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Serbian oil and gas company Naftna Industrija Srbije (NIS) this year marks the 10th anniversary since Russia's Gazprom Neft became its largest shareholder in 2009. NIS CEO Kirill Tyurdenev tells Energy Intelligence in an interview how the Serbian company has changed over the past decade and what the future holds. How would you evaluate the company's transformation over the past 10 years? What are the successes NIS achieved and how has NIS changed over the period? Over the past 10 years, NIS has changed dramatically, and the dynamics of the company's financial performance are the best evidence of our success. Before Gazprom Neft joined as a shareholder, NIS incurred a loss of about $100 million to its shareholders. The total debt stood at some $1 billion. In 2018, the company's net profit exceeded $250 million, while earnings before interest, tax, depreciation and amortization reached more than $500 million. The company's debt dropped to $657 million. Today we consciously keep net debt at this level, because it is economically profitable for us to raise the money in such a volume and under such conditions that the market provides now. In terms of operational performance, I can say that when Gazprom Neft entered the share capital of NIS, the company's production amounted to roughly 1 million metric tons per year (20,000 barrels per day) and was gradually decreasing. Last year, we produced about 1.3 million tons of oil equivalent. Refining volumes at the end of 2018 reached record levels, exceeding 3.8 million tons. One of the key projects of the last 10 years is the modernization of the Pancevo refinery, which Gazprom Neft started after the acquisition of NIS in 2009. This made it possible to bring Euro5 standard fuel to the Serbian market, expand the products basket, and increase the efficiency of products output. Thanks to Gazprom Neft's investments, NIS received the status of the largest domestic supplier in the fuel market and began to export oil products to the markets of the Balkan region. We have also increased our share in the retail market. In Serbia, we are approaching a 44% share in retail and 70% in wholesale. In addition, the company went outside Serbia to Romania, Bulgaria and Bosnia and Herzegovina. We have 315 fuel retail stations in Serbia and about 90 stations outside the country, under the brands NIS Petrol and Gazprom. If we talk about foreign expansion, then we are now working outside the country in exploration and production. We are conducting exploration in Romania and Bosnia and Herzegovina. In addition, the company is diversifying its business. In partnership with Gazprom Energoholding, we are building a combinedcycle power plant, that is, a power plant with a gas and steam turbine. Also, together with our Hungarian partners, the MET group, we are implementing a wind farm construction project. In addition, at our own facilities, we built several plants for electric power generation and thermal energy at eight oil and gas fields with a nameplate capacity of 14 megawatts. On gas fields in Romania, the construction of a unit for the generation of electricity with a capacity of 7.5 MW is under way. This year, NIS is prepared to update until 2025 its development strategy, which was adopted in 2017. What are the main goals you plan to achieve? It's too early to outline the parameters of the updated strategy, we are working on them now. In the autumn we will submit the strategy for the shareholders' approval. You already mentioned that in 2018 NIS produced 1.3 million tons of oil equivalent. What is the production plan for 2019? Are you planning any actions to stabilize declining production, or to increase it? Indeed, the company's production is declining because in Serbia we are working at mature fields, and if nothing is done, production will be declining by 20%-25% annually. We managed to keep this decline rate at 3%-4% thanks to the implementation of modern technologies and measures to improve efficiency. The longterm goal is to find an opportunity to keep production at 1.2 million toe/yr. We can do this through technological development and implementation of NIS projects outside Serbia will help. So what is the production forecast for 2019? It should be flat on 2018. Are there any interesting assets in Serbia? In Serbia, most of the areas have already been studied, captured by various types of seismic. I don't think there might be any surprises here. However, we are constantly taking measures to increase oil recovery rates and we managed to achieve some success as we were on time to invest the money in the development of NIS' scientific and technical center and to boost the efficiency of our investments in exploration and production segments. Are you planning any field acquisitions? We look at various possibilities. Are you still considering opportunities outside Serbia? We consider various options. If you look at other oil companies in the region including Mol, OMV or INA most of them grew because they produced oil in various regions in Africa, the Middle East, Northern Europe, and not only onshore, but also offshore. But this is a complicated business connected with country risks. In our company we consider such projects only in the medium term and with a partner with whom we can share the risks. In the short term, we plan to develop our own existing assets, where the successful implementation of the production program will allow us to talk about the possibility of expanding the horizons of our presence. This year, you plan to complete the construction of a delayed coking unit at the Pancevo plant. What are the project parameters? How much will the depth and volume of processing increase? Yes, indeed, this year we will complete the construction of the deep processing complex with delayed coking technology. This is the largest investment project of the secondstage Pancevo refinery modernization and one of the largest investments in the country's economy in recent years: the project costs exceed €300 million ($332 million). The launch of the complex will put our refinery on a par with the world's best refineries with a refining depth of more than 99%. This will allow us to produce more gasoline and diesel and stop output of high-sulfur fuel oil. As you know, in 2020 new Marpol rules come into force that would complicate production and sale of fuel oil. The cessation of fuel oil production will not only improve environmental performance, but also ensure that Serbia fulfills its international obligations to limit the use of high-sulfur fuel. At the same time, we will start producing coke, which is used in metallurgy and in the construction industry. This product is currently imported into Serbia, but our production will cover the needs of the domestic market and allow us to export something. Are you planning new projects in refining? We are considering a number of investment projects at the Pancevo plant, which will allow us to optimize our product portfolio. Now I won't name them, because for this you first need to conduct a feasibility study and understand the economics. You have already mentioned projects in alternative energy. At what stage is the construction of the wind farm in Plandiste? Work on the implementation of the project is in the active stage, we are holding tenders and selecting contractors to make the final investment decision. The construction itself, after the conclusion of all contracts, may take 12-14 months. What is the investment program for 2019 compared to 2018? Over the past 10 years after Gazprom Neft acquired a controlling stake in NIS, more than €3 billion has been invested in the development of the Serbian asset. Our longterm development strategy assumes a further investment of €2 billion between 2017 and 2025. If we consider the current period remaining until 2025, this is €1.4 billion. Last year, we invested 41 billion dinars, that is, €347 million, which represents an increase of 55% compared to 2017. We continued the growth trend of investments this year: NIS investments in strategic projects in the first half of this year amounted to 18.4 billion dinars or €156 million, an increase of 7% compared to last year. If we talk about the distribution of investments, then out of €2 billion of total investments, about €1.1 billion is for exploration and production. However, life makes its own adjustments, and in the updated strategy we will refine the investment plan. Does NIS plan to attract loans in 2019? Does the company have difficulty raising funds because of sanctions restrictions? In general, how relevant is the issue of sanctions of any kind to you? We have no problems with borrowing. We have an average borrowing rate below 2%. If we talk about financial constraints, then it is more difficult for us to take longterm loans, but in general there are no problems. How does the ban on the import of Iranian oil affect you? There is enough oil in the world. Current restrictions do not affect us. NIS is actively searching for an optimal import crude oil basket. You tested different crude grades. Are there any plans to add new crudes to the basket, and from which regions? NIS is a company that has a constant interest in optimizing the process of purchasing crude oil, since it is a strategic raw material that involves the allocation of significant funds and whose effects have an impact on numerous business segments. In the past, we conducted a number of analyses of different crudes from various markets Europe, Asia, Africa and, for the purchase of a specific crude, we are guided, first of all, by economic indicators. Today we are actively buying oil which Gazprom Neft produces at the Novy Port field. Novy Port is a light oil, and when mixed with other crudes, it produces a good product mix with good yields. Today, oil is transported by the Croatian Janaf pipeline, which transports this oil from the port of Omisalj to the Sotin measuring station. From there, the crude is being shipped by pipeline to the Pancevo refinery. Gazprom Neft is actively engaged in digitalization, digital transformation, and the introduction of new technologies. How does this affect NIS? We are already living in digital transformation. We have a number of projects that are being actively implemented both in exploration and production, as well as in processing and marketing. At the beginning of the year, the CDO [chief digital officer] position was created and the CDO office was created, which acts as the consolidator and methodologist of all digital projects in the company. The difficulty concerns the need to change processes within the company. However, all companies that have somehow decided to move in the direction of digital transformation go this way.