Kiril Kravchenko NIS CEO, Interview for Bloomerg

February 11, 2012

“The right way to spend 3 billion euro” What are the Company’s business results in 2011? What factors influenced the results, are there any new trends, have the current trends changed? Provide data on volumes of production, processing, sales (retail and wholesale)? Your forecast for the dinar exchange rate in 2012, what movements do you expect in this segment? The Company’s business results in 2011 are, I would say, more than impressive. You can judge for yourself – the net profit for the year amounted to 40.6 billion dinars, which is almost three times what it was a year ago. We managed to increase the company’s EBITDA for 62%, which now stands at 52.4 billion dinars, and to reduce by almost a third the Company’s loan liabilities. So I can say that, in general, I am pleased with the performance of NIS in the past year. Of course, macroeconomic factors have a major impact on our business, and this influence has not always been positive, however, it wasn’t a turning point.The negative effect on us, first of all, came from a drop in consumer purchasing power and fluctuations in oil prices. If we talk about the fluctuation of the dinarin 2011, it must be said that inflation was quite significant – above 7%, butSerbian financial authorities managed to keep the dinar exchange rate against the euro in a stable corridor. I hope that in 2012 the National Bank of Serbia will be able to fulfill its task of keeping inflation under 4% (+/- 1.5%) - for us the stability of the national currency is one of the key elements of business planning. The main factor that allowed us to achieve the status of Serbia's most successful company are our people. In 2011, NIS has learned to win - we have managed to maintain a positive trend in our financial results, to improve effectiveness of our own work, to learn to keep in step with our competitorsand to withstand the crises in the economy. I want to emphasize that this was made possible by virtue of our multiethnic, multilingual team of professionalswho work at NIS. By the way, I would like to point out an interesting trend – in 2011 Russian managers have gradually transferred their authority in making strategic NISdecisions onto our Serb colleagues, and as we see by the end of the year, this experience has been very successful. It is now impossible to say thatrepresentatives of the Russian team are dominant – they are already dissolved in a multinational environment and have became one of its elements. In 2011, we have an effective return on investment in exploration and production - the amount of extracted oil and gas production rose by 24% and for the year amounted to more than 1.5 million tons of oil equivalent. We do not intend to stop there – in 2012 the active phase will include implementation of ambitious plans for regional expansion of this field in Bosnia, Romania and Hungary, which, as I'm certain, will reflect positively on company performance in the near future. Key stages of the refinery Pancevo modernization program were realized in 2011, work at the plant stopped twice for repairs. Naturally, these events have affected the processing amount – compared to 2010, output declined by 17%. However, the nature of this is purely technical, and the Serbian fuel market was not affected - as insurance, we used export channels of petroleum products supply. Difficult economic conditions in which the Company operates have affected the results of the NIS distribution network – sales declined by 7%. The reason for this seems to me quite obvious – the economic crisis (not just in Serbia) led to a drop in purchasing power and compression of the fuel market, which is recorded not only in Serbia but also in virtually all neighboring countries. An additional negative effect can be traced to excise policy – excise duty rates for gasoline and diesel fuel in 2011 increased one more than one occasion, which also didn’t stimulate the consumption of fuel. However, I must say that despite the overall decline in sales on the national fuel market, we maintained our market share, which indicates the formation of the stable core of NIS loyal consumers among Serbia’s citizens. In general, speaking about the results of 2011, I would like to emphasize that most indicators of the company's business plan were exceeded and NIS, in almost all parameters, came close to leaders of the regional energy sector. What is the volume of investments implemented in 2011? What is your forecast for this indicator for 2012? Partners, volume, timing ofimplementation? It is important to understand that in 3 years that have passed since the transfer of NIS under the control of “Gazprom neft”, executing the investment program is a priority for us. It is enough it to say that since 2009 the volume of direct and indirect investment in the development of NIS amounted to 1.5 billion euro, and in the next 3 years we are going to invest the same amount. The total investment in the core business of the NIS in 2011 amounted to 34.4 billion dinars (75% more than the Investment Program for 2010). Most of the money – about 23 billion dinars – had been spent on the development of processing facilities, mainly in the project of modernization of the Pancevo refinery. Another 7 billion was spent on projects of exploration and production of hydrocarbons, and 3.4 billion dinars have been spent on reconstruction and construction of a new filling station and the establishment of a sales network in the region. It should be understood that our investments are carefully considered and long-term – we are investing money not for the sake of expediency, but in order to achieve objectives set in the NIS 2020 development strategy. If we talk about investment priorities, they remain the same – the expansion of the retail network, including regional expansion, and modernization of production facilities, development of exploration and production units, promotion of new businesses, such as electricity and petrochemical production. Special attention should be given to investment in the environment – by 2015we intend to spend at least 400 million euro, 6.5 times more than our obligations set out in the SPA. In summary, by 2015, as I hope, we will become a textbook example for our competitors on the subject of the right way to spend 3 billion euro effectively. Are you considering the possibility of development in the direction of electric power, what funds will be allocated for this purpose and what will be the investment schedule? Do you plan to invest in gas electric power stations or some other direction and facilities? One of the priority investment areas in 2012 will be the energy sector, thedevelopment of this segment is necessary for the transformation of NIS from an oil company into a full energy holding company. In this segment we are interested in almost everything – from hydropower to biofuels, wind energy and thermal waters projects. In general, in 2012 NIS, together with its strategic partners, intends to invest at least 35 million euro in the development of this area. If we talk about our plans for the future, the volume of investments in this sector, which we consider extremely promising, will be measured inhundreds of millions of euros. I would also like to mention unconventional sources – this is an area of considerable interest for us and the Company already formed a corresponding center of competence and in the near future we are going to come to grips with the project in this area. The schedule of Company refineries modernization – what has been completed, how much money has been spent, how much is left to completion of the work? Modernization of the Pancevo Refinery is fully according to schedule. We are planning to complete all construction and installation work in August 2012, followed by another 2-3 months of conducting start-up operations, and at the end of Q4 the plant will begin full operation. Naturally, this plan will require us to maximize efforts in all areas, and our staff working in Pancevo is well aware of this. Suffice it to say that all the 1,600 people employed on the project for the construction of the installation MHC/DHT kept on working even in today's extreme weather conditions when, due to frost and snow, a state of emergency was declared in the country. The most important milestone proving that the project of modernization of the Pancevo refinery entered the final phase was the start of operation of the joint operating room, which was attended by the head of “Gazprom” Alexei Miller and Serbian President Boris Tadic. Let me explain the importance of running the operating room: it is the head element of the new system of integrated oil refining process on a single site, consisting of oil refineries in Pancevo and Novi Sad, and its use will become a tool for improving work efficiency in this field. So far we have received 466 million euro allocated to us by “Gazprom neft” for the modernization of the refinery project, and we can say that the major portion of construction of the MHC/DHT installation, as well as the necessary infrastructure facilities of the factory is completed, and by the end of the year for the regional fuel market we will provide fuel of “euro-5" standard made in Serbia. However, the modernization cycle will not end. Already in 2012 we will begin the first phase of modernization of the plant HIP Petrohemija, 33.6% owned by NIS. The ultimate goal of this project is deep integration of refining and petrochemical production, which will allow both plants to cut costs. As for the Novi Sad refinery, we intend to make it a center for the production ofhigh quality lubricants and base oils, which will be in demand on the European market. The trend of increased sales of our line of oils indicates that this goal is quite attainable. How do you comment on the fact that not so long ago, Wood & Co included NIS in the group of companies on whose shares they provide advice? Recall that on February 2 Wood & Co gave a forecast of 972 dinars per share of NIS at the beginning of 2013, which led to increasing in share value of 8%. Do you plan to go on some other stock market, besides BelEx? Of course, we appreciate this fact. I think that behavior by Wood & Co is a reflection of investor confidence, which NIS has managed to win over since the listing of its shares on the stock exchange. We pay great attention to relations with minority shareholders, including private individuals – we run a special consultation office, we regularly conduct presentations about our results and plans, and we generally take a proactive approach. The stock exchange community views our efforts positively – in 2011 NIS was voted the best company in “Working With the Investor”, which in itself speaks about what kind of image we were able to create. Listing on a foreign stock exchange is very interesting for us, without any doubt.Let me explain – in NIS we are committed to the philosophy of ”constant striving for perfection” and this regard this step is a very serious professionalchallenge for us that we are willing to take on. Technically, at this stage we areprepared to a large degree – we have a well organized system of communication with investors, we are using financial statements that are compliant with international standards, but the decision on this matter should be taken by the company's shareholders. Tell us more about the hydrocarbon production projects in Bosnia, Romania and Hungary. Regional projects of the Block “Upstream” is very important for NIS in terms of diversification of sources of crude oil and a permanent increase in proven reserves. A key element of the NIS strategy on this issue is looking for strategic partners in the countries of interest to us in this field. We are currently working in Bosnia and Herzegovina (under the joint venture “Jadran-Naftagas” created with “Neftegazinkor”, a subsidiary of the Russian “Zarubezhneft”) – where we already carried out preparatory work for drilling exploratory wells, and we expect to get the first volume of oil in 2013. Another important area of exploitation is Romania, where we cooperate with the Canadian company East West Petroleum. We are currently engaged in registration of license agreements, I hope that the recent resignation of the Romanian Government will not alter our plans in this country significantly. And we also have other serious plans – in 2012 we plan to drill at least two exploration wells in order to begin production as the end of this year. I stress that this is not all, currently we are negotiating with several potential partners for projects in Romania. In Hungary we are working with RAG Hungary Kft, a subsidiary of the Austrian company Rohöl-Aufsuchungs Aktiengesellschaft. We already started with implementation of this project – exploration drilling at the site “Kishkunhalas” located in the southern part of Hungary began on January 31, 2012, and in 2013 we expect to start commercial production of hydrocarbons in this field. As in the case of Romania, we are not going to limit ourselves to one partner – I hope that in March and April we will announce the creation of another similar consortium, this time for the extraction of natural gas. Now we are in the phase of negotiating with a potential partner for this project – the international company Falcon Oil & Gas Ltd, which owns exploration rights on one of the units on the territory of Hungary. If all goes according to plan, the first volumes of gas will be produced by the end of 2012. What are the plans for the development of the retail network in Serbia and neighboring countries? In 2012 we intend to continue the strategy of modernization of our retail network in Serbia – we intend to reconstruct about 100 existing stations, and to build new gas stations. In the beginning of 2012 we formally presented our redesigned brand “NIS Petrol”, under which we are going to develop mass market sales. Of course, the modernization of our petrol station means not only changing signs – we intend to provide a new quality of service, to make our petrol station a place where people come not only to refuel. In 2012 it is very important for us to enter firmly the retail markets of neighboring countries. Priority areas for us are Romania, Bulgaria, Bosnia and Herzegovina, where we already have subsidiaries and a number of gas stations.By the end of 2012 we need to establish an effective network of several dozenstations outside of Serbia – through it we intend to sell additional quantities of fuel which will appear after the launch of the modernized Pancevo Refinery. Of course, without logistical support we can’t speak about efficient network operation, so that another goal is the acquisition and/or the construction oflogistics infrastructure – storage depots, warehouses, etc. However, our plans for Serbia and for the region are not limited only to a gas station network. We intend to actively develop parallel product lines – bunkering, the sale of bitumen. There are also our separate plans for lubricants: in 2011 we managed to make a good foundation for the future – the share of packaged NIS oils on the market increased by a factor of two, we have successfully entered regional markets, now we are engaged in the production of raffinates, and we have an eye on further production of base oils. Do you plan to pay dividends for 2011? This issue is managed by Company shareholders, the decision will be taken by them. I, for one, wish to remind you that the Company has a significant amount of losses from previous years which should be eliminated first.