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The transfer to Upstream does not radically change the scope of my responsibilities in the company

Vadim Yakovlev

Interview with the Deputy chairman of the Management Board Gazprom Neft, Vadim Yakovlev

PRIME, business news agency.

— You have been put in charge of exploration and production at the company. When did you receive this offer and why did you agree to accept it?

— In terms of international experience, this is not a precedent-setting example. I’m sure that a much more exceptional event would have been if someone from ExxonMobil were invited to an equivalent position at, say, Shell. Internal rotation, including of management positions at this level, is common practice in western companies. As for me, the closer association with the Upstream unit does not change the scope of my responsibilities at Gazprom Neft radically. For some time I have divided my working time almost equally between the financials block and the issues related to business development, including implementation of our key transactions on the acquisition or sale of assets and projects to enhance organisational and operational efficiency. In fact, this transfer will give even greater priority to my responsibility for the direction of the company’s activities, which is key for Gazprom Neft in terms of business development both now and in the future.

During my career, I spent four years at the exploration and production unit of NK YUKOS, and for two of those years I worked at the biggest oil producing company Yuganskneftegaz. This experience gave me a good understanding of the specifics of oil extraction and enabled me to speak the same language as those people who are directly involved in it. Therefore, I will not need a lot of time to get to know people and fit in at this new position. After all, I was directly involved in the decision-making process on key issues.

— Could the strategic and tactical priorities in the production sector change with your arrival?

— The strategic priorities are defined by the company’s board of directors — that is 100 million tonnes of oil equivalent production by 2020, and there is no reason to revise them. But this is a landmark that is not an end in itself. The main strategic directive for the company’s management is to achieve the industry’s highest rate of aggregate income for shareholders and operating efficiency.

As for sources of growth, the existing project portfolio gives us confidence that we can achieve the production level of 80-90 million tonnes by 2020. We’re talking about a range because the exact figures will depend to a great extent on the timing of projects related to the creation of external transport infrastructure, on our partners and their ability to move with us at the same pace, and, of course, the confirmation of our understanding of the geology of new assets. Accordingly, the target of 100 million tonnes should be achieved by acquiring new assets and entering into new projects both in Russia and abroad. As for priorities, I am convinced that the greatest opportunities for growth for Gazprom Neft exist in Russia. First of all, I mean the unallocated fund and resource base of our principal shareholder. Finally, a significant contribution to production can be made by the optimisation of the tax system in the sector and by bringing in new technologies in oil production. As far as overseas projects are concerned, we already have a presence in many areas. Most recently we have expanded the geographical scope of our activities even further by entering into exploration projects in Bosnia, Romania and Hungary. And we do not rule out expanding our presence in other regions.

— Does Gazprom Neft need new foreign strategic partners on already announced projects? The Gazprom management is considering the possibility of allowing new partners into extraction projects under the assets swap scheme only. Could this be an option for Gazprom Neft as well?

— Actually, Gazprom Neft has managed to create a unique network of partnerships for a Russian company. Among our partners there are states, state-owned companies, private domestic partners and foreign majors. And that, to a large extent, gives us additional opportunities to access new assets. We are in a constant dialogue with potential and existing partners, because, after all, working through cooperation is standard practice for the global oil industry.

As for the areas of partnership, we are not ruling out asset swaps either. Another option is sharing technology, while a third involves finding a partner for projects that are too large and risky, where the risks preclude the ability to work alone. As a rule, all of our partners are not financial investors, but industry players who speak the same technical language as us and who, through dialogue, provide us with an additional, independent, detached point of view, that of a new member also interested in the positive outcome of a specific project.

— Is the company planning to increase its investment program for the current year based on the results of the first six months?

— Traditionally, in the middle of the year we evaluate the possibilities of adjusting the annual business plan. This year, additional opportunities were made available to us due to a favourable situation on the commodity markets. Based on the results for the first six months, we have formed a cash flow that exceeded the mark approved by our business plan. At the same time, the new geological data received, as well as the positive results for the first six months allowed us to form an additional portfolio of projects that we will be able to implement already during this year. The total volume of investment in addition to the business plan will amount to 200-300 million dollars. This will allow us to create a basis for further increases in production right now.

— How is the company implementing its operating cost reduction program?

— For Gazprom Neft, optimisation of costs is treated with the same priority as the expansion of its business. We have been dealing with this issue since the formation of the current management team. In this work, we assume that the rate of increase in costs from year to year should be reduced. We have also set ourselves the task of reducing the rate of growth of Gazprom Neft’s costs to below the industry average. We have managed to get to grips with this problem in the last two or three years.

Today, we are ready to tackle more ambitious goals — to take the lead on performance indicators within three years. In this regard, there is an interesting brand new industry project, which will allow Russian oil majors to obtain an objective ranking in each area of ​​their oil production activities. The project is being implemented by five oil companies with the participation of Schlumberger. The essence of the project: an analysis of each item of cost in oil extraction, adjusted for regional particulars (geographic conditions of oil extraction) and geological data (the status of reserves). This may be analogous to the system of determining performance that exists in the oil refining business using Solomon Associates indexes, which conducts regular assessments once every two years. I want to emphasise that there is nothing like this project in the world yet!

— Why did Gazprom Neft and Gazprom decide on the “business sale” scheme and not a simple transfer of licences for oil assets? Will their acquisition affect the company’s capitalisation?

— The method of acquiring assets through sale, rather than the transfer of licenses, is as transparent as it is possible to get for a public company such as Gazprom Neft. Assets acquired from the parent company will match the rate of return on invested capital for the projects being implemented by the company. As of right now, we can say with full confidence that, for example, the Novoportovskoye deposit is not included in the capitalisation of Gazprom. Payback of this project will largely depend on our efforts to optimise the plan for development, construction and transportation of oil from the field, as well as the tax burden for new assets in areas with a remote transport infrastructure. As a result, I am confident the project will be implemented and will increase the capitalisation of not only Gazprom Neft, but Gazprom as well.

It should be noted that the acquisition of new production assets from Gazprom will have some effect on Gazprom Neft’s refining sector. Entry into the equity of SeverEnergia will increase the share of condensate in the hydrocarbons production structure, since a large part of SeverEnergia’s reserves is gas condensate. There is the possibility of using the condensate at our oil refinery in Omsk, and we are interested in deepening its processing chain.

— How is your partnership with TNK-BP progressing with regard to Slavneft?

— With regard to our joint venture with TNK-BP — Slavneft — here the task is to stabilise production volumes. Today the portfolio of production assets is sufficiently balanced, which allows us to anticipate the transition to the production stabilisation stage due to growth at new fields and a reduction in the rate of decline at mature fields.

— Can the Kuyumbinskoe field become the next separate project with TNK-BP, outside the perimeter of Slavneft? Has there been any progress in the negotiations with Rosneft to create an infrastructure alliance for Kuyumba and the Yurubcheno-Tokhomskoye zone?

— From a legal point of view, an asset like Kuyumba can be spun off from the structure of Slavneft, in the same way as Messoyakha. But so far there is no investment decision on this project, and its adoption will require a significant amount of geological exploration planned for the medium term. If we are talking about a possible infrastructure partnership with Rosneft (Rosneft’s Yurubcheno-Tokhomskoye field is located in approximately the same area as the Kuyumbinskoe field), then at the moment there is no question of there being a negotiation process, but preliminary consultations are taking place. The assets themselves are at the geological exploration stage, so it is hard to enter into a meaningful discussion on the timing and amount of production, but there is understanding of the feasibility of combining efforts to develop infrastructure using both the partners’ resources and, possibly, the resources of Transneft.

— How do you evaluate the new proposal by the Ministry of Energy to adapt the 60/66 tax regime to high oil prices through the 55-66-86 formula? When, in your opinion, could the taxation system in the oil industry switch to the windfall profits tax?

— In my opinion, changes in the tax base of the oil industry are long overdue. These changes, in the first approximation, have to be so ambitious that making them in one step is almost impossible. Instead, it must proceed in stages. It is more important to begin to take steps in the chosen direction than to continue discussions about technological formulas that become obsolete before they are born. If it is not broke then do not fix it. There is consensus on the 60/66 formula: this decision is long overdue, and it is moving in the right direction because it’s better than the system that we have now.