There are quite a few who would crave for a quick buck

Alexander DyukovInterview with the Chairman of Gazprom Neft's Management Board Alexander Dyukov

The Kommersant Open a new window

In May Gazprom Neft’s Board of Directors adopted changes in the company development strategy until 2020. A new strategy until 2025 is to appear before the year-end. ALEXANDER DYUKOV shared with the Kommersant his view as to why it will contain no fundamental changes, what priorities international expansion will embrace and what pros and cons the state ownership has.

— In May as Gazprom Neft’s strategy until 2020 was updated, you said, that work would commence to shape the strategy until 2025. Are its key parameters clear yet?

— The work is underway and is to be completed by the year-end. I would like to note in advance that you should not expect any dramatic changes. The strategy primarily implies projects. However, upstream and downstream projects have an extended life cycle, which makes them highly inertial, so these sectors are unaccustomed for sharp turns. Marketing has a higher degree of agility.

— Gazprom Neft has a group of inefficient assets which the company intends to dispose of. Such assets include the South-Toraveiskoe field in the Nenets Autonomous District (NAD) which was proposed to be used as the core for building operations in the region and the Kolgotorskaya group which the company inherited together with Sibir Energy’s other assets. Who are you negotiating their sale with?

— It would be more correct to say that the South-Toraveiskoe field rather than being ineffective is not strategic to us as we have no other assets in the NAD. We had plans to set up a new production center in the region but eventually abandoned those plans. The Orenburg Region replaced the NAD. We have decided on the buyer of the South-Toraveiskoe field and now the deal is being formalized and is due to be closed within the next few months. The Koltogorskaya Group was only recently put up for sale.

— How does the Company plan to develop in the Orenburg Region?

— The resource base we have now will allow us to increase the annual production up to 5 mmtoe. But naturally we are not going to draw a line at that — we will be on the lookout for opportunities of acquiring new assets in this region.

— Just a year ago the alliance between Gazprom Neft and Shell was announced, the parties entered into a memorandum and it was assumed that you would be building joint operations through your JV— Salym Petroleum Development. But there is no news on its development. Why?

— We are continuing negotiations. It is easy to integrate assets. But following the integration we and Shell apart from retaining the value are concerned with adding it, which is a more challenging task.

— Why can’t TNK-BP and Gazprom Neft agree on dividing Slavneft’s assets?

— Why do you think we are interested in the split-up? It is not all about splitting up the assets. The purpose is to ensure efficient management of the enterprise to maximise the financial value for the shareholders. We can achieve that result with Slavneft without anyone wanting a split-up.

— Who is the buyer of your oil?

— There are more than ten of them. They are majors (Exxon Mobil, Repsol, Shell, BP, Total, Neste Oil) and global traders (Gunvor, Vitol).

In 2012 Neste and Gunvor proposed the best terms and maximum premium to Platts published prices.

— You said that in early May Gazprom Neft would start due diligence of the Elephant project in Libya which you are allowed to enter on the option from ENI. Has the process been launched? There is an opinion that new Libyan authorities are not overly happy to see Russian companies.

— We are retaining the interest in the project. In May our team was to head for Libya to assess the production facilities and infrastructure, but the situation in the country remains complicated and our partner — ENI — recommended putting off the trip for the time being. We still have the time. The option is effective until the year-end and we know nothing about the decision of Libyan authorities to discontinue cooperation with Russian companies.

—Gazprom Neft is the leader of the National Oil Consortium (NOC). How do you view the implementation of this project? How efficient is it? Some think that it is a political project.

— The project is commercial. Like the other projects which are being implemented in Venezuela by other oil companies, including majors. Our Junin-6 project is in the initial stage of operation, therefore it is difficult to say at the moment how efficient it is going to be, however there is no doubt that it will pay back. The effective intergovernmental agreement guarantees the minimum internal rate of return of 19%. If we are speaking of the current status the project has not yet gained a momentum — well pads and infrastructure assets are still under construction. The drilling of the first stratigraphic well was completed. In August-September we are planning to start producing under the ’early oil’ project.

—What is your take on the Badra field development in Iraq?

— This project is of strategic importance to us. Apart from access to the region with the largest pool of reserves it enables us to acquire a valuable experience implementing an overseas project in partnership with international companies. And also we are gaining an operatorship experience. Additionally, from my standpoint, the execution of this project will strengthen the image of Gazprom Neft as an international company.

— If Iraq has such a high priority, then are you not interested to join the Qurna-2 in place of Statoil?

— We are not conducting any talks on the Qurna.

— You have also decided to develop a trading business in Iraq. Why?

— It is a business that allows us to generate an additional income and that has a certain synergy with our trading operations of Russian oil.

— What are you planning to do with the Serbian NIS, 51% of which cost Gazprom Neft €400 M?

— We are setting ourselves the task of making NIS the energy sector leader in the Balkans. By 2020 the company is to produce 5 mmtoe and refine 5 mln tons of oil with its capitalization reaching €5 bn.

— Under Gazprom Neft’s strategy by 2020 the company will have access to international assets with a combined refining capacity of 25-30 M tons. The company has refineries in Serbia and Italy and there is information that you are interested in refineries based in Greece and the Netherlands. At the same time investors have some ambivalent opinion of the downstream market potential in Europe with the currently prevailing low margin. Why does Gazprom Neft need to do that?

— This or that way Europe will remain the main market for Russian oil. Participation in the downstream allows oil companies to uphold their market share and retain that portion of the margin which contigent on the market situation migrates from retail to refining and from refining back to production. It is the reason which drives our need to stay in Europe.

Yes, refining is evidently having a rough ride. Some refineries have closed down, while some are operating near breakeven levels and are close to bankruptcy. However, it would be a mistake to assume that all the refineries are loss making or marginally performing. There are high performing enterprises which normally are refineries with a high capacity and refining depth located inside protected markets. Such refineries are operating at a high margin which can be only slightly below that of Russian refineries.

— What markets outside Europe are you targeting?

— We are closely watching the fast pacing Asian market, where unlike Europe green-field refinery construction could be a project with a positive rate of return.

— Gazprom Neft owns the only refinery in Moscow and the issue of removing it beyond the city borders has recently been raised more often. Are there any such plans?

— This enterprise has a strategic importance to the city. I am not talking of employment or taxes payable by the plant. From the scale perspective for Moscow it is a drop in the bucket. It is important that supplies from the Moscow refinery meet over 35% of the capital city’s market gasoline and diesel consumption and 20% of jet fuel consumption by the Moscow air hub. In addition it provides easy logistics and close proximity to the consumer. In theory those supplies can be made from outside, but, first, it would impose an additional traffic load on the transportation infrastructure and I am not sure whether it will prove equal to that task and, second, it would increase the cost of petroleum products for Moscow consumers.

If we are to speak about the negative environmental impact produced by the refinery I would not exaggerate that effect. The Moscow refinery is not the only plant operating within the city borders. If you had been to Vienna you would have seen the refinery that is not just inside the city but in 10 minutes’ drive from its center. The environmental safety is our priority. We are already implementing a number of projects which would allow us to decrease hazardous emissions and discharges by several times and compact the sanitary protection zone to the plant perimiter.

— Does Gazprom Neft have plans to develop the shelf?

— We are planning to become the operator of the Prirazlomnoe and Dolginskoe fields whose licenses are held by Gazprom.

— Why is your role limited to operatorship?

— Gazprom Neft has not yet obtained clearance to operate on the shelf — according to some dedicated agencies we are not sufficiently exposed to the stateside supervision.

— Does Gazprom Neft as a state company have any preferences?

— Preferences? Where? In what respect? We have paid the highest amount of money in fines following proceedings with the Federal Antimonopoly Service and believe my word, the prices at our fuel stations were not the highest. We have no privileges. Gazprom Neft is competing with the other market players and private companies on absolutely equal basis. And we are quite succeeding in it. We lead the way in the industry on near all key performance indicators. And generally speaking I think it is not important who the owner is. The company being a well-run concern is what counts.

— What do you expect from the new government?

— Primarily, it is necessary to continue work to reform the national taxation system. The main task in the long run is to switch over to the income based taxation system rather than revenue based. Such revision will make commercially viable those reserves whose development in the existing taxation system is economic only prior to the MET and export duty. And it in turn will ensure a sustainable production growth and, therefore, increased budget revenues.

— The point of migrating from revenue to profit in the taxation system has long since been raised. When do you think the revised system should be introduced?

— The 60-66 system was the first stepping stone to relieving the tax burden and has already been instrumental in putting into production a portion of reserves. If we are to speak specifically about Gazprom Neft, then 10% of wells we are planning to drill this year were included in our production program due to the switch to 60-66 system. This system’s potential is not perpetual and some time later we may have to make another step to introduce the 55-72 or 50-85 system in order to ensure that drilling and production are maintained at the same levels.

You also need to understand that by improving the economy for some wells, you are in parallel making it better for those reserves that are already commercially viable. It is a positive development for oil companies although it will eventually lead to reduced taxes, which is not good to the state. However the attempt to make up for those losses through higher export duties may result in oil companies axing some refining projects. So the income based taxation is the solution which will enable to commercialize reserves having positive economics prior to tax leading to high levels of commercial reserves, production and budget revenues and on the other hand saving the need to increase tax rate applicable to refining.

Unfortunately, it will not be possible to achieve it overnight. It is difficult to provide administrative support to a system like that. But no doubt we should be moving towards it if we are to take a pragmatic attitude to subsurface management. The 60-66 system is only the initial step which could be followed by the approved guidelines for granting tax credits on oil for new negative performance fields and legalization of tax credits for acreages with hard to recover reserves. The relevant proposals have been developed by the Energy Ministry together with petroleum companies. The only thing they have to do is to take an appropriate decision.

— And until when do you think the 60-66 system should remain in place?

— The system has not only helped involve in production a portion of uncommercial reserves, but due to evening out duties served a robust stimulus for attracting investments into projects that increase the yield per barrel of crude. The only thing that refiners need to get those projects going is the consistent tax burden, at least until the time when refining investments reach the breakeven point. At the same time we need to push back the gasoline export duty to 66%. In order to protect the domestic market last year it was increased to 90% from the size of oil duties. It was justified at the time of gasoline shortages, but now there is no such need. The 90 percent duty gravely impacts the construction progress of cat-cracking units required to boost the output of gasolines.

— Do you think the petroleum product reserves system is efficient and is capable to prevent fuel crisis?

— Yes, depending on the season there may develop a shortfall of some products, normally, gasoline, jet-grade kerosene and winter diesel fuel. Stocking up appropriate reserves by the beginning of the season allows painlessly live through the demand peak. However these measures cannot secure complete stability as our market is part of the global market and price escalations there result in higher prices in our market. In order to make domestic prices less dependable on global prices it would be necessary to properly implement the idea of tying excise taxes to global oil prices. It would permit maintaining the gas service prices at the current level, i.e. below 30 rubles per liter even in the face of violent oil price fluctuations in the world market.

— This program also contemplated creating an independent refinery which will be owned by Rosneftegaz. Do you think it is needed?

— I believe that Russia has excessive refining capacities with the half of petroleum products going to export. Instead of construction of new refineries it would be more correct to speak of raising efficiency at the existing ones, which we are in process of doing by upgrading the yield per barrel of crude and output of petroleum products required in the market. For instance, the dewaxing unit put into service at the Omsk refinery allowed us ramp up diesel output without compromising kerosene production.

—Gazprom Neft is experiencing problems with achieving the statutory rate of associated petroleum gas (APG) utilization, do you propose that the state should revise the policy regarding this aspect. How?

— If you are speaking of regulating the APG utilization rate, some time back authorities set the reference mark at the absolutely right level — the 95% utilization rate. It contributed to the growth of investments in appropriate projects. But over time it became clear that we need a differentiated approach to APG utilization so as to maximize production output and budget revenues while lifting the burden on the environment. A raft of proposals on such adjustment have been made and integrated into the draft resolution which is under review by the government. It remains to resolve the issue of small and remote negative performance fields where the 95% utilization rate makes development uneconomic. It would be practical to develop new approaches to address them. If the situation is left as it is then flaring fines will grow considerably and the company will start surrendering their licenses to such acreages.

— During seasonal peaks of demand oil companies subsidize agricultural producers. Do you think it is a right thing to do?

— Oil companies directly subsidizing the agricultural sector are far from being common in the world practice. No doubt they need subsidies but it should be the government subsidizing them as it is the case in the European Union rather than companies from other sectors of economy.

— There is rumor that some of the agricultural producers, having obtained fuel at reduced prices, then resell part of its volume at the market price. Has Gazprom Neft ever run across cases like this?

— It happens, however, it is difficult to say whether it happens a lot. Gazprom Neft is not a law-enforcement agency, and we don’t have unlimited resources to conduct investigations and inquiries. Some cases clearly demonstrate that there are quite a few who would crave for a quick buck. To give you an example, in November we received a letter from one of the governors, in which he demanded shipment of winter-grade diesel fuel to agricultural producers at reduced price, and he wanted it done in November-December. Think of it: harvesting is finished, there’s knee-deep snow in the region, and they say they need fuel in the amount that is at least 80% of total oil products consumption of the region.

—How acceptable, in your opinion, is the government intervention in the industry’s pricing?

— Administrative price control helps to resolve local issues, but would rather undermine the economy than benefit it in the long-term.

— There are continuous rumors that you may leave Gazprom Neft to head a bigger state-owned company or take up a government post. Will you continue to work in the company?

— Of course I will, signing a 5-year contract means something and I did it in December 2011.

— How efficient, in your opinion, was moving the company’s office to St. Petersburg?

— About 700 employees moved there, about 300 were unable to do it, mostly due to family reasons. This is a very high ratio that confirmed high loyalty of our employees. Besides, not only was it important to keep our people, but also to keep our business going. I think we managed to do it.