Interview with Sibneft president Eugene Shvidler

- In February this year the shareholders of Sibneft announced that they had purchased aluminum assets. Did you personally take part in the organization of this transaction?

- Yes, very actively.

- Can you say how negotiations with shareholders of the aluminum companies went?

- Agreement in principle was reached by the end of last year. After that, everything happened very quickly over the course of one month. When newspapers wrote that an aluminum scandal was in the making, there was no scandal at all. In general, it was an exemplary transaction in every way: the way in which the parties showed prudence and an ability to reach agreement, the way in which the transaction was structured and, of course, the scale of it.

- It is said that the Renova group also offered to buy shares from the owners of KrAZ, but that they preferred the offer made by Sibneft shareholders. How did this affect relations between Renova and Sibneft, did Renova take offense?

- If the transaction with Renova had been completed, it could not have been torn up. But if the transaction was not completed and our offer proved to be a better one, there is no reason to take offense.

- And is your transaction complete?

- Almost. The shares have been transferred to the new owners and Russian Aluminum is practically functioning as one company. But it may take a year for the paperwork to be completed and for the transaction to be approved by various committees.

- How much did the shareholders of Sibneft pay for the aluminum assets?

- It is very difficult to estimate, because the transaction had multiple layers.

- But the figure of $500 million which was published in the newspapers, is it correct?

- No, it's much more than that. So much that I don't even want to say.

- The president of Siberian Aluminum Oleg Deripaska said that his assets cost $760 million. According to what you have said, Sibneft shareholders paid much more for the shares of aluminum plants. How did it happen that Sibneft shareholders and the shareholders of Siberian Aluminum own equal shares in the charter capital of Russian Aluminum? Perhaps Deripaska is a junior partner? If not, could you say how much Siberian Aluminum will pay to Sibneft shareholders in order to become an equal partner in this union?

- The details and figures are confidential. I can say only that the transaction was absolutely equal and financially beneficial for both parties.

- But what funds were used to buy aluminum plants? It is rumored that Sibneft's money was used.

- Sibneft's money was not used in the aluminum deal. And it is easy to determine by looking at our GAAP accounts. Our shareholders obtained funds in particular from western investment funds.

- How are relations between the shareholders of Russian Aluminum? It is said that there are many differences between Roman Abramovich and Oleg Deripaska which could cause the company to collapse.

- This is not possible. Russian Aluminum was structured in such a way that the company will function effectively whether or not there are differences between the owners.

- But there was the example of the merger between Sibneft and Yukos to create Yuksi. In that case, the company was also registered and began to operate, but in a short period of time it collapsed.

- In the case of Yuksi, the PR was ahead of events. The initial stage of checking the partner was carried out too fast and we were disappointed by each other's assets. The crisis also had an impact. In the case of Russian Aluminum, everything is the other way round. That experience helped us a lot.

- This year the government plans to sell shares in Onaco and probably Slavneft, whose assets interest Sibneft. Your rivals, Yukos and Tyumen Oil Co, have started buying shares in these oil companies and their subsidiaries. Why doesn't Sibneft do the same?

- I don't see any advantage in doing so. Yukos and TNK probably had to pay more than the market price for these shares. And it is not certain that these acquisitions give you any advantage in auctions and tenders. I am sure that they do not. But other companies probably see some sense in it. Maybe they are urging themselves forward in this way: Having bought the shares, there is nowhere to retreat.

- But Sibneft is not put off by the presence of aggressive minority shareholders in the state companies which it is planning to buy?

- No, we have a lot of experience negotiating with minority shareholders.

- It is supposed that a big stake in Onaco will be sold - 85%. As for Slavneft, the stake is not even a blocking one, only 19.68% What will you do with it?

- Nothing special. We will try to work with the company and will look forward to further sales.

- You already work with it. Many managers from Sibneft work in Slavneft. And crude produced by Slavneft is exported through one of your shareholders, Runicom.

- Every company, including a state one, must use the services of a trading company. Runicom is a market-oriented company with excellent results, so why shouldn't Slavneft work with it? In what way would it be better if Slavneft used the services of Crown?

- But doesn't it make more sense for TNK to buy Slavneft shares. They already own 12.58%, and by buying some of the state shares they will get a blocking stake.

- There is nothing to block. A blocking stake is necessary as a protection against dilution, but now it is not in fashion to dilute anybody. A blocking stake now and a blocking stake five years ago are two different things. And any problems can be solved by other means, including negotiations.

- TNK has not succeeded in its attempts to reach agreement with Slavneft management.

- It all depends on the people. Maybe Mikhail Gutseriev and TNK management dislike each other. I don't know whether we are better negotiators than TNK, but I think that we have a good chance. But in any case, a stake of 19% or 25% doesn't give you the right to join one company to another.

- You said recently that out of the state companies, Sibneft is most interested in Rosneft. Don't you think that the president of that company, Sergei Bogdanchikov, is delaying its privatization on purpose?

- I don't think that it depends on him. Besides, if the privatization of Rosneft is postponed until next year, we will not be upset. If you remember, the privatization has been postponed many times. When Rosneft is put up for sale, then we will see.

- Are you not concerned about the consolidation of Rosneft assets which TCL International is carrying out?

- If the TCL group is doing this at its own expense, then there is nothing to worry about. It is the same story with TNK and Yukos in the cases of Slavneft and Onaco. If TCL is buying assets at Rosneft's expense at the request of Rosneft managers, than that question should be addressed not to me, but to the authorities.

- Some time ago, Sibneft together with Transneft, Transnefteproduct and the Ministry of Railways announced plans to create an electronic exchange for the sale of crude oil and refined products. Why have you chosen these partners?

- Because they represent the infrastructure in this market and it is very important that their requirements in the creation of an electronic trading system are taken into account right from the start. Besides, I think that it will be a commercially successful project and the partners are going to earn money from it.

- Why did you decide not to invite Slavneft and Rosneft to participate in this project?

- We will probably invite all those that wish to join. The above mentioned companies are simply the first.

- And then Sibneft will buy them and it will all be very convenient?

- That is also possible. But now, thank God, they are not making a fuss and are not trying to create their own exchanges, like other companies.

- It is said that all these electronic projects are being initiated by companies in case the government introduces obligatory sales of oil through exchanges in order to have their own pocket trading platform.

- I don't know what is said. We have discussed our project with the government and have found strong support.

- Do you think that fair privatization is possible in Russia, when all participants have equal chances?

- At present, every large oil company has certain acquaintances, administrative resources and other resources which it acquired over a long period operating on the Russian market. With privatization, a certain competition between these resources takes place. And I think that this is a fair competition for this place and time.

- In addition to state companies, which assets are you interested in?

- Various, but within Western Siberia. These can be licenses for developing oil fields, or small companies, or parts of big companies.

- What do you mean?

- I mean some big companies where the management has already understood what it is worth and is ready to sell its assets.

- You mean Sidanco?

- Sidanco is a good example.

- And which Sidanco assets might you be interested in?

- Potentially, whatever is near us. For example, Varyoganneftegas or Varyoganneft.

- But Varyoganneft has already been sold to Nafta Moscow?

- It is not clear what has been sold. But if these assets are put on sale, we are going to consider the possibility of buying them.

- And why does Sibneft not want to buy fields outside Western Siberia? Many companies, for example Surgutneftegas, are trying to expand beyond the borders of their traditional regions.

- Surgutneftegas is in a situation which is somewhat different to our own. It has few opportunities for significant growth in this region and a lot of cash. We are in a different situation: we have an opportunity to grow in Western Siberia.

- Are you planning to buy fields where there is only gas?

- No. Gas production is a good and promising business, but until the situation with Gazprom and the gas market becomes clearer, we will not deal with it on large scale.

- And when could the situation with Gazprom become clearer?

- It depends on what happens with the management of this company. If it remains the same and continues to do the same things - that is one situation. If new management comes along and begins the demonopolization of the gas market - that is another situation. In that case, many oil companies will enter this market.

- There are many rumors about Vyakhirev's possible successor. One of those named is the head of the Presidential Administration Alexander Voloshin. Do you think that the gas market would be demonopolized under him?

- I think it would.

- Many oil companies are trying to acquire refineries in the CIS - in Ukraine and Belarus. Does Sibneft plan to do so?

- This is not for us. We are short of production rather than refining capacity. Everyone knows that we have the best refinery in Russia - the Omsk refinery. It has an excellent location, close to producers. And there is no particular competition in this region.

- But it is not an export region.

- This is true. Last year we exported only 2.5 million tonnes of our oil products. But it is not a matter of exporting for the sake of exporting. It is a matter of profits, and we believe that the Russian market can also be very profitable. In 1999, we supplied the domestic market with more than nine million tonnes of oil products.

- Your shareholder Runicom owns 6.47% of Omskenergo shares. Are there any plans to increase this shareholding?

- Our refinery and other plants are located in Omsk, and there is a lot of continuous production there. That is why it is important for Sibneft to have a reliable, autonomous source of electric power in this region. But we are not at all interested in acquiring the whole company.

- But Omskenergo is precisely one of those companies which could be divided up within the framework of the UES restructuring plan proposed by Anatoly Chubais. Could Sibneft be interested in acquiring one or more power stations in this system?

- Potentially - yes. But everything depends on the terms, and on what kind of social obligations would be imposed upon the owners of these generators. Property is above all responsibility.

- What will happen with Sibneft shares in the near future?

- Nothing. We have been thinking about increasing the liquidity of our shares by issuing level three ADRs, but right now this is a difficult question.

- Why?

- Because one of the shareholders would have to sell about 10% of their shares at close to market prices. Nobody wants to do this, because our shareholders have seen other prices. If the price is right then we could sell the entire 90% controlled by the Sibneft management.

- Is this possible?

- Everything depends on the circumstances. You never know what the right price is.

- Sibneft promised to disclose the list of individual shareholders. When could this happen?

- I don't think this will happen soon. I do not want to predict when people in Russia will hold shares in their own names.

- Boris Berezovsky said recently that he did not have any Sibneft shares any longer. Has he really sold them?

- Or given them away. And long ago. We constantly try to convince everyone of this, but nobody believes us.

- And why did Kenneth Dart not make it onto Sibneft's board of directors this year?

- We had an arrangement under which, in order to remain on the board of directors, he had to retain his 5% shareholding. But Dart sold part of his holdings. According to his representatives, only 3% is left.

- Sibneft has never made any large scale investments into production, saying that it was not profitable for its shareholders. Nevertheless, the company recently announced its intention to invest $1 billion in six fields over the course of a few years. Where do such changes in investment policy come from?

- Actually, nothing has changed. We did not say that investing in production was unprofitable. We said that we wanted to make investments which were well thought through. And the $1 billion which will be invested in the six fields -- two of them are already in operation -- is an investment which has been well thought through. For such a group of assets it is not such a large figure, it just looks like a round number. The majority of this investment will happen over the first three years.

- Sibneft Vice President Alexander Korsik recently said that you are still considering the possibility of alliances with Western oil companies, but that now it is a question of searching for a strategic partner and not a strategic investor. Could you explain the difference?

- Previously, Western oil companies needed to acquire shares in a Russian partner in order to gain entry into a big project -- in other words to become a strategic investor. The history of Sidanco and BP Amoco is a classic example of such an approach. In my opinion, this time has passed. I do not see any advantage in selling Sibneft shares to an oil company as opposed to an investment fund. It is much more interesting to bring in a strategic partner for a specific project and share risks with them.

- A year ago, you said that Sibneft was conducting these negotiations with India's ONGC and Hungary's MOL. Has anything changed?

- Negotiations with these companies are continuing. But I would say that we have now switched our attention to service companies, and things are proceeding much faster with them. Now we are working at our oilfields with US Schlumberger and Anglo-Canadian BJ Services.

- Does Sibneft plan to borrow any money from the West this year for production projects or to participate in privatization?

- We have always taken out foreign loans. Our balance sheet is such that we can borrow a lot of money quickly. I will not say how much we intend to borrow this year because then everybody will know how many assets we can buy. But looking at our annual balance sheet, if you think it over you can guess that it will probably be a figure with nine zeros.

- Why did Sibneft make a loss in 1999 under Russian accounting standards, but make a considerable profit - more that $300 million -- under GAAP?

- It is not a question which should be addressed to us, but to those who develop accounting systems. There is a big difference between Russian and Western standards - in amortization and in use of profit. Thus, the figures differ.

- It just creates the impression that Sibneft is avoiding taxes in Russia and showing good results to Western investors.

- We must, we are simply obliged to minimize our taxes within the framework provided for by the law.

- All of a sudden and for the first tim, Sibneft this year decided to pay out $50 million in interim dividends. What for, what does it give the company?

- It gives the company nothing. It is the wish of the shareholders who want to take their money back.

- And why have Sibneft's profits grown by nine times compared to last year under Western standards? You have not increased oil production.

- We have reduced it. But how well did we produce oil! Costs have changed completely, because we simply stopped everything which was not profitable, including drilling. As a result, we have earned more dollars from the same volume of production, that's all. Besides, oil prices have grown considerably in comparison with 1998.

- Due to the growth in oil prices, export duties will be raised from 1st August from 20 euros to 27 euros. How does Sibneft feel about this?

- For us, these are considerable costs. If we multiply this difference by Sibneft's annual export volumes -- about 4.5 million tonnes -- we get more than 30 million euros. But it can't be helped. We will pay. We are not going to go to take legal action against the government.

- What do you think of the new Minister of Energy Alexander Gavrin?

- As a minister, I do not know. He has not held office for that long. But personally he is very nice, and he seems experienced, as he was mayor of a northern oil producing town for a long time. I think that the people in the new government generally differ a lot from old-style bureaucrats -- they have a much more responsible attitude towards their work.