Speech by Eugene Shvidler, President and Chief Executive Officer of Sibneft

Sibneft - The Next Five Years - Speech delivered to a gathering of Sibneft employees to mark the company's fifth anniversary, 8 September 2000, Moscow

Ladies and Gentlemen,

It is a pleasure to address you today as we celebrate our fifth anniversary. The last five years have been a period of almost constant change at sometimes bewildering speed. Certainly, we have learnt a lot in a short period of time. We have faced huge challenges, but I am proud to say that our people have risen to meet these challenges.

What have we achieved in five years? We have focused on improving the way that we produce oil, bringing down costs and improving productivity. Our direct production costs are now around 90 cents a barrel, an achievement of which we are very proud.

We have built from scratch a brand new system to evaluate the investments that we make. We have revamped the way we manage our upstream operations, spinning off workover and construction units. We have also gained access to technology and expertise which our own service divisions do not have, by signing agreements with international oilfield service companies Schlumberger and BJ Services. We shortly hope to sign an agreement with a third oilfield service provider, Halliburton.

Where do I see Sibneft in five years time? The Russian oil sector five years from now will be very different to the one we know today. As the gap between stronger and weaker players widens further, consolidation in the sector is inevitable. I expect that the number of major oil companies in Russia will be reduced from around a dozen today to around than half that number within five years.

Sibneft intends to be among that number. We hope to make some major acquisitions over the next few years. In addition, we also hope to make some smaller acquisitions: we see Russia's small, independent producers as a sector ripe for consolidation. Indeed, we have already been holding discussions on a possible buyout with several of them.

We currently produce some 330,000 barrels per day of oil. Now that we are confident that we can extract oil more efficiently than most of our peers, we can turn our attention to increasing that figure. This is why we are bidding for Onaco. Despite the relatively high starting price, we see a genuine opportunity to create value. This is also why we would like to participate in future tenders for Rosneft and Slavneft. And if other assets come on the market, be they individual fields or entire companies, we will also study them closely.

We will also raise production through organic growth. Sibneft this year began work on a $1 billion investment program to develop new fields. We have also resumed drilling under a pilot project at the giant Sugmut field. By bringing these new fields on stream, and by boosting oil production from fields already in operation, we hope to raise output from our existing assets to 420,000 barrels per day within three or four years.

We are investing $225 million in our upstream operations this year, and in the longer term we are targeting annual investment in our existing asset base of around $300 million.

We now hold some 4.6 billion barrels of proven reserves, but almost all these reserves are located near our home base in Noyabrsk. Over the next few years, we hope to gradually reduce that region's share of our overall reserve base.

We will expand aggressively beyond the confines of our home base in Noyabrsk. We are interested in the potential of the Timan-Pechora province, in Eastern Siberia and in other promising regions. But we will not sit on assets which we cannot put to work for us. This is why we sold our stake in East Siberian Oil and Gas Co, the company which controls the giant Yarubchenskoye field.

We are also trying to encourage the government to restart its stalled effort aimed at liberalizing the gas market, which would allow us to start generating value from our huge gas reserves of around 1.8 trillion cubic feet.

If we do enter a major new greenfield development in Russia, we would like to do so in partnership with another company, either Russian or foreign. This is not a question of our ability to muster the necessary financial or managerial resources, it is because we believe in spreading our risks.

In the global oil industry, such risk-sharing partnerships are the norm. In Russia, such partnerships are virtually unheard of. Russian companies have to learn to work together, and that will require a change in mentality.

Sibneft is no longer seeking to sign an all-embracing strategic alliance with a single foreign oil company. Instead, we are hoping to strike up a range of partnerships with various oil companies structured around individual projects. In the process, we will learn from our partners and avoid putting all our eggs in one basket.

Through a combination of acquisitions and organic growth, we hope to be producing more than 800,000 barrels per day in a few years time. Of course, we will not pursue size for its own sake. The overriding aim is to maximize profit for all our shareholders.

Where does Sibneft see its place in the world? We do not aspire to join the ranks of the super-majors. In the medium term, we see our niche as a company focused on the Russian upstream with production somewhere around the million barrel per day mark.

Participating in upstream projects overseas would certainly help mitigate the risks associated with investments in Russia. But for a company with a large base of low-cost, high-quality reserves, it makes more sense to concentrate on acquiring expertise through partnerships with foreign companies in our home market than to plunge headlong into overseas ventures.

Indeed, the development of a more stable investment climate in Russia could lay the groundwork for future overseas expansion by Sibneft through a series of asset swaps.

One day, we believe Russian oil companies will compete alongside the majors on equal terms around the world, and we are doing our best to bring that day forward.