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Igor Sechin: “Deals signed by Rosneft at SPIEF are worth about $44-45 billion”

24 June 2016

Rosneft CEO Igor Sechin interview to Russia-24 news channel

Good afternoon, Igor Ivanovich.

— Hello.

First of all, I suggest we could sum up the results of the St. Petersburg International Economic Forum, where you signed deals with partners from India and Vietnam. In your opinion, which of them are the most important and promising for the Company?

— It is a great honor for our Company to participate in the St. Petersburg International Economic Forum, held under the aegis of the Russian President. Of course, we've been preparing to it and working with our partners. And I'm glad that we managed to support both the President and our country in those agreements we signed, which create the environment for sustainable work and for prospective development of several our projects. Generally, it should be noted that the estimates are, of course, preliminary and expand far beyond evaluations announced at the Forum. Our Company alone signed a number of deals worth about $44-45 billion.

What a terrific sum!

— The sum is big, but it corresponds to the load of work we do. And, surely, it goes beyond evaluations made by the Forum moderators. As far as I heard, they mentioned a figure slightly above 1 trillion roubles. Our Company alone has secured development of new projects up to 3 trillion roubles with these agreements. So there's no need to be shy, but we should sum it up impartially and sustain the work that has been done and had been laid the foundation for. But talking about which document was the most important... For us, undoubtedly, all of them were important, otherwise we wouldn't be engaged into it. These include agreements with Russian regions, where we perform our activities, domestically, as well as oil products distribution and organization of new projects. You know, at the moment we are working a lot on import substitution, developing a number of new enterprises on creating a marine underwater fittings and shipyards, as it is known. For example, now we've made an agreement with Rostec to localize a marine helicopter, developed by the Italian Finmeccanica. Moreover, we managed to sign a number of promising deals with Indian partners — I mean our Indian partners entering our upstream projects. In fact, we, of course, need to mention that our mutual intentions are to implement the plan announced by President of Russian Federation Vladimir Vladimirovich Putin and Prime-Minister of India Mr Modi, on creating an energy bridge between our countries which will be of integral nature, including participation in production, in transport projects, in refining and oil products distribution across the territories of growing markets, India in particular. We also appreciate the opportunity to keep our positions on traditional markets, the European one, first of all. During the summit, we inked some deals on boosting supplies to our partners PKN Orlen both in Poland and Czech Republic. Despite some concerns, we consider our position here quite stable, as we are linked with the consumers by the infrastructure, including main oil pipelines “South Druzhba” and “North Druzhba”, which certainly provide competitive advantages for us. A more challenging issue is to develop projects in Asia-Pacific region — here we face stronger competition, and sometimes these are new markets for us. This is why I would mark our deal with India as one of most important results. The contract signed with PetroVietnam is also significant and strategically of extreme importance to us; it implies supplies of 96 million t of oil for the duration of the contract. This is a huge contract. This contract alone is a full scale in current prices, and if we correct them following to growth prospects, it will exceed the amount we name now. At the moment, it is already about $36 billion. That is why I told that preliminary evaluations by the moderators look quite modest. We continue technological partnership, which is proved by the agreements with European shipyards, participating in our Far East projects, as well as by a range of other documents we signed. As I've already said, we find all of them very important.

Also you inked a deal on selling of over 20% stake in Vankorneft. Could you specify the price of the deal? The media sources mentioned a sum exceeding $2 billion.

— It is true. It actually is. We managed to persuade our partners that the fundamental price of production projects does not depend on current situation, and even to improve the initial offer, and I would like to thank our partners for it. They trust us and understand the value of our resource base and now have the opportunity to take part in our work. They are sure that in future all of this work will be aimed at providing energy security to India. And it will. That is why it is a very good project. The fact that Indian partners boost their share in Vankorneft capital, allows us, in our turn, to decide on development of East Siberian cluster. We will boost production in the region and implement new projects.

But in nearest future you won't be inviting new partners to the project, will you?

— It can be done in different ways. The widely accepted world practice is of course is participation of partners, especially in new producing projects, that allows to minimize personal costs for the implementation of these projects, increases their immunity against market volatility. That is why we don't see anything negative in the fact, that we implement many joint projects with different partners.

Also as part of the Forum an Energy Summit was held apart from you, your partners from Latin America, including Venezuela, India, Vietnam, and leaders of American ExxonMobil, French Total and Italian Eni took part in it as well. Does that mean that sanctions are not an obstacle for business?

— First of all, I would like to thank our partners. Their arrival proves the fact that we have a proper discussion with them. They participate in our projects and appreciate the working conditions — first of all, it refers to longevity of our projects, to trust, and to taking into account mutual interests. These are three most important features of partnership, I think. And, of course, the investment cycles of oil and gas industry — they exceed any political cycles, and partners are focused primarily on the economic feasibility of implementation of and participation in these projects, this is the most important thing. What do we offer them? We offer them an excellent resource base, we get technologies and use those financial instruments that are at our disposal, at the disposal of our partners. But these are basic features of implementation of the projects. I would still say that the high efficiency of our projects is the key factor, as well as the created atmosphere of trusting relationships — these are the main reason for all our partners to arrive, and not some sanctions. In recent years, companies of the oil and gas sector across the world operate under a variety of risks. Sanctions are one of them. But we have to work in these conditions. And our projects' efficiency is our basis for attracting partners.

But the State Department advised US companies not to go to St. Petersburg, the EU today has extended sanctions against Russia. Maybe it's a message from businesses to the government — that they do not pay attention to the sanctions?

— In general, I am sorry to see such a transfer of sanctions to the corporate level. Companies are not involved in political decision-making process, and to make them responsible for certain steps of politicians, especially when sanctions are imposed completely illegally, as it was done to us... I see no point in discussing this. Our partners accept it understandingly, we work with them and have no intentions to escalate. However, the fact that we find ways to operate effectively even in these conditions proves that we will keep doing it regardless of what made-up obstacles are imposed or invented. We cannot stop operating, can we? Which is why we are going to find a way to respond respectively, we are going to work and respect participants of all our projects.

But, apparently, investors do not pay much attention to the sanctions as well? Given that Rosneft has become the largest company in terms of capitalization in London. In your opinion, what factors could have an effect on that?

— Year to date, we have managed to increase the company's capitalization by about 36 percent, which is an important indicator itself. I think that investors take into account, first of all, the effectiveness of the company, they assess its resistance to those risk factors mentioned and see how we respond. Actually, we are quite a transparent company for our investors, we hold regular meetings, inform the market, provide our reports in accordance with the international standards required, and the market treats us with trust. Investors bear in mind those factors that were not counted, they see that our financial state is stable. In the last year, we halved the debt burden — that is the most important thing, I believe. At the moment, the company operates at the debt/EBITDA ratio that equals one. This is a very comfortable financial and economic state for any company, but for our company, which is under the sanctions, certain limitations, this is a brilliant result. The market appreciates that.

And do you intend to raise new borrowed funds this year?

— We do raise a lot, but mainly within project financing to implement those projects that feature economic feasibility. We will raise, of course. We will drill, we will work. Last year, we drilled 1,800 wells; this year the drilling rate is to be kept on the same level. You know, at the moment we implement a big exploration-drilling project on the Magadan shelf in the Sea of Okhotsk. We are getting ready to drill in Khatang next year, we have mobilized the required equipment already. There's a lot to be done.

You are saying that you are going to continue working on the shelf?

— We surely will.

And may there be any rescheduling of the start of production or exploration on certain objects?

— Of course. In particular, we reschedule to an earlier the start of a range of exploration works on our shelf projects. All the other licenses are on schedule in accordance with the license commitment. And, as I said, we speed up at some projects.

Are there plans to reschedule to a later date?

— We are fine with our current license commitment.

As for production, is there a chance of a rate change, volume change this year?

— We are working in this direction every day. I think that, given the increase in drilling, we will show slight growth by the end of the year, year to year.

Recently, the central office personnel has been cut. Are there going to be any further cost cuts, and if so, by means of what items?

— We have completed consolidation on our newly acquired assets — of course, this provides optimization. And at some point, this restructuring causes additional staff to appear, but then there comes a time when you need to clean up. Moreover, nowadays it is customary in our Company to make a yearly report on cost optimization. We keep on doing this regularly. Naturally, this applies not only to the central office, it is also transferred to our subsidiaries where measures are constantly being taken to improve efficiency. Perhaps, it is enough to say that by the end of last year we achieved the original cost of oil production of $2.6 per barrel, and this year have reduced it even more — to about $2.1. This is the result of the work of the whole team, of application of new technologies, of our high-quality resource base, of stable funding — that is, I think, the way the company operates, in general.

Last year it was decided to pay 35 per cent of net profit as dividends. Could this figure change in the future, and is it possible to increase or reduce the amount of dividends?

— Well, in general, according to the company's standards we pay out 25% of it, but we have taken into account the issue raised by the government of the need to increase dividend payments and have found the appropriate sources. And we see the payout level of 35% this year as acceptable for us, it does not increase our investment program. Whether the government will demand it from us next year is not a question for me, but a question for the government. If we need to hold a dialogue on maintaining, on the impact, say, of this level on the investment program, we will hold it. And I don't see anything dramatic in this. I think this is important, perhaps, for us to see such universal approaches extended to all market participants, not only to our Company. It is clear that both tax and dividend burdens on us are great enough, and our auditors calculated precisely that we pay $25 per each produced barrel at current prices as a fiscal withdrawal, as a form of fiscal withdrawal. But we, unfortunately, have become the only such company in our country, and no one pays so much as we do. Of course, it's a great honor for us, but given the fact that the tax burden on the Company is impressive, we would like to see we are not alone to support the budget. We would like to see attention paid to other sources, including companies successfully working on the market. In my opinion, this would be fair and could fuel our enthusiasm as well. A question should be raised on tax versatility for the oil and gas sector in the whole. We do raise such questions but get no answers yet. Underfunding of the sector may cause a complex trend of reduction of its efficiency. I think if we say that all have to pay at least 25 percent of net profit under IFRS, then all have to pay instead of coming up with ideas like 10 or 50 under RAS. Let's all pay dividends on the similar level. We don't understand: at first they tell us to pay, and when we pay it turns out that we are all alone. I would rather avoid creating the impression that we alone are correct. They all are correct, they all are successful, they all work fine, and I think that in crisis environment this should be taken with comprehension, costs should be cut - especially, if it is not happening. There is a necessity to cut costs and increase efficiency for our country. We would appreciate it if the regulators had a universal point of view on efficiency for the country of state-owned assets management.

In your opinion, what should be changed about the tax system? At the moment, the tax on added income and the tax on financial result are discussed.

— I don't know which final result will be chosen, but obviously, let's say Exxon has a tax burden of about 40-43 percent, ours exceeds 60 percent, in some cases for some projects it is up to 83 percent. This is why Exxon costs $370 billion - their funds for development are not taken away from them, while our funds are collected from us. These are interconnected issues — the creation of an investment climate, the creation of a healthy market and an effective level of taxation, which allows for implementing projects. Also the company's capitalization depends on this directly. Suppose, there have been a lot of speculation on the big tax manoeuvre. It was calculated for $100 price, but now we have prices below $50 for a second year in a row. And at the same time, there were no adjustments. And the Ministry of Finance itself agrees: yes, we did calculated on $100. So now what? If we have $50, not $100, some measures must be taken to adjust these approaches. We also understand there are issues with the budget, and as I said, we are active to participate and contribute in solving these problems. But still we would like to stress out that the economic state of the industry is deteriorating, especially in refining — of course, some additional stimuli are to be found.

And what these stimuli could be?

— We need to reduce taxes. The mineral extraction tax (MET) has been doubled, they promised to reduce export duties and failed, and at the same time prices plummeted. One needs to simply look impartially at these processes and prevent collapses in investment processes. Should any intervals for investments emerge, unfortunately, this may lead to critical consequences — the need to reestablish production, reestablish refining. These will be very serious additional problems. It is a must to consider this responsibly, very much so.

What is your suggestion? To what extent the taxes should be reduced?

— We are discussing it, and our position is quite reasonable. And we do hope that the dialogue that we are constantly maintaining both with the Ministry of Energy and the Ministry of Finance, will get us to positive results.

But the reduction can happen only next year, and this year we should not expect any tax breaks, should we?

— This is a question for the Ministry of Finance, not for me. Anton Germanovich [Siluanov] himself approves, during the Forum as well, that for him $40 is the basis price for the budget 40 to 50, he said. And if he understands it, we hope to get some response to our questions. As far as there is no $100, we definitely have to look for an opportunity to provide for lost investments.

As we have touched upon the Ministry of Finance, Anton Siluanov says this year it is more complex to sell Rosneft, than, for example, Bashneft. And Minister Ulyukaev thinks that there is a 50-percent chance to sell Rosneft this year. Although, in Saint-Petersburg he said that it is highly possible that a stake in Rosneft will be sold. And how do you assess the chances to sell Rosneft this year?

— This is an easy question for me: of course, they know better. They know better for the government is the owner, and they know better which way of sale, which efficiency they aim at. And we are ready to implement their decisions, whatever they are.

In your opinion, what is the priority now selling to a strategic buyer or to numerous investors?

— In the environment of volatile prices, political instability at capital raising markets, and shortage of funds caused by various reasons, a public auction or an exchange sale will be extremely non-effective, and may even lead to losing of saleability. Because when the quotations start falling while probable purchasers lack financial resources, we will have to respond somehow. That is why I let myself assume that the bidding may be disrupted. And that is why I don't consider exchange sale as a possible, effective or realistic variant. Most likely, we should be talking about a strategic investor with a proper expertise. He should provide for synergy. Representatives of the Ministry for Economic Development who reported at the Forum, were right such an investor should have the appropriate expertise, not carry risks of claims, and provide for synergy while working with the Company. I think this would be right. But in any case, a question will arise on cost estimating. And there we have a corridor from $56 billion at current quotations up to approximately $120, even $130 billion based on the fundamental price of the Company. So, everyone is welcome to take upon the decision of giving one or another evaluation — we will do it in any case.

And your partners from China, do they match the requirements? CNPC has already expressed their interest in buying a stake in Rosneft, hasn't it?

— As for the expertise of our partners, as I have already said, the Ministry for Economic Development should be addressed, they know better. They need to understand, who they would like to see as our partners, while we already maintain partnership with Chinese companies say, with Sinopec in Udmurtneft, with CNPC and many others. I hope, there will be some development. The visit of Russian President Vladimir Vladimirovich Putin to China is ahead. We will also try to contribute, negotiate something new there, and bring it to the market. That is why we work with them, we are not scared of Chinese partners.

But you personally are not negotiating privatization with Indian partners at the moment, are you?

— No, we are not. We have not received such an order from the government.

You mentioned your cooperation with European partners. Do you plan to export gas there?

— We are actively working on our gas program. In fact, I believe that gas as an energy source will be very promising, say, in mid-term, and we definitely should work with gas. But due to some legal restrictions we cannot supply gas from the Russian Federation to export markets, except for liquefied gas projects — so, we realize a project at Far East, and it embraces all our activities on gas export from Russia's territory. But we work with gas on international markets, and as you know maybe you've heard that we have already delivered the first LNG cargo to Egypt. And we plan to perform similar activities in Europe as well. Of course, it is not related to some kind of a competition with Gazprom, because they supply piped gas to Europe, and even small cargoes of liquefied natural gas through regasification terminals cannot affect Gazprom efficiency. But we try to get such competences, develop them, we will definitely implement a huge gas project off-shore Venezuela, and we will also build a LNG plant. And I believe that in this case Europe, of course, will also be our key market.

And is it possible to evaluate some target levels for gas export to Europe? What volumes do you plan to deliver there in the near future?

— It's too soon to speak of that. Due to the current legislation of Venezuela, we will have to give away about a half of our gas to our local partners. But certainly we will monetize our share effectively. And the European market is one of the best in this regard. But, however, we can also create good transport conditions there.

You were talking about collaboration with Indian partners. And at what stage are negotiations on purchasing a stake in Indian full-stage refinery now?

— They are at the realization stage. Main documents were signed, and we are going through various bilateral procedures, receiving approvals from corresponding antitrust regulators and working towards finalizing the deal.

And when will it be finished?

— In this case everything depends not only on us. As I said, we are bound with decisions on necessity to receive approvals from different institutions. We are working on it. I believe, we will finish it by October.

And how big the price of the deal can be, or is it too early to talk about it?

— There is a general understanding, but before the documents are finally signed, it is probably too early to discuss. In general, we are talking not only about 49% stake in refinery, the framework of deal includes the second stage of the plant with prepared territory. All these needs some small specifications. But in general all principal decisions have been made, including those concerning evaluation. There are some additional assets that we've included.

As far as we have touched upon external markets. Vladimir Putin mentioned that the cost of refinery in Indonesia may total $13 billion. And what the role of Rosneft could be like in this project?

— You are making me feel awkward. Vladimir Vladimirovich said everything absolutely right.

And what will you do there?

— We will build the factory.

With Indonesian partners?

— Perhaps, we will build it ourselves, but naturally we will create a JV with Indonesian Pertamina participating. We are negotiating for more partners from Russia to join the JV — in particular, the bank, which will finance the construction of the factory. The bank, in its turn, will give tied loans to suppliers of equipment, which, we suppose, will mainly delivered from the territory of the Russian Federation. And the project itself will be adapted to our Tuapse Refinery, with 12 million tons of primary processing capacity. A second stage of the factory is also possible. The work is underway, so we will work. The market is really good, as population of Indonesia reaches about 300 million and is growing, consuming is growing, wealth of population is growing. They switch from bicycles to scooters, from scooters — to automobiles, and these are those growth point where we definitely should be present.

You said that OPEC no longer performs the function it used to do before that of a global regulator. What have been the recent changes in OPEC functioning? Can we say there are other more influential factors for the global market?

— You yourself have just said OPEC is no longer a regulator, what is there to discuss? We believe the regulation is now in the hands of the three main players — the markets in the USA, Saudi Arabia and Russia. The basic conditions that brought about the change are quite simple — they include resource base evaluation, the presence of technology, and financial tools. All the countries I have named possess the full set of these tools, which caused such positions to form. Characterizing the USA market, it must be noted that apart from being major producers, they are major consumers as well. That, undoubtedly, allows them to keep the balance. The position of Saudi Arabia is different: they, on the contrary, are minor consumers in their domestic market and are major exporters. The Russian market is a more balanced one: we consume enough and have an opportunity to export. As I said, we have good infrastructure connections with the main export markets, and oil and gas pipes built back in the Soviet times. That allows us to boost efficiency and keep our traditional markets. And, without a doubt, we are actively working on new markets as well. All these factors are determining: resource base, technology and finances.

Is it possible that the role of Russia on the oil and gas market will change in the nearest future?

— Certainly, it is going to increase. It is going to happen due to the same three parameters I named: our resource base is one of the best in the world, and we have necessary technologies. We perform 31-stage fracking by our own means, we have mastered the technology, while only a while ago it was impossible. We have set a world record in drilling a horizontally inclined well in one of our Sakhalin projects, we have sharply increased volumes of onshore drilling. All of these are efficiency elements allowing us to feel confident in the competition. Also, the work we do on fund raising and long-term export contracts helps us to resolve the issue of attracting investment. We possess everything that is necessary, that is why I believe the role of Russia in the global oil and gas sector will increase.

What is your forecast on the oil price dynamics for the next half a year?

— The current volatility is going to persist. We believe the level of $50 or even $55 will be stable by the end of the year. But we do not see any fundamental factors that could lead to price growth before the end of 2017. By the end of 2017 is when we suppose to reach the level of $65 per barrel.

And a question for car enthusiasts: will petrol prices go up?

— Petrol prices in Russia do not depend on the global oil prices but are connected with taxes and excises.

Excises have recently risen. Has it been reflected in the price yet?

— The prices will then react correspondingly. I have mentioned that in the course of our meeting as well: global oil prices impact us to a smaller extent than the level of withdrawal to the budget. It should be regarded objectively.

To conclude: You already said Rosneft has become the biggest Russian company by capitalisation in the London Stock Exchange. What further achievements are planned?

— Actually, we did not set that goal, for me it came as a surprise. Of course, we are working hard and are going to continue that way, guarding the interests of our shareholders. It was unexpected for me indeed because we cannot be compared to leaders of the Russian industry that are in more favorable conditions: without sanctions, with a lower tax load, with their own transport. It just happened by accident.

Which goals are set for the next year, for instance?

— This is our primary goal. We do not compete with anyone, that is not the most sensible thing to do. We are different companies. We just work to obtain technology, to boost our efficiency day to day, we manage the risks, try to foresee negative trends, and react to them timely. We will do our best.

I wish you success and thank you very much for the interview.

— Thank you very much.