Surgutneftegaz CEO Vladimir Bogdanov.
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“There Are Sprinters, and We Are Stayers”
// Vladimir Bogdanov speaks about the plans of Surgutneftegaz
Tomorrow the annual meeting of shareholders of Surgutneftegaz, which is reputed the most closed Russian oil company, will be held. The dividends of Surgutneftegaz will grow by 14%, though oil production decreased by 1.6%. Surgutneftegaz CEO Vladimir Bogdanov told Kommersant how the company plans to combat the decrease in oil production, what it wants from the state, why it doesn’t attract partners and buy assets abroad.
– In Russia there is stagnation of oil production. This year Surgutneftegaz decreased its oil production, whereas it has boasted oil production growth in recent years. Do you believe the trend will keep?
– We have several scenarios of the development of the company till the year 2020. One of them suggests the keeping of the current level of production amounting to 65 mln tons per year (2007 64.5 mln tons was mined), others suggest the increase in production to 74 mln tons, 85 mln tons, and 100 mln tons. The result will depend on many factors – taxation, oil price, finance and equipment. Though it’s difficult to make a precise prognosis when, for example, cement price get twice higher, as was the case last year. Metal prices have grown by 40-50% since April 1. And it need be said that ours is a metal consuming production; metal accounts for 72% of production costs.
– How much are you planning to produce this year?
– As to Western Siberia, we’ll produce the same as we did last year. It very much depends on the launch of the Western Siberia – Pacific ocean oil pipeline. Today our oil wells in Talakan allow us to produce up to 5.000 tons daily, we only need a means of transportation.
– Surgutneftegaz issues reports according to Russian standards only, and experts opine that it doesn’t reflect the real financial situation. Don’t you consider making reports based on international standards?
– Legally, we are to make only two types of reports –bookkeeping and tax. We do not regard the preparation of reports complying with the International Standards of Financial Accountability necessary, since now the Surgutneftegaz public corporation is the centre attracting income. It consists of 56 departments, whose activity complies with the SAP/R-3 integrate system. It reflects material and finance flows. When we produce oil, it is reflected in the automated accountability system. When we sell oil, all the agreements are reflected in the system. When we receive income, pay taxes, pay salaries, buy assets, - it all is reflected in the system. At the same time legal entities are in charge of some of our sub-divisions, for example, Surgutmebel. There is also a plant Kirishinefteorgsintez processing oil, and we invest extra money in it. There are also sales and marketing entities, and almost all their incomes are reinvested. That’s it. When it comes to a huge body with several legal entities as income centers, then consolidated accountability is required.
– Unlike the majority of IPO companies, you have no independent executive officials, and you make no international audit of resources.
– I’d say we have independent executive officials.
– But those are your former employees.
– You think they deserve less that anyone else to be on the board? It’s the shareholders who elect board members. And as to auditing resources, there are questions on the principles of openness of initial data for this kind of accountability.
– Who are your main shareholders?
– There are 100.000 of them.
– Compliance with corporate standards would boost your capitalization.
– It’s just one of the elements that can boost capitalization. Referring to sports notions, I can say that there are sprinters, and we are stayers.
– What financial results can we expect this year?
– Income depends on a number of factors: the fluctuation of oil prices, the tax on mining minerals, customs tariffs. Today oil price is on the rise, but if it falls, we’ll get in the Kudrin’s scissors. So far I can only state that we got 19 bln roubles in net profit compared with 8 bln roubles last year. So, concerning effectiveness, we are doing fine. It is the decrease in costs that became the major factor contributing to the growth of income. We worked pretty well in this direction last year, though there are segments we cannot control. These are energy and transportation tariffs, increase in prices for industrial goods on the part of monopolies, we also have to index salaries.
– Which costs can’t you control?
– Basically, those regarding the purchase of materials and equipment. When a company has more than 2.000 suppliers and large amounts of purchases, saving 3-5% can be reputed efficient. Though our reserves are practically exhausted.
– Which measures are you going to take?
– We set up a reserve park for storing 1 mln tons of oil. Account taken of the prices changing and tax periods (customs tariffs get overhauled once per two months), we can use it for our benefit as well. Besides, we deliberately keep several oil wells untouched; their potential is 1.5 mln tons of oil production annually. We do not intend to mine oil at any price. With setting up the reserve, we have two goals in mind. First, we can launch these wells at any time, boosting oil production. Second, a large part of them have a lot of associated gas. And targeting at 100% of gas utilization, we create corresponding productive capacities. In the long run, it will allow us to get 800-900 mln roubles a year, effectively using associated gas, which we still have to burn partly.
– How much are you planning to spend this year?
– Last year we invested 92 bln roubles, with 86 of them invested in mining. This year we’re planning to make investments of 100 bln roubles. Investments in mining will remain at the last year’s level. But it is only prognosis, and the sum will have to be increased, because metal, construction materials and services prices have grown. Partly, creating reserve capacities helps us sap the growth of costs. We can tell our suppliers: We have a reserve of 1.5 mln tons, so we won’t purchase anything now. It’s a common market approach when producers seek to dictate their rules suppressing customers within the country. Now some prices on Russian production are above the international level. For example, Russian pipes cost more than those Chinese or Ukrainian, being often worse in terms of quality. But we have to buy them because of the prohibitive import tariffs. Another aspect you need to take into consideration is the deterioration of the resource base, which is the reality to reckon with. Because oil is going to be mined in those areas where it’s difficult to mine, costs will grow. Working at efficient oil fields, where you can get 50 tons of oil from one well daily is one thing; and having to exploit 4 or 5 wells to achieve the same result is quite another matter.
– The government is planning to boost oil production, according to the energy strategy. What need be done to this end?
– When devising an energy strategy, you must study your resource base in detail. Then you’ll see that there are still resources in the regions with developed infrastructure. They are hard to mine, being in deposits with low collecting properties and oil saturation. And there are new insufficiently explored regions with less developed infrastructure, such as Eastern Siberia. In both cases a flexible approach to taxation is required. The state mustn’t be left without any taxes, surely, but one should see the return from oil production as a set of factors. When starting to work with resources that are hard to mine, we have to purchase more materials, machinery production and so on. And the related branches begin producing more, boosting the tax base. With our orders, the machinery branch can achieve really high levels of development, and spurt, which in the course of time will allow for selling the production abroad as well as in Russia. So not only will the government gain in taxes, it will also expand its presence in the world markets. But to achieve this, you must clearly define the rules for the period from 2020-2030. To make appropriate plans, we need understand now what the taxation system will look like in the future. This will determine our output volume, and the production volume of the related branches. We all need time to prepare the expanding of the current capacities in order to boost the volume of output.
– How would you alter taxation?
– First, it’s necessary that all provisions of the tax code be interpreted accurately and distinctly. Another matter is the tax on mining minerals. The present scheme of its calculation was adopted as far back as 2003. It’s clear that this tax is easy to administer, but keeping it unchanged causes oil mining in some deposits unprofitable when you consider the growth of the costs. I am convinced that ad valorem tax (measured in per cent - Kommersant) must be introduced, which concerns only several deposits. If the current scheme of calculating the tax on mining minerals remains unchanged for the period from 2009-2010, then the severance should be increased to $45 per barrel at least. The tax must be calculated separately for the home market and exports. After all, this tax is the burden to be carried by customers. The oil mined in Eastern Siberia must be freed from the tariffs on the recoupment period, otherwise it will be pointless to work in the new regions. The tariff should be imposed only after the recoupment. Capital depreciation must be made faster. And we need to take a set of measures. Under the present system, the world growth of oil prices hardly influences the mining of oil in those regions where it’s hard to do. Tariffs and the tax on mining minerals, which must be differentiated, account for the lion’s share of our payments. But everyone fears the complication of administration. And I believe that it’ll be easy to administer considering the flow rate. Now there is a sufficient number of control systems to understand how much oil is produced within a certain oil field and how many wells can be launched there in the future. You only have to divide one figure by another, arrive at an average flow rate and devise tax schedule.
– If nothing is changed, will the company be able to make profit?
– Yes, it will. Otherwise, what’s the goal of our work? But if nothing is changed, we’ll produce, say, 40 mln tons of oil, instead of 60 mln, annually. Because under the present circumstances, the more you produce, the higher your losses. And in this case the state will also incur losses due to the decrease in the tax base with us and the related branches. The foreign trade balance will worsen, and I wouldn’t rule out deficit of oil products in this country.
– And who can guarantee that the benefits oil producers can get will be reinvested rather than serve the purpose of boosting dividends?
– Right you are, a lot of companies “contributed” to building up this reputation. But these times are gone for good. Oil producers have changed, the reality has changed.
– You mean it’s only the taxation that restrains oil producers?
– And besides the imperfection of the legislation. There are a lot of indirect laws referring to statutory acts, which were adopted at the governmental or ministerial level; and they sometimes contradict each other. It’s necessary that the Forest, Land, Water and Town-planning Codes be elaborated and amended, which must be direct laws, intelligible, easy to implement, and correspond with each other and the Law on the Interior of the Earth. As a result, it will allow drawing up permissive documents on oil mining in time. Besides, the peculiarities of work in licensed oil- and gasfields are to be considered. A special work order is to be introduced there – the drawing up of documents must be facilitated. Isn’t that absurd – to build and launch 800 facilities a year you need to collect 30.000 signatures! If things stand this way, no one will want to build and launch anything in this country.
– Every time Surgutneftegaz publishes its accounting, its competitors begin calculating how much money it managed to save up. The sum is not indicated in the report. Could you tell us how high it is?
– The funds saved up is tactics and strategy. And all our funds are to be allocated in a range of projects.
– Do you keep money in banks, or invest it?
– Like any other company, we use market mechanisms. But imagine what will happen if we say that Surgutneftegaz is interested in some stocks or shares. Their prices will soar. Our money brings us profit, which is not that low. It serves as good support when we need to accumulate funds, and raise big sums of money in no time to buy expensive equipment and build infrastructure in new areas of business. We invested 62 bln roubles in Eastern Siberia, and we’ll invest another 98 bln within three years. Then we’ll address the Nenets Autonomous Okrug. We’ll have to build everything there from scratch. As to the Yamal, our prospects are good. I think next year we’ll set to building a petroleum chemical plant in Surgut. Of course, the project is expensive, and no mistake should be made. We intended to produce low- and high-density polyethylene, but the market has been oversaturated with this production. By the way, we can have a partner in this project – western companies or SIBUR. The market is very specific, we need an aggressive marketing strategy. We consider a possibility of producing mineral fertilizers, and in this case, we’ll probably manage to do it on our own: Today the government pays much attention to the development of agriculture, which can’t do without mineral fertilizers.
– Have you already conducted talks with your partners within the chemical industry?
– Yes, we have. But we can’t figure out the final project yet. We supply SIBUR with a great amount of BFLH (broad fraction of light hydrocarbons – Kommersant), so they should also understand that when we launch a chemical complex, we’ll utilize this raw stuff. Oil refinery is the third investment pattern. Next year we are finishing the building of a hydrocracking plant in Kirishi. Then we’re planning to build a cutcracking “Kirishi-2” plant refining 12 mln tons of oil annually, with the entire circle of secondary processes (hydrocracking, cutcracking). And if we want to build it quickly, we’ll have to use credit resources in addition to the funds we have.
– Why don’t you buy a business that is already functioning? Other oil producers tend to buy refinery plants in Europe.
– Because we see nothing that could attract us. We also studied possible variants at a certain stage, but I don’t see a big margin there. If you build a good refinery in Russia, which will correspond to European standards, you can earn more.
– Have you studied projects on mining abroad? In Africa, Latin America?
– Yes, in Antarctica and Arctic (laughs). We invest money in Eastern Siberia, a region studied at 7-9%. Eastern Siberia is more attractive and interesting for us, in terms of discovering new deposits, first of all.
– Will you manage to realize your plans? They say one of the state companies will buy you. Haven’t Rosneft, Gazprom or Rosneftegaz made a bid yet?
– No, they haven’t. These rumours are nothing more than bull speculation beneficial for those speculating on the stock exchange.
– Don’t you feel a little bit offended that you are not regarded a strategic company, and you are not able to get strategic deposits?
– No one has sold them by auction yet.
– And if they are put up to auction, will you participate? For example, as a partner of state corporations?
– We haven’t considered this opportunity yet. And as to partnership, you can organize it in different ways. When developing new oilfields, the greatest costs are connected with building infrastructure, and in these terms partnership is beneficial and rewarding. For instance, we built a concrete road, with Rosneft and TNK-BP bearing half of the costs since they also use it now. We built moorage on the Lena river, which can also be used by other companies, Gazprom among them.
– So you are ready to cooperate only when building infrastructure?
– You can cooperate sharing risks. And we have projects where the company runs no risks at all. We are a self-sufficient company in terms of equipment, staff and funds. We have a whole set of service subdivisions. If we didn’t have it all, we wouldn’t have achieved such results and received such profits.
– And you don’t need new technologies?
– Technologically, we don’t fall behind the leading oil producers of the world. If we need equipment to apply new technologies that is not produced in Russia, we purchase it from the leading international producers and train our staff. I see no economic reason in giving anyone something we can do better.
– Isn’t it hard to compete with state companies?
– I can’t say that any special conditions have been created for them, which would impede us. If only we presume that when signing documents, officials will flinch from protracting time constraints…
– What terms does Surgutneftegaz export oil on?
– We sell all oil on the tender basis. First, we sign preliminary contracts concerning the right to take part in tenders. Then we hold oil supply tenders monthly. Shell, Total, ÂÐ, Neste, Statoil, Mitsubishi, Itochi, Mitsui, Gunvor, Vitol are the tenders we cooperate with. Besides, we have term contracts (annual ones), which are concluded on the tender basis as well. We have term contracts with Statoil, Total and Shell. As to oil products, we also have term contracts, for example kerosene contracts with BP.
– And what’s the scope of your cooperation with Gunvor?
– We have only oil contracts with it. On average, we export 2.8 mln tons of oil per month, with this trader accounting for 250.000 tons.
– You are going to purchase shares in the market to realize the option program. Have you fulfilled your plans?
– We have an option program, it is realized in due course, and we buy up shares in small proportions. Now a new generation of managers is coming to the company, and the youth should have their option share.
– But judging from the reports, one can’t say that the generation of managers is changing.
– I reiterate: the program works. We’ll grow the young generation, who will manage successfully, and get their options.
– After heading the company for 24 years, don’t you consider a possibility of giving up direct management? Now CEOs of large corporations have to engage in politics, buying media assets for example…
– We have never been engaged in politics, and are not going to do it. And purchasing is business. I am not going to retire: I have the energy, will and passion to work, if I can put it like that. For me and many of my colleagues, Surgutneftegaz is a way of life, rather than merely a place of employment.
Denis Rebrov
All the Article in Russian as of Apr. 29, 2008
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