional capital and retrofitting.

— Will the restructuring lead to staff cuts in RosGeo?

— As I already said, our business is of the seasonal nature; therefore, the staff number of RosGeo employees is not permanent. During active field work, up to 20,000 people are involved. We try to keep employment at maximum and the staff number optimization will be due to retirement of employees or due to optimization of managerial personnel in the framework of restructuring.

— What is the level of wear of major assets of the company?

— It is about 70% and up to 80% in certain areas.

— You told about the need for an increase of capital in RosGeo to renovate the equipment. Have this amount changed due to drop of ruble? If is there an answer for Minfin or are you still in the process of negotiations?

— We are in a productive dialogue. RosGeo did not receive additional capital yet at the moment of its creation. This is evidenced by conditions of its machinery and technology. It is clear that the holding creation the technology has come forward very far. To turn RosGeo an efficient company, bring it to the world standards, you will need investments. We estimate them as RUB 25 bln. This figure has not changed.

We evaluate these investments with deliberate care: we sign out key competences which development would allow the company to be competitive not only in Russia but in the world market. For example, we could increase operations in transit areas off the country; and we see high prospects in the engineering marine geology.

— Not long ago you wrote a letter to Vice Prime Minister Andrei Belousov to tell about breaking covenants of the contracts. Is it hard for RosGeo to service loans; whether the company needs a restructuring of borrowings?

— Our concern was about the fact that if the low oil prices remain for a long time, this would greatly affect the geologic surveys. The geologic survey cycle – from the start of field works till discovery of the deposit – comprises up to three years. Therefore, the geologic survey cannot be in “on/off” mode; the work should be carried out continuously because it is the work for future.

At the present time, the total borrowings of RosGeo are more than RUB 13 bln. Of this sum, about RUB 7 bln lays with the parent company and more than RUB 6 bln is for affiliated ones.

The bank covenants were set in other macroeconomic conditions and part of them hardly applicable in the current economic situation. Directly or indirectly, the covenants are linked with a negative financial result of 2019 and do not reflect the current paying capacity of RosGeo.

Today, we have a substantial liquidity cushion for supporting operations and serving facility commitments. Besides, we still keep significant volumes of spare limits in a number of banks.

— In January, the government was changed nearly entirely. In this regard, could you expect substantial changes in the RosGeo Board of Directors?

— Objectively, the Board of Directors will change, and the main stockholder – the State – will make necessary decisions to this end. We, as the management, believe that the new Board may include representatives of Minprirody, Rosnedra, Minenergo, and, possibly, Minfin and experts in geology. Candidates for the Board are still in consideration.

— What measures should be taken by the State to support the industry or directly RosGeo to come out of the crisis with minimal losses?

— It is not for the first or second time passes through the oil drop prices; there was 1998 and it was 2008. If the rebound comes rather fast, this situation does not create substantial problems. The State today has accumulated substantial reserves to overcome such crises successfully.

But if the low oil prices situation lasts for long, I think that the State could use NWF funds to support advanced geologic surveys. It is evident that the crisis will pass away and we need to look for the future, for 10-20 years. The Arctic and Far East are the regions which are of strategic value for Russia. It is there we see most unexplored territories and perspectives for discovering new deposits.

— What is your attitude to the governmental initiative to increase appropriations for the State contracts from 25% up to 50%?

— I think it is reasonable the decision which may be implemented as soon as possible in the current conditions. We have appropriation of not more than 25% under the State contracts. As commercial contracts relate, the situation is different: some are 25%, some are higher but it is rarely higher than 30%.

— Head of Minprody Dmitry Kobylkin said that RosGeo could function as the State Coordinator on the Arctic Shelf. How would you treat this opportunity?

— The government should decide on who would become the work coordinator on the shelf. We cannot define this mechanism and do not participate in the discussion of it.

— In fact, did RosGeo propose as one of the governmental support measures to give it the status the sole performer of geologic surveys on the shelf, in the transit area and geophysics onshore?

— We are ready to do so. We have the largest seismic fleet, unique engineering fleet, seismic capacities onshore and drilling capacities. We can do all the works.

— Did you ask for additional preferences, for example, regarding the governmental contracts?

— Just otherwise, we did not get any additional preferences under the governmental contracts. Now, all governmental contracts for geologic surveys, which earlier were to select the sole performer, are run on the competitive basis. And in the beginning of May bids and competitions begin where we are to participate on the competitive terms.

Here, the question is whether there are many other companies in Russia which have the entire range of geological knowledge and competences. RosGeo can do the entire works; for us seismic is just one of the stages of the geological study. We are the only company in the country which works from stating geological task till receiving the result.

— In other words, you feel steadily in the commercial market?

— The governmental contracts bring us less than a half of the earnings; most is formed by commercial orders. Certainly, we are in the very competitive sphere when we work with large subsoil resources users, for example, the shelf. Moreover, our fleet competes in the foreign markets.

We are less competitive in solid commercial minerals. Here, RosGeo historically was more oriented to the governmental order and less oriented to the commercial market where a share of contracts was 15-20%. We will expand actively in this segment. The objective is to bring the share of commercial orders on SCM up to 50%. Recently, we approved the new investment program for solid commercial minerals; we buy rigs and other equipment.

— On the whole, how will the investment program of RosGeo change in 2020 due to the crisis? Are you to reduce it?

— We have already reduced and diversified it. Initially, we planned this year investment program as RUB 10 bln. The current estimate is about RUB 3 bln. Today, we select only those projects for investments which will bring about the maximum economic effect in the coming year or two.

Find the interview in the Interfax website at

https://www.interfax.ru/interview/706626