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Interview with Boris Silbermints, Deputy CEO for Exploration and Production of Gazprom Neft.

Moscow. January 28, 2010. INTERFAX.

“On Thursday, Gazprom Neft signed a contract for development of the Badra field in Iraq. Work in this Middle Eastern country will be the first major project of Gazprom’s oil subsidiary outside Russia. Deputy Chairman of the Board, Deputy CEO for Exploration and Production of Gazprom Neft, Boris Silbermints, told Interfax why 2010 will be a breakthrough for the company in terms of implementing foreign projects.

- What volume of investments will Gazprom Neft make in Badra in 2010? Does the company plan to increase its share in the project in the future?

Gazprom Neft acts as consortium operator in the development project for the Badra field in Iraq (the Russian company owns 30% of it). The remaining members of the consortium are the Korean Kogas (22.5%), the Malaysian Petronas (15%) and the Turkish TPAO (7.5%), while the Iraqi government owns 25%.

In order to start the work this year, the partners will jointly invest over 200 million USD, including payment of a subscription bonus. The Iraqi party does not participate in the payment, and so Gazprom Neft will pay 40% of the total amount. As a whole, for 20 years of work at the field, the consortium will invest around 2 billion USD in Badra.

As for working in Iraq, it is harder there in terms of safety than in terms of field development. Of course, the field is not a simple one, but we are optimistic about the prospects of its development – according to the plans, the consortium is supposed to reach oil rate plateau of 8.5 million tons within 7 years. We expect that in future we will be able to include this production in our consolidated accounts with specification of the exact volume produced at Badra.

Since Iraq still does not have a stabilized legislative base, we have decided to establish a consortium of state companies, thus minimizing risks. During project implementation, the partners’ shares may vary but, for the time being, considering the volume of required investments by the consortium in Badra and capital investment plans of Gazprom Neft in Russia, our company does not intend either to increase or to reduce its share in the Iraqi project.

Is Iraq the launching platform of Gazprom Neft for development of business in the Middle East?

Yes, we see great prospects for us in the Middle East.

Besides Iraq, this includes Iran, of course. As early as November of last year, Gazprom Neft and the National Iranian Oil Company (NIOC) signed a memorandum of understanding, which reflected intentions of cooperation in developing the Azar and Shangule oil fields.

Negotiations with Iran regarding specific conditions were somewhat simplified after the victory of Gazprom Neft in the Iraqi tender. In our geologists’ opinion, the Iranian Azar and Shangule and Iraqi Badra field are components of one large oil field. Contracts for work in Iran are somewhat different from Iraqi ones, although both of them are service contracts; but thanks to Badra, we have created a precedent and now we can demand that the contract conditions of work in Iran be no worse than in Iraq.

I hope that by the end of the first half-year of 2010, Gazprom Neft will reach a consensus on entering into the development of Azar and Shangule as operator. A short time ago, an Iranian government delegation visited Russia; at meeting with the management of Gazprom Neft, the representatives of the Iranian party supported our company’s plans to work in their country.

Gazprom Neft has already prepared a feasibility study of the projects in Azar and Shangule; the documents will be discussed with NIOC in February.

At present, we are also calculating the synergy potential of Azar, Shangule and Badra, and we believe that it may be profitable not only for our company, but also for Iran and Iraq.

What prospects of Gazprom Neft activities in Africa can you mention?

Today Libya is becoming the key priority of Gazprom Neft in Africa.

Thus, in the first half of 2010, Gazprom Neft will participate in developing the Elephant oil field in Libya. Gazprom and the Italian Eni, which owns the Elephant field (their share is 33%) are now winding up the corresponding negotiations and procedures. Gazprom Neft will represent the gas concern in the project.

On the whole we are planning to become a serious player in the Libyan market by actively participating in other projects as well; what those projects will be, I’m not prepared to tell you yet; we are making an estimate and this is confidential information. If we manage it, we expect to increase the company's share in production of Libyan oil "to the critical mass", producing at least 10% of the country's oil. The advantages of Libyan business for Gazprom Neft are obvious – production here is done on land, and our company has extensive experience in this area. In addition, in Libya there are no political or economic sanctions against foreign business – any contractor can come and start working. And, logistically speaking, traveling to Libya is simpler and faster than, for example, to countries of West Africa, which are also potentially interesting for us – here we can pick up experience of working on the shelf, which is really necessary for Gazprom Neft.

Thus, Gazprom Neft is already present in Angola – via the Serbian company NIS, a controlling interest in which was bought at the end of year 2008. NIS owns shares in projects in four blocks and now we are studying opportunities for increasing these shares.

Among the company’s African projects are plans for geological exploration operations under PSA conditions on the shelf of Equatorial Guinea. We recently initialed the corresponding contract. We hope it will be signed in March – April. The initial geological exploration work in Equatorial Guinea will be done by Gazprom Neft on its own. In the future, attraction of partners specializing in shelf operations is possible.

Equatorial Guinea produces around 20 million tons of oil per year offshore. These are quite large volumes for a small country. The major operators here are the American ExxonMobil and Marathon; exploration drilling here was started by Chinese companies and now Gazprom Neft is coming for geological exploration.

In what other global oil producing regions is Gazprom Neft planning to develop its activities in 2010?

If we speak of Latin America then of course, it is Venezuela in the first place. All the participants of the Russian National Oil Consortium (NOC; besides Gazprom Neft it includes Rosneft, LUKOIL, TNK-BP and Surgutneftegaz) that will work in Venezuela hope that the document establishing a joint venture with PDVSA will be signed soon. In the near future, a Venezuelan delegation will visit Russia and, I hope that we will move on in this issue as soon as February.

But oil plans of Gazprom Neft in Latin America are not limited by Venezuela. We expect that towards the middle of the year we will be able to start work in Cuba, where the sea shelf is divided into blocks. Gazprom Neft has managed to reach an agreement to enter the geological exploration project under PSA conditions with one of the companies that already has the right to geological exploration and production on one of the blocks.

Work in the Gulf of Mexico means closeness of sales markets and minimization of transportation costs. All of the above-mentioned regions of the world are far from Russia, although it does not mean that we do not plan to expand our activity in neighboring countries. Gazprom Neft continues to study potential projects in Turkmenistan, Kazakhstan and Central Europe. Thus, we are preparing to accomplish the long-term strategy of Gazprom Neft – 15% of the company’s production will be from foreign projects by 2020.

Such serious attacks on the international arena call for substantial investments. What volume of capital investments is planned for these purposes in the near future?

So far, I can’t quote exact figures, because we have just begun operating abroad. Nevertheless, as early as in the middle of this year – in terms of the number of countries where Gazprom Neft will be working – we are planning to catch up with our Russian rivals who have been doing foreign projects for a long time now. In one year we want to do the scope of work which took other companies many years to do.

This is a serious challenge for Gazprom Neft by many factors: we need to build the corresponding team, find financial, organizational and other resources. But the most important task is to become an effective international company.

However, so far Gazprom Neft’s production is almost completely located in Russia. What are the results of Gazprom Neft’s operations in 2009, and what are the plans for 2010?

To begin with, I would like to emphasize that from January 1, 2010, Gazprom Neft will show its production volume with one figure – the general figure without splitting up into 100% subsidiaries and joint ventures as it used to be. In addition, later on our accounting will show oil production in barrels of oil equivalent, specifying qualification in terms of oil and gas.

The production rate for the Gazprom Neft group of companies in 2009 was 47.9 million tons which is 3.5% more than the corresponding figure for 2008. It is clear that a serious decrease took place with regard to the “old” assets of Gazprom Neft, which were developed by 100% subsidiaries of the company. But on the whole, due to consolidation of production of NIS and Sibir Energy, we have recorded production growth.

I believe that the main achievement of 2009 is that we managed to find additional reserves for oil extraction on assets with a downward production rate. In addition, it took a short while to launch the first (for Gazprom Neft) electric power project - GTPP in the South Priobskoye field. A decision has already been made to double the power of the station from 48 to 96MW. In the future, we are planning to develop the electric power industry component ,which has such a big impact on operational costs. The work will be mainly carried out at the new assets – at Novoportovskoye and the group of Messoyakh fields.

In 2010, according to our preliminary conservative plans, Gazprom Neft plans to increase production in Russia by 3% to 48.6 million tons. Given that during the year Gazprom Neft will finally receive the first of Gazprom’s fields – Novoportovskoye and Orenburgskoye – possibly the figure will be slightly higher. Of course, no production is now underway in Novoportovskoye, whereas in the Orenburgskoye field, the current volume of produced oil is around half a million tons.

How is the process of transferring Gazprom’s oil fields to Gazprom Neft going?

The main decision was made – these fields would be handed over to Gazprom Neft. During 2010, the Novoportovskoye and the Eastern part of the Orenburgskoye fields will be entirely handed over to Gazprom Neft. At present, the corresponding procedures are being carried out by specially set up working groups.

How different are the figures for exploration drilling in 2009 and what are the company's plans in this area for 2010?

Of course, the crisis has had its impact on the scope of geological exploration of all oil companies. Thus, in 2009 Gazprom Neft reduced exploration drilling 4 times compared with 2008. However, we have drilled many test wells, which enabled us to place production wells more efficiently as early as this year.

In 2010, Gazprom Neft intends to return to the pre-crisis level of 2008 in terms of scope of exploration drilling. Exploration is mainly planned in the traditional regions of operation – in the area of Noyabrsk and Muravlenko. This will enable the company to reduce the production rate decrease in Western Siberia.

With respect to new regions, in 2010, there is a schedule for drilling 9 exploration wells in the Messoyakh group of fields owned by Slavneft (Slavneft belongs to Gazprom Neft and TNK-BP on a parity basis) and re-entry of old wells in the Novoportovskoye field.

On Gazprom Neft’s exploration writes in Eastern Siberia this year, a continuation of geological explorations is planned by way of re-entry and testing of several previously drilled wells. So far, we are not planning to place a lot of emphasis on Eastern Siberia due to the uncertain situation with geological estimation and absence of the required infrastructure.

Have the producing assets of Sibir Energy already been fully integrated with the business of Gazprom Neft? Sibir Energy – on a par with Shell – owns Salym Gasolineeum; how are relations with Shell going on?

Integration of Sibir Energy’s assets is in an active phase now. We are expecting a production increase for the main producing asset of Sibir Energy - Salym Gasolineeum. We have good relations with Shell and we are constantly in dialogue over Salym Gasolineeum. I am chairman of Salym Gasolineeum’s board of directors. At the last meeting of the board we passed the budget for 2010, which envisages production growth and, accordingly, growth of proceeds and net profit.

Salym Gasolineeum fields are located close to our 100% subsidiary – Gazprom Neft Hantos. Hantos and Salym experts are constantly exchanging their experience. In addition, innovations introduced by both companies are being studied. For example, Gazprom Neft has proposals for prolonging the Salym Gasolineeum oil rate plateau for two years longer in comparison with the previous plans. At present, Shell is studying these proposals. Gazprom Neft in its turn takes Shell’s experience of labor safety in a Western company.

Are Gazprom Neft and Shell considering options for cooperation other than partnership in Salym Gasolineeum?

Of course, we are studying all possible options for cooperation. Especially because Shell is interested in expanding its presence in Russia, and Gazprom Neft is interested in doing the same abroad.

Is Gazprom Neft interested in strategic oil fields in Russia? Does the company intend to set up joint ventures to participate in them?

We are very interested in Russia’s strategic oil fields. We will participate in all the tenders that are scheduled for 2010 and later.

We see no special need to set up joint ventures with any companies to participate in such tenders in Russia. Especially in Western Siberia. As for the Nenets Autonomous District, here our partner is LUKOIL.