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Interview

with Elena Korzun, General Director, Assoneft

13.04.2009 / Energyboardroom

When it comes to the Russian oil and gas sector, outsiders often only see six big players while the rest – the independent producers– are limited to and within the domestic market. Is this perception accurate, or do independent producers have a bigger role than we think?

Even though the output of independent oil producers is small, professionals around the world know about them. At the begging of this century, Russian independent oil producers represented around 10 percent of the total output, however in the past years production has decreased considerably. For instance, in 2008 it represented 4 percent of the total output or to be more precise 20 million tons. This decline can be attributed to the fact that oil majors like Rosneft are taking over minor independent companies.

Would be the reason why their importance in the sector has declined in terms of production?

It is not the main reason, since independent oil producers, as in any other part in the world, usually work in new small and complicated fields, which majors are not interested in.

What is the main difference with regard to independent oil producers in Canada, the USA or Australia … where they are very active and are highly regarded by the State?

Nearly 40% of oil production in the United States is made by independent companies, when it’s only 4% in the Russian Federation. Their core business is the same but the structure of the industry is totally different. There are two reasons for this: our market is too young, and there are no governmental policies made for independents.

The Russian oil industry was privatized in the nineties and was designed to have several big players. No one forecasted the raise of independent producers who first appeared as joint ventures operating separately. A big change took place in 1997 in Tatarstan when its President, Mr. Shaimiev, signed the Decree on measures to increase oil production that enabled independent companies to multiply their output by five that year, and reach a level of around 6 million tons per year today.

Now Mr. Putin (NE: Prime Minister)and Mr. Sechin (NE: Deputy PM in charge of energy) have understood that we can not only rely on big oil fields any more, and have to change the rules in order to develop the plethora of small fields in the Russian federation.
You mentioned that the time of big fields is over… No one is investing in East Siberia where there are huge untapped reserves, as capital investment there is very high and there are no incentives put together by the government.

Do you think that we can expect a change at a governmental level? How do you expect things to unfold in the coming years?

The Government has recently started to work on tax reforms for companies working in East Siberia, as the Kremlin has understood that the years of ‘milking the cash cow’ where over and that it had to cooperate with the oil industry from now on. Moreover, our Ministry (NE: Ministry of Energy) has been asked to prepare a law creating a status for the independents. This will give the possibility to provide independents with a tax system that would be more favorable to them. Today independents only produce crude oil and do not have their own refineries and only have access to the ones in Moscow and Ufa; access that can be jeopardized if any domestic tension was to happen. Our association asked for independent refineries last year, and proposed places like Tatarstan or the Komi Republic to settle them. But now that the economical crisis has occurred, priorities have changed.

Has the crisis put these projects on hold?

Not really, but their advancement does not go as fast as planned. The situation will change in a few years and these refineries will be built as we have investors willing to undertake these projects. To set sound bases to the oil exchange market in Russia, it is very important to have independent refineries. Yet major companies are arguing that building these independent oil refineries would not be a necessity, and that we could work together with them.

In other countries that we had the chance to cover, lot of majors have been working with independent producers and, in some way, see them as part of their future. A bit like in the pharmaceutical industry where small independent companies were developed and then integrated in the process; it seems that in Russia there is more of a conflict of interest than actually a will of working together. Is this a misperception? If it is not, why is that?

Some years ago the ideology of Mr. Khodorkovsky (Yukos) to have only a few major, trans-national companies was and is still very popular in Russia. Now Tatarstan has set the example, and big companies – such as Tatneft – are working together with independents. If our Government had policies to support this sector, and set fiscal privileges for small companies, it would become more advantageous for the majors to share their licenses. That is why a governmental policy that would not only support small business in trade, restaurant, building, business… but also in the oil industry is a real necessity.

In a former interview you mentioned that everything in Russia is based on auctions, which is why only money matters. Is this discussed in your talks with the Government? Do you have the feeling that they are now looking at new solutions?

We have been discussing this matter with the Minister of Natural Resources and are willing to organize close auctions where only small investors would be able to bid on these small fields that are not interesting for bigger investors. But again it’s not our main subject of discussion as today even the Minister of Natural Resources has no other issue but the crisis to deal with.
Our priority is to obtain the extantion of all the performance conditions of the license agreements for one year due to the crisis, as independents did not get credits from banks for 2009 and would not be able to make the changes required by the audits.

Apart from the difficulty to access credit, what has been the impact so far on independent producers of both the dropping oil prices and the drop in demand?

At the end of 2008 independents endured direct losses as the situation with oil prices both on the world and the domestic markets was a catastrophe, and worsened by the crisis in the banking sector. During the 2nd and the 3rd quarter of 2008, they had, however, obtained benefits. Now, examining the situation as of January/February 2009, I would say it is slow but we will survive.

Not so long ago the oil barrel was around $15-20, and people said “you know you don’t remember when it was $10 or even $7”. Then, the barrel reached $140, and now that it’s down again, at around $37, people say it is too low. What is the fair price for the industry to not have losses, especially for independent producers?

Everything depends on where the field is, as well as the Ruble/Dollar exchange rate. Any price around $50 would be enough for our companies to grow.

Even when Prime Minister Vladimir Putin ordered a review of the budget with a projected price of $41?

The process of oil production can be undertaken without losses even at a price of $7-10, but the tax system of countries play a huge role. We should have a system where the tax burden is based on financial results of oil companies. The Russian one is not flexible; therefore our Prime Minister has this task –which I already mentioned -of improving it, and already started this process on new fields.

A lot of foreign companies were coming to Russia in the nineties to set up joint ventures with locals, what opportunities can you foresee in the sector?

There are opportunities for foreign companies in Eastern Siberia, in oceans and northern territories to work with our small investors…

When you see Canadian companies become majors by exploring in Algeria, is this a scenario that is possible for Russian independent gas producers?

Independents are not only active domestically, but also internationally, and have projects in Nigeria, Burma… and are willing to continue. They have a tough present but a promising future. Of course small fields are not important for majors but they have to be exploited; it will de facto become a job for independents.

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