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Interview

with Mikhail Polonskiy, President, Promstroi Group

27.02.2013 / Energyboardroom

Mr. Polonskiy, first I would like to congratulate you for doubling the company’s revenues between 2011 and 2012 and bringing the revenues to an even higher level as compared to 2009 –when the ESPO pipeline was your flagship project. After 2 years of downturn, it seems that the rough times are behind Promstroi Group. What have been the challenges and opportunities of building the post-ESPO Promstroi and what do you attribute your current success to?

Between 2011 and 2012 Promstroi Group completed all its works and commissioning obligations on or before schedule. However profits were slightly less than expected, even though our revenues approximately doubled compared to the year before. Therefore we are satisfied with the results of last year.

More good news was that the company honoured its agreement to buy out a large shareholder, meaning that today more than 75% of the company belongs to its management.

One of our achievements has been the completion of the third stage of the South Balyk gas refinery complex for SIBUR. We began and in one season (six months earlier than the scheduled time) have constructed the oil pipeline circumventing Penza for Transneft, and carried out hydrostatic testing with temperatures around minus 20 degree Celsius at the end of December 2012.

In addition, we commissioned a large gas refinery complex for TNK-BP in the Orenburg Region – the Pokrovsky gas refinery. This has been the largest construction project for TNK-BP in the last five years.

We carried out the main works concerning the installation of metal structures and industrial pipelines, instrumentation and electrical equipment for our client, VoronezSyntezKauchuk, a subsidiary of SIBUR, an enterprise for the production of butadiene-styrene thermoplastic elastomers with the production capacity of 50000 tons per annum. This allows us to speak confidently about commissioning of the facility within the first quarter of this year.

In March 2012, Promstroi Engineering was established. How does this newly established subsidiary integrate into the group?

Initially we searched to acquire an existing Engineering company transformed from one of the Soviet design institutes, but after a long and unsuccessful search, we decided to integrate this division into the Promstroi Group through the establishment of a 100% new subsidiary – LLC Promstroi Engineering.

Promstroi Engineering’s services include the development of detail engineering and technical documentation without subcontracting, value engineering, engineering survey and design management within the EPC project, etc. We have ambitious plans for the development of our advanced design competences.

In fact, the subsidiary is close to creating a Joint Venture with a well-known American company in the oil and gas upstream engineering segment.

Moreover, we have determined a list of potential foreign partners in order to create a Joint Venture in downstream engineering.
These Joint Ventures will be mutually beneficial in terms of receiving the best Western methods and systems and in return providing them access to the Russian market.

In the 2010 interview you mentioned that you expected foreign companies from China and the US to enter the market. Has this happened and do they contribute to modernizing the industry?

Unfortunately or luckily for us, I can’t give many successful examples of this since 2010.

Foreign companies find it difficult to enter the Russian market. Construction in Russia is carried out in our own traditional way.

One of the main problems in the industry is the absence of demand for efficiency of investments. It is common that the process of investment planning and management is conducted by separate contracts for engineering, procurement and construction.

In a competitive environment the price of turn-key construction for a large industrial facility is calculated as a sum of risks for a customer and a contractor. Therefore, the price is optimal only when there is an EPC contract in use. In our opinion, in the near future the number of projects performed by EPC contractors will increase, which means that the niche for Western companies will also increase. If one has risk appetite, there is a good deal of work outstanding in Russia.

Already in 2010 during our interview you mentioned your desire to bring Promstroi to international markets and you believed you were ready to compete with foreign players. One of the first milestones of that strategy is that in 2012 Promstroi received the status of contractor of Saudi Aramco, Saudi Arabia’s national oil company. Do you see it as a trend that Russian companies are looking for projects in foreign countries?

Regardless of the fact that Russian industry has been in disarray for the last 20 years, there are Russian contractors that qualify to participate in projects in the Middle East and Africa. However, due to sufficient workload in the internal market, Russian companies have neither the desire nor the financial resources to enter foreign markets at the present time.

Speaking about the Joint Venture in Saudi Arabia, it was established 2 years ago in February 2011. Last year we passed the prequalification procedure and Saudi Aramco granted us the right to construct onshore pipelines.

We still receive invitations to participate in tenders. However, we own only 50% of the JV, the other 50% belongs to our Saudi partners and it is not easy to deal with them. That’s why we cannot proceed to the implementation of the project.

Could you tell us about the foreign strategy of your Company from 2012 onwards?

In the near future we are solely concentrating on markets in Russia, Belarus and Kazakhstan. In these territories we have assets and anticipate large volumes of work in the sectors: oil and gas, metallurgic, refinery, energy and infrastructure.

With regards to cooperation with Western companies, we are open to cooperate and to help them enter this big market.

Relations between Western and Russian companies have, due to bad experiences, been remarkably cold during recent years.

However, we need western partners ready to take contracting risks in Russia. But it is a mutual process: both we and our partners have to carry out the corresponding part of the work.

What is a competitive advantage of having Western partners who are going to bring efficiency to the table but also increase the prices?
Prices are higher, but compared to what?

There are two approaches towards the price of a project. The first one is a project executed in a traditional way; the second approach in one form or another represents an EPC contract. The traditional way seems cheaper in the beginning, but the actual price of construction will be twice or three times higher than projects that are being executed on basis of an EPC contract – under an EPC contract the contractor carries the project risk for schedule as well as budget in return for a fixed price.

Everyone knows the examples of projects where the timeframe to construct a facility was 9 months but eventually took 27 months.
Having said that, sometimes it is cheaper to pay a higher price: Promstroi or any other serious contractor provides a bank guarantee for the performance of its obligations in terms of time, price and the quality of a project.

Every construction project is subject to some uncertainty but we hope that in the future Russian clients will become more risk averse. We aim to eliminate as much uncertainty as possible using our experience, human resources, machinery, bank guarantees and other advantages.

What makes Promstroi Group a partner of choice? What sets the company apart from other competitors in the market?

It is a matter of common knowledge that we as a company have built our reputation over many years. Many of the employees at Promstroi Group have worked together for 30 years and there has not been one project we have not finished – all of them have been completed successfully.

Promstroi Group boasts a top management team and specialists of different ages combining the best Soviet experience and modern technologies. The Company provides a comfortable informal environment for the professional development of young specialists.

Going forward, where do you want to take Promstroi Group in the next 3 to 4 years?

By that time we will have concluded four Joint Ventures with Western partners in the sphere of design for strategic industries: oil and gas production and transportation, the petrochemical industry, oil and gas processing, energetics and road construction.

Revenues will amount to about 40 billion RUR per year. The contraction will not be less than 60 billion RUR. The number of our employees will be about 10,000. Provided that, Promstroi Group will remain a non-captive, independent, effectively managed and market responsive company.

The project management system will consist of two legal entities: one will manage construction of linear facilities such as roads, bridges, oil and gas pipelines and power transmission lines, while the other will deal with construction site facilities such as for the oil, gas, energy and metallurgy sectors.

We will establish a training facility to educate highly skilled technical and engineering employees and workers: welders, assemblers and electricians. This process took off in Belarus where the workforce is less expensive. A Customs Union between Belarus, Kazakhstan and Russia makes it possible to engage foreign employees in projects on Russian territory without immigration implications.

I estimate that within three to four years this Company, to the shareholders’ delight, will be worth at least one US dollar more than one billion US dollars.

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