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Igor Sechin Made a Report at the Presidential Commission For Fuel and Energy Industry

04 June 2014

Rosneft President, Chairman of the Management Board, Executive Secretary of Russia’s Presidential Commission on Strategic Development of the Fuel and Energy Sector and Ecological Safety Igor Sechin took part in the Commission’s meeting under the chairmanship of Russian President Vladimir Putin on June 4.

The meeting reviewed the issues concerning diversification of lines of fuel and energy sector development in Russia’s economy, implementation of a number of fuel and energy industry investment projects in the Far Eastern Federal District, and also problems of pricing in the domestic gas market. In the course of the meeting, a teleconference bridge with the General Director of Vankorneft, Rosneft subsidiary, Arcady Kuznetsov was carried out. Kuznetsov told about plans for development of the Vankor cluster.

Igor Sechin made a report about diversification of lines of fuel and energy sector development in Russia’s economy. In the report a special priority was given to development of resource bases in Siberia and the Far East, extension of the ESPO pipeline project, issues devoted to instruction of amendments to the fiscal system of the sector, and also pricing in the domestic gas market.

«By your order, Vladimir Vladimirovich, we have analyzed our current position as to mention the most important moments of fuel and energy industry development and make necessary amendments due to the situation in the worldwide markets», - Igor Sechin told.

The main priorities stated in Sechin’s report must be the development of the domestic market, primarily in the Eastern Siberia and Far East, diversification of export supplies to developing markets of the Asia-Pacific region, and also continuation of oil companies’ efforts to develop their own competencies to cut dependence on services of foreign partners regarding the oil service sector as well.

When reporting, Igor Sechin touched upon a problem of global financial risks which are currently expressed by limitation of access to the capital market, manipulation of the market, and also by actions aimed at oil price decrease. However, as he mentioned, these phenomena will not be long also due to a high dependence of the budgets of producer countries on the worldwide oil prices

Mainly, as Igor Sechin supposes, it is necessary to develop the fuel and energy industry in the country’s East, create a new large center for oil and gas production in this region, in connection to which a quick distribution of subsoil areas is needed. In the course of deoffshorization, in the reporter’s opinion, distribution of new areas only between organizations which shareholders are Russian individuals and legal bodies can be considered. Moreover, an issue of economic feasibility of transport fares for the Eastern Siberia and Far East should be explored.

Igor Sechin assumes that development of the resource base in the Eastern Siberia and Far East will let our country and companies to substantially increase a share in the developing markets, primarily in the markets of Asia-Pacific region where accelerated growth of demand in imported oil and gas and also their products is continuing. In addition to domestic demand, it will create an important impulse for the country’s eastern regions to develop, allow selling oil from East Siberian and offshore fields effectively. According to predictions, by 2030 Russia can increase a volume of supplies to Asia-Pacific region by more than two times in comparison to the current level.

Rosneft president highlighted that the development and extension of the ESPO pipeline project implementation of which could be made on conditions of project financing including financial deposits of state and non-State pension funds, is also an important issue. Use of funds of oil companies themselves which are interested in the development of East Siberian fields is also possible.

The Company’s president mentioned that the Eastern Siberia has a significant gas potential – existing and promising fields can provide an output of 200 bln cubic meters a year. «It is obvious that we should sell this gas at the market. If oil and gas companies have an opportunity to enter gas transport system which is being created by Gazprom on economically justified conditions, it will optimize investments», - he highlighted. Igor Sechin suggested taking into account an opportunity to give independent gas producers the rights to export gas from new fields of the Eastern Siberia and Far East, because this measure will be a motivation to development of the whole region.

Speaking of a tax maneuver, Rosneft head said that a seeming simplification of the tax system of the sector, as the Ministry of Finance supposes, should preserve a break-even point of the oil sector and meet current needs by consumers of all countries of the customs union. Moreover, it is not taken into account that these proposals will make a discouraging effect of production, directly contradict the tasks for development of the Eastern Siberia and Far East. For example, the changes suggested will significantly worsen the economics for development of a number of new large-scale projects such as Yurubcheno-Tokhomskoye field, Filanovsky and Lisovskoy fields with a total annual output up to 20 mln tones after 2020. A consequence of this tax maneuver will also be a freezing of a number of new projects devoted to petrochemistry and refining in the Far East. There are risks to implement the Far East Petrochemical Company (FEPCO) and modernize Angarsk Polymer Plant. Also, there will be a total decrease of investment attractivity of the sector and investment climate for Russian and foreign investors in general due to changes of rules of the game.

Igor Sechin emphasized that projects in the oil and gas sectors are implemented during 30-50 years, as a rule. To make investment decisions for this period and attract financing on a long–term basis, the stability, mainly, and predictability of the tax system especially, is needed. As the head of the Company said, it is necessary to consider that a long-term nature of activity of the oil and gas sector, presence of investment plans and long-term contracts allow both budgetary receipts to be predictable and multiplicative effect to be guaranteed for the economics.

Rosneft president mentioned that a total volume of investments of Rosneft in the Eastern Siberia and Far East will amount to 3 trillion rub in connection to new long-term contracts of supplies to Asia-Pacific region. The investments in exploration of the Arctic shelf planned will amount to $400 bln only for first 20 years. «In general, investments in the oil sector including oil production, refining and transportation for 2010-2014 have already made up more than 5 trillion rub. To guarantee these investments and achieve corresponding multiplicative effect, of course, a stable fiscal regime is needed», - he said.

Igor Sechin suggested investigating more weighted parameters of the tax system modification, provide the universalization of taxation for the oil and gas industries and also other sectors of the economics where a level of budget payments is significantly lower than the revenue. As he said, it is also necessary to inventory non-systemic benefits given to certain projects, and document them though law if necessary.

«These measures will help not only to resolve current budget questions, but also provide the stability of the tax regime necessary for continuation of development of the oil and gas sector to implement priority projects in the country. As we suppose, comprehensive investigation and further promotion of those measures, the most important of which is providing the tax stability and developing an infrastructure of the Eastern Siberia and Far East, will let us to move from reaction to immediate calls to create a long-term strategy in the fuel and energy sector aimed at diversification of the economics in general. This will allow us to increase investment attractiveness of the country in general and resistance to negative consequences, instability of the global economy and other external actions», - he concluded.

Rosneft president also reported about the projects of the Company in the Far East. He emphasized that Rosneft actively operates in the Far Eastern region. This direction is one of the Company’s preferred ones. This year, Rosneft carries out an annual meeting in Khabarovsk as to show the importance of this region.

At the moment, Rosneft produces 30 mln tons of oil and 1.6 bln cubic meters of gas annually in fields of the Eastern Siberia and Far East. The Company is organizing a new province on a base of the Vankor oilfield. These oilfields will provide an additional output up to 30.9 mln tons of oil and more than 8 bln of cubic meters of gas by 2020. The gas production in the fields of the Eastern Siberia and Far East is planned to reach 45 bln of cubic meters by 2030.

One of the main projects in the Far Eastern region is the EPC project. A preliminary cost of the project is estimated at 659 bln rub in first and second succession, in total – 1.3 bln rub. Considering the importance of implementation of this project for the Far East, Rosneft president asked to give it a priority status.

In addition, Igor Sechin in his report paid attention to the project to create a shipbuilding cluster in the region and proposed to make «the Far Eastern center for shipbuilding and ship repair» a unified site for Russian companies to place orders for building ships and marine facilities for work on the shelf.

Among important projects of the Company in the region is also the LNG plant in the Far East, as Igor Sechin said. He highlighted that the existing changes in the global market makes this project global. The plan commissioning is planned for 2018-2019. Igor Sechin reminded that use of gas transport infrastructure of the Sakhalin-2 project would be economically justifiable for this project. He asked to render assistance in joining this system on economically feasible conditions.

  Report of Rosneft President At The Presidential Commission For Fuel and Energy Industry in Astrakhan

  Excerpts from Rosneft President speech on the Far East fuel and energy complex development strategy

Information Division,
June 4, 2014