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First Serbia, then the Balkans, and then the World

23 June 2011

Kirill Kravchenko

Interview with NIS General Director Kirill Kravchenko

Oil & Gas Journal Russia

— Kirill Albertovich, what motivated Gazprom Neft to purchase shares in NIS?

— NIS is one of the largest vertically-integrated oil companies in South East Europe, and the Balkans are a region with good potential for economic growth. For Gazprom Neft NIS represents a strategic point for further business expansion in Europe.

Although at the time of our acquisition of the company in 2009 its production facilities required upgrading, we were convinced from the very beginning that NIS has exceptional geographical and human potential. As the majority shareholder Gazprom Neft is interested in improving the profitability and competitiveness of the company, and will therefore be fulfilling its obligations and playing an active part in realising the strategic goals of NIS. We have identified several key areas of development: investment in the refining facilities, technological modernisation of refineries, increasing oil and gas production and modernisation of the retail network.

We are sure that the company is capable of becoming one of the leaders in the open, competitive South East European market.

— What has changed in the company over the past two years?

— A lot has changed. I consider our greatest success to have been the financial stabilisation of the company, which two years ago was in very poor condition, as evidenced by the large losses it was making. During this time all our efforts were focused on improving profitability, reducing costs, increasing efficiency and improving the organisational structure.

Despite the considerable amount of problems both within the company and outside (resulting from challenging market conditions) we achieved positive results in all these areas. For the first time NIS was able to make a profit, which in 2010 amounted to €160 million. We were able to significantly reduce the costs, restructure the company’s loan portfolio and reduce bank debts, transform the company into an open joint stock company and float it on the Belgrade Stock Exchange.

Next year, as a result of the upgrades to the refining facility, NIS will fully change its fuel production system to correspond to European standards. In order to fully get across the importance of this achievement, I will note that in 2009 alone, due to the technological improvements of existing facilities in Serbia, the company began for the first time to produce unleaded petrol and Eurodiesel-5 and completely halted production of environmentally-harmful lead-based petrol.

What else has changed? For the first time in the past eighteen years of the company’s history the production of oil was increased. In 2010 the volume of production reached 1.2 million tons, up by 30% from 2009 figures. Over the past two years we reconstructed and built as many stations as had been built in the previous seven years.

We would have been unable to achieve all of this without an effective system of management. We were able to form a highly professional management team, which efficiently copes with the tasks expected of it. Currently we are not only able to conduct business in several languages, but also actively apply the very best international practices and technologies to the work that we do.

Another priority was investment in human resources, staff development and training, and a system of motivation was established. All this time we have been working to develop our long-term vision for the company, and in this respect we found great success in the formation of a ten-year strategy that takes us forward to 2020.

In general I can confidently say that over the last two years we have made significant progress and that today we are able to confidently look forward to the future.

— Gazprom Neft has pledged to invest €500 million by 2012 in order to modernise NIS. What exactly will this resource be used for?

— Most of the investment will be aimed at improving the refinery in Pancevo, particularly the construction of hydrocracking and hydrotreatment facilities. This project is key for us because it will allow us to begin releasing petroleum products of European quality, and it is also extremely important from an environmental perspective — as a result of this project the level of emissions will be reduced.

Up to this point Gazprom Neft has invested approximately €200 million, and is contracted to release another €300 million.

In the process of developing the project according to the purchase and sale agreement, we decided to build a hydrogen plant, a sulphuric acid regeneration unit and a light hydrocarbon vapour recovery system at the road and rail petroleum loading facilities. Thus the modernisation program has expanded while deadlines remain the same.

An additional €60 million will be invested directly into environmental projects. In 2010 an environmental audit was conducted based on the analysis of the current system of environmental management, identification of potential risks and development of measures to eliminate problems and reduce ecological risks. Funding for this program will be used in the modernisation of equipment, elimination of soil contamination, water purification, land reclamation, reduction of emissions into the atmosphere, waste management, environmental monitoring etc.

— The NIS Board of Directors recently approved a long-term development program. What are the strategic goals and objectives of this program?

— The main goal of NIS is to transform itself into a leading energy company and a worthy competitor in the South Eastern European market. The strategy defines the main objectives and directions of development by three predetermined deadlines — 2011, 2013 and 2020. In addition we are developing the twenty year company strategy on a step-by-step basis.

Speaking in greater detail, we are diverting a lot of resources to achieve production growth and an increase in our resource base in order to enhance company profitability. We plan to increase production of hydrocarbons to 2 million tons by 2013, and up to 5 million tons by 2020, including activities both in Serbia and in other countries.

After the reconstruction of the Pancevo refinery the refining volume will also increase, allowing us to export oil products to other countries in the region. Following the launch of the hydrocracking complex the optimal production volume in 2013 will be 4 million tons, including exports within the region. Given the trends in demand in the regional market, in 2020 the production volume will amount to 5 million tons. A special place in our strategy has been devoted to petrochemical development.

Increased production volumes will require both active development of the retail network and long-term cooperation with key customers in the region. Along with increasing the number of stations we are focusing on upgrading the retail network, as well as developing such areas as the sale of aviation fuel, bunker fuel, lubricants, oils, LPG etc.

— It is already known that NIS aims to develop a marketing network in the Balkan market.

— Yes, in this regard we have two priority markets — Romania and Bulgaria. Most of the oil will be supplied from our refineries. In addition to these two countries we are considering our presence in the markets of Bosnia, Montenegro, Croatia and Hungary. These countries have logistical advantages and therefore are attractive to us.

— What resources do you intend to utilise in order to increase the feedstock base? How do you assess the resource potential of the country?

— Prior to the arrival of Gazprom Neft there was practically no development in terms of exploration in Serbia. Moreover, production and reserves had been steadily falling for 20 years. Thanks to NIS specialists and their Russian colleagues, alongside an increase in oil and gas production we have been able to increase the level of resources and initiate some promising new projects.

Domestic production of crude oil is currently the foundation of the company’s financial stability. With regard to production growth we are striving to ensure that the reserves-to-production ratio stands at 1:10 in accordance with international best practices. This means that if we increase production to 5 million tons by 2020, then our resource base should be at a level of 50 million tons.

We have big plans in the field of geological research, including existing resource bases in Vojvodina in Northern Serbia. In addition to this we plan to carry out exploration in the southern part of the country.

I believe that the Balkan region is generally very promising in terms of resources, so we are striving to make the most of these opportunities.

— Do you include shale gas in the scope of opportunities?

— Certainly. The development of alternative energy sources plays an important role in our strategy, notably nonconventional oil and gas sources in Serbia, as well as the development of geothermal wells, solar and wind energy. In addition we intend to enter the Serbian electricity market.

— Do you have other ambitions overseas?

— Extending our upstream activity outside of Serbia is, of course, of great interest to us. We see potential for exploration and production in Romania, Hungary, Montenegro and Bosnia. We have already begun work on a project in Bosnia. Our goal is the expansion of concession areas. At least 30% of production must take place outside Serbia.

Outside the Balkans, NIS is currently involved in mining concessions in Angola and the company’s oilfield service team is working in Turkmenistan.

— You are currently carrying out exploration in two regions of Bosnia in conjunction with Zarubezhneft. Have you obtained data regarding stocks? Could NIS collaborate with other Russian companies?

— As a joint venture with Zarubezhneft we plan to carry out 2D and 3D seismic surveys this year. By the end of this year we plan to get a preliminary picture of the stock situation. We hope to begin drilling the first exploratory wells next year based on the results of the surveys, and we should begin commercial production in 2014. According to our preliminary estimates the reserves are approximately 10 million tons.

Regarding possible future collaboration with other Russian companies, we are always willing to hear promising proposals.



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