Speech by Sibneft COO Alexander Korsik, First Vice President

International Economic Forum in Omsk, Russia, June 11-12, 2002

I am very pleased to be representing Sibneft at this forum. Since our company was registered in Omsk region in 1995, we have always considered ourselves to be an integral part of this region.

There are three main parties involved in our company's operations - shareholders, employees and the regions in which we work. The shareholders earn profits, the employees get jobs and salaries, and the regions collect taxes. Should the balance of interests of these three participants be upset, each of the others loses as well. If there are no profits, there are no jobs and no taxes, and everyone suffers.

I should say a bit about the history of Sibneft. In 1996 and 1997, this was a company that had plenty of assets but was barely scraping by. Its debts exceeded 800 million dollars and salaries were paid out several months late.

Since then, a great amount of work has been accomplished including improved cooperation with the regions, such as with the Omsk regional Administration, which rendered assistance to the company in a variety of complicated situations. This effort covered several areas, and as a result we now find ourselves in a fundamentally different position. We consider ourselves to be the best oil company in Russia. I think that the Omsk region might believe so as well.

What have we done? We did the basic things, without which no company in the world can exist.

The first thing we did was to learn to count our money. We learned how to understand exactly what we get from each dollar invested in drilling a well or in modernizing a facility.

Secondly, we learned to obtain information on our own activities and operations, and we learned to provide our management with information as a tool for corporate governance.

Thirdly, we quit doing things we shouldn't be doing. We stopped sewing clothes and making bricks, and focused only on oil production, refining and oil product sales. I think that we have succeeded, as there was simply no other path to take.

We focused on new technologies, which gave us a huge advantage and allowed us to become what we are now. If we had not done so, we would have become a typical Soviet-type company on a provincial (I wouldn't even say "regional") level. Instead, we are now a modern, world-class company.

And lastly, we started to spend plenty of money and energy on our personnel, for only people can make our metal work. When I say "metal", I mean the plants, the wells, the oil fields, and everything else. People are the most valuable part of our company.

What do we have now? According to last year's results, Sibneft led the industry in terms of growth in production. This year, production will grow by 30%, which testifies to the way we work internally, and how we work in Omsk and the other regions where we operate. As a result, we have strong revenues. In my opinion, we have the highest net profit per ton of output among our peers. We create jobs for our employees, we provide them with good salaries, and since we make a profit, we pay taxes. Thus, the regions where we operate continue to develop, and the balance I spoke of earlier is fulfilled.

Production

Oil production is the engine of any oil company. A refinery is and always will be a secondary institution, though it is a significant and essential part of the company. We focused on production. We learned to manage our fields, to maintain our reservoirs, to stop rushing for drilled meters and to drill sensibly in those locations that bring oil, and that bring returns. This is our main achievement.

We started using the most advanced technologies, and new well productivity is increasing every year. The same people are working at the same fields using the same facilities. It's the technology that has changed.

If one takes a look at productivity on the whole, one could say that the level of growth is not too high. Nevertheless, the average Sibneft well flow rate is 15 tons, while the average figure in Russia is 8 tons. As you see, we exhibit a constant dynamic-we grow and evolve.

Now, at last, we come to the subject of production in Omsk region. There is oil in Omsk region. In September 2000, we won a contest for a license to develop the Krapivinskoye field.

Let's have a look at the dates. In September 2000, we won the license. In December 2000, we started operations at the field. In December 2001, we recovered the first commercial oil. This year, we plan to extract 120 thousand tons of oil from Krapivinskoye.

We are positive that it is possible to increase capacity up to 1 million tons. It could be even higher. We keep on moving forward, and I am sure some additional results be evident.

Our operations in Omsk currently include every area of activity for an oil company-exploration, production, refining, and sales.

Refining

The Omsk Refinery is no doubt the best plant in Russia. This is beyond question. Fortunately, over various periods of time, the Omsk refinery operated under able leadership that maintained the plant at a competitive level. We continue to modernize the plant. We worked out a 10-year program with two very simple criteria. Firstly, the plant should have an advantage over the competition. Secondly, the plant should turn out only those products that the market demands, both in terms of assortment and quality. We plan to do neither more, nor less than is required to satisfy these two criteria.

I have two examples for you. In 2001, Omsk Governor Leonid Polezhaev opened a sulfuric acid alkylation unit, used for commercial production of A-98 gasoline. At the moment, we are working on modernization of our catalytic cracking unit.

Marketing and retail sales

In 1996, we had only 140 filling stations. Now, we have more than 1000 filing stations under our control. If one takes a look at our geography, one will see that it's very broad. We have expanded beyond the limits of Omsk region. We are moving all across the country. We have moved into Sverdlovsk region and into Europe. Currently, we are on our way to Moscow. Nevertheless, we remain in Omsk region.

In the regions where a lot of small companies are involved in sales of petroleum products, the taxes on filling stations are generally either paid only partially, or are completely pilfered.

In my view, the most preferable situation for the country would be when the core players in the regional fuel markets were large, competing corporations. If this were the case, the full volume of taxes would be paid. Business would become more transparent. This is in the best interests of both the regions and the major companies.

What do we want? Our strategy is very simple. We continue to focus on the Russian market because we believe, at the present moment, it is the best.

People frequently talk about political risk in Russia. Today, that sounds a bit strange. In Russia, these risks are significantly lower than in many other countries. Therefore, it is natural that we plan to invest where the risks are minimal. We will invest, first of all, in Russia and, first of all, in Omsk region.

The second part of our strategy is to keep a balance between upstream and downstream. This permits us to smooth out fluctuations in prices for oil and oil products, and ensures stable company operations during different periods of time.

The third element of the strategy is to strive to use our existing potential. At present, we own a lot of assets that we couldn't use five years ago. Today, they are being utilized much better. Even so, I am sure that we need to study for about 10 years in order to learn to use them fully.

And finally, we intend to acquire new assets, first of all in Russia, in both in upstream and downstream. In particular, we are going to proceed with a geological survey in Omsk region. It is my hope that the Krapivinskoye field is not the only one in the region.

And there is, in my opinion, one more important point. We plan to invest in people. People define everything. The future of this company depends on people - the way the company lives right now and the way it will live tomorrow.

The final theme that I would like to mention is the relationship between the state and oil companies. In my opinion, the state has to be very active and at the same time absolutely inconspicuous. It may sound like a paradox, but in reality these things go hand in hand.

The state has to be invisible in order not to prevent the normal development of business. Business knows by itself the direction it needs to go. It moves towards improvement. On the other hand, the state has to be active from the point of view of combating bureaucracy and minimizing it. The state has to be active from the point of view of creating an environment for competitive business. And the state has to be very active and very strict in creating absolutely equal conditions for everyone. It is only on a level playing field that normal development can take place.

Thank you for your attention.