Alexander Dyukov, CEO Gazprom Neft, – interviewed in Politica magazine

December 20, 2017

The latest ratings from the Serbian Business Registers Agency show NIS was Serbia’s most profitable company in 2016. What do you have to say about that? Let us recall that that when Gazprom Neft first acquired its controlling interest, in 2009, the situation was completely the reverse. NIS was a loss-making company, beset by huge debts – the company’s losses in Q1 2009 stood at more than EUR120 million, with a bank debt approaching EUR1 billion. Performance was down right across the board: there was no development strategy, and no investment had been made in geological prospecting, oil refining or the filling station network, for many years. Together with our Serbian partners we have adopted effective investment decisions, engaged professional managers, and put in place a development strategy for the holding company – which we have followed to the letter. All in all, we’ve been able to transform NIS into a major regional energy company. Total investment in NIS’ development since 2009 stands at EUR2.5 billion. Today, the company is the most profitable in Serbia, generating EUR1.3 billion for the state budget every year. NIS has been transformed into a modern, international company, managing a filling station network across four Balkan states, owning one of the most state-of-the-art refineries in Eastern Europe, and developing alternative energy sources. The company is also continuing to develop successfully beyond Europe. NIS had adopted a new development strategy. What does that involve? NIS’ holistic corporate strategy to 2025 includes several key priorities, reflecting the main challenges facing the company currently – ensuring stable production volumes of oil and gas, while continuing to expand the resource base; increasing conversion rate and improving efficiency in oil refining; and refitting and modernising the retail network. We remain of the view that investments in electricity projects – including the thermal power plant (TPP) in Pančevo, as well as electricity generation through co-generation and wind-energy facilities – are fully justified. We plan to invest a total $2.2 billion in developing the company to 2025, which means NIS will retain its position among Serbia’s largest investors. NIS’ most important investment project currently is the construction of the deep refining complex at the Pančevo refinery. What does implementation of this project mean for purchasers of oil products, and what does it mean for the development of the company itself? What is the total project cost, altogether? For consumers it means, essentially – excellent fuel. Production volumes of high-performance diesels will go up by more than 38 percent together with growth in production of gasoline and LPG. Once the complex has been commissioned, the refinery will cease production of heavy (high-sulphur) fuel oil – which isn’t the most environmentally friendly of fuels, and which, in effect, will exit the Serbian market. In terms of Serbia’s economy – it means more than EUR300 million in investment, as well as higher tax revenues, which are vital for development. As of now, this is the most significant investment project in the country. Added to which, this means additional jobs, as well as an added impetus for local businesses, since we plan to engage mainly Serbian contractors in construction. As regards the company – this is a key project in the second phase of the major modernisation of NIS’ refining capacity, something Gazprom Neft has been pursuing since 2009. EUR500 million has already been invested in the first phase of the project, in building the hydrocracking complex at the refinery in Pančevo – as a result of which the plant has become one of the leading businesses of its kind in South–East Europe. Implementation of the “Deep Conversion” project will mean the plant is a match for the best refineries in the world. Once the complex has been commissioned, in Q3 2019, refining depth will reach a record 99.2 percent (it’s currently 86) – a key indicator of any refining facility’s operational efficiency. By way of comparison, the average refining depth at refineries throughout Europe is 85 percent. In addition to which, NIS will start producing petroleum coke – something that, as far as Serbia is concerned, has, hitherto, always been produced abroad. The Russian NIS’ majority shareholder is, then, fulfilling all of its remaining obligations under the sales–purchase agreement. But can we be certain that the project will be seen through to the end, given current market instability and ongoing fluctuations in both the exchange rate and the oil price? As regards our obligations under the sales-purchase agreement, we are – at the moment – not just meeting these, but have significantly exceeded them. Construction of the deep conversion unit (DCU) has nothing to do with that agreement. In taking the decision to launch the project, we have been guided solely by economic considerations, on the basis that NIS’ refining capacity has to be competitive on the European scale. As regards financing the project, I don’t see any problem: funds have been allocated for this in the budget, and I have every confidence that everything will be completed on schedule, regardless of negative factors beyond our control. There is a further key asset, whose fate has not yet been finally decided – HIP PetroHemia. Since you started working in Serbia, Serbian government has – to a greater or lesser extent – been openly lobbying for a decision on the acquisition of PetroHemia. Instead of that, you became one of the most important shareholders in the company, as a means of converting its accumulated debt before NIS. Yes, we are fully aware of the importance of this asset to Serbia’s economy, which is why we have been supporting this company for many years. As part of the agreement with the Government of Serbia, NIS supplies PetroHemia with a key raw material – straight-run gasoline. We have enhanced the management at HIP PetroHemia by engaging specialists with experience of working at international companies. Added to which, NIS has fully adhered to the agreed plan for the reorganisation of PetroHemia: on which basis, the issue of the company’s indebtedness – to all creditors – has been resolved. It is precisely through implementing this plan that the restructuring of NIS’ interest in HIP PetroHemia’s ownership structure increased to approximately 21 percent. Are you happy working with your minority shareholder – the Government of Serbia? How are major decisions taken? NIS is a genuine example of shareholders working successfully together – in our case, Gazprom Neft and the Government of Serbia – and is a model for effective strategic collaboration in energy between Russia and Serbia. All of the most important decisions in recent years have been taken on the basis of agreements between major shareholders, with an appreciation of the major role that NIS plays in Serbia’s economy. Our work together has demonstrated that in Gazprom Neft Serbia has found a partner it can rely on in developing its energy industry, while Gazprom Neft has found in Serbia a platform for development. We will continue deepening and fine-tuning this collaboration, to our mutual benefit. So the answer to your question is obvious – we are completely satisfied with our cooperation with the Government of Serbia. Gazprom Neft doesn’t limit itself exclusively to business-related projects in Serbia. Considerable resources have been committed to St Sava’s Cathedral. Just how much money has been donated to the cathedral, thus far? We have invested EUR37 million in social, cultural and sports projects throughout Serbia since 2009, EUR4 million of which has gone on mosaic decoration on the cupola of St Sava’s Cathedral. We know how important construction of the cathedral is for the people of Serbia, which means this project is extremely important to us too. And, of course, it’s also a symbol of Russian–Serbian friendship. Work on the mosaics is now reaching completion and we hope that, early next year, this part of the cathedral will emerge in all its glory. The company is also a sponsor of Red Star Belgrade (FK Crvena Zvezda). How do you see future cooperation here? Why would Gazprom Neft be interested in sponsoring Red Star Belgrade? We have, for the past seven years, been supporting not just the Red Star Belgrade professional team, but also the education and training of talented young Serbian footballers. This represents the most significant investment in Serbian sport in recent years. And for us, given Red Star Belgrade’s popularity in the country, it’s a highly effective marketing initiative, and we will continue working with Red Star Belgrade. We congratulate the team on reaching the spring play-offs in the European League, and wish them further success in both the European cups and the national championship. How satisfied are you with the work of NIS’ new management? The best indication of management activities is a company’s high performance – both operational and financial. NIS continues to deliver a profit for shareholders, as well as effectively implementing strategic projects, and maintaining a high standard of corporate governance. Both NIS’ previous and current management adhered and are adhering to the strategy adopted by their Serbian and Russian shareholders.