Kirill Kravchenko for the Politika daily: Serbia Can Count with Our Support

December 29, 2014

We want to have the lead in everything, efficiency is our main priority. The price of fuel at petrol stations in Serbia is going to continue falling in the following months, which is related to the decrease in the price of crude oil. Refiners are now making stocks of cheaper oil not to be refined before next year. I cannot be precise about the dynamics in the petroleum product price reduction, but there will definitely be no price increases at the current oil price, said Kirill Kravchenko, Chief Executive Officer of NIS, in an interview for the Politika daily. What business results do you expect this year, considering the fact that NIS' profit decreased by 33 per cent in nine months? The results will be worse than last year. The economic situation is not only difficult in Serbia, but in the entire region. When we are concerned, worse results were mostly aided by the unexpected drastic reduction in the oil and gas price, an increase in depreciation and provision expenses, and also an increase in the corporation tax from 10 to 15 per cent. However, the results will be slightly better than expected, primarily as a result of efficient business operations and internal cost reduction at all levels. We have planned to save 3.6 billion dinars, but we will save approximately eight billion. This will not improve our business result compared to 2013, but it will certainly reduce the shortfall. At the same time, the increase in direct and indirect taxes will reach 10%. Where did you save the most? At the Pančevo Oil Refinery, for instance, we have increased the production of “light” petroleum products - petrol and diesel, while reducing the production of dark ones - bitumen and heavy fuel oil. We have managed to negotiate a good feedstock price; we have used new types of feedstock and other types of oil. We have been reducing administration costs – we have been substituting more costly foreign experts for professionally skilled Serbian staff. We have considerably increased energy efficiency by reducing electricity consumption, as an example. Now we also generate it ourselves. The only thing on which we have not been saving in the last 5 years, as opposed to the previous period, is geological exploration. Since 2009, hydrocarbon reserves have grown for more than 50%. Further reduction in own costs will also be a priority of NIS next year. This is a factor which we can influence directly, which is not the case with the price of oil and the national currency exchange rate. The dinar has marked 20 per cent devaluation this year. We lost approximately nine billion dinars alone on the exchange rate difference in the first nine months. We are planning to save additional three to five billion dinars per year in 2015 and 2016. It is going to be really difficult, but we have to work towards it. That is our number one task. What are your expectations in the upcoming year? On a personal note, I am an optimist, but when it comes to planning - I am a pessimist. We have planned activities with an entirely different oil price, but life makes its own “adjustments” - the price of hydrocarbon feedstock is at a record low. We have been forced to adjust our plans, prioritise our objectives and reduce all types of costs. The overall economic situation gives us a reason for pessimistic forecasts. We expect the following year to be even more difficult than this one for our Company, but we have not changed our dividend policy. Further, we are not planning on any considerable reductions in our investment programme for the following year. We are planning to invest approximately 40 billion dinars, just like this year. It is a truly serious challenge for us. Serbian Prime Minister stated halfway through the year that the state as an owner of 29 per cent of NIS wants appropriate profits. Has he got what he asked for? What exactly was he dissatisfied with? I personally understand the Prime Minister's position. The statement was given at the time when Serbia faced a grave misfortune indeed – flooding and the state budget needed additional funds. We are now very close to resolving the issue of collection of debts to NIS. It is our common interest to use a flexible policy and reach a solution which will be good for everybody. We used to believe that NIS as a commercial company must collect its debt fully and on time. We are now more flexible and prepared for compromises in terms of major debtors - Srbijagas, Petrohemija and Air Serbia (55 billion dinars), in the form of writing off the interest rate or a part of the debt, payment in instalments. When Petrohemija is concerned, we have already reduced the price of the basic feedstock – straight-run naphtha, which costs us an additional 20 million euros annually. Does NIS need Petrohemija? I cannot give a straightforward answer to the question. On the one hand, petrochemical industry is not our speciality and we cannot be as efficient in this segment as in petroleum industry. That is why it is in the shareholders' interest to find the best possible partner. We want to help the state and Petrohemija, but we would not like to run the business. NIS is able to sell petrol at a higher price in the market, but we have opted to sell it to Petrohemija at a lower price as we understand our social role in Serbia. Is the ownership stake of NIS in Petrohemija going to increase on that account? Yes, but not to exceed 34 per cent. It does not matter how big a stake a shareholder may have, what does matter is that Petrohemija be operational and that we find a way to take it out of the crisis together with the state. Do you have any information about the course of the investigation into privatisation of NIS launched by the Ministry of the Interior? No. It is a matter of the state. It was our duty to submit information on privatisation, which is what we did. How will the increase in the excise duty on fuel as of 1 January affect sales? At the beginning of the year, we planned a market growth of 1.5 to 2 per cent. However, there is stagnation now. At the beginning of 2015, we may even expect a slight decrease in sales, which will not be influenced by high excise duties only, but other state levies as well, including the recent introduction of a mandatory reserves fee, all of them increasing the price of a litre of fuel by additional 3.19 dinars. It is realistic to expect that the market will start recovering in 2016 and 2017, which is reflected in all economic analyses, and primarily the expected growth of GDP. NIS had planned to invest 59 billion dinars this year, but the investments will not exceed 40 billion, which will also affect further expansion of the petrol station network. Are current state levies too high and at the same time the biggest “culprit” for the fact that fuel is expensive? The total state share in the fuel price in Serbia is slightly higher than in the region, but it is not the highest. This share is even higher in Hungary, while in Bosnia and Herzegovina and Macedonia - it is lower. The levies in Russia are lower by four to five times, as production is primarily burdened with taxes, while it is the other way round in Europe. Will you manage to collect the debt from Srbijagas? We are close to resolving the issue. We hope to see some results soon owing to a change in our approach and a more flexible policy. At the moment, Srbijagas owes us 27, Petrohemija 23, and Air Serbia 4 billion dinars, which exceeds this year's planned investments of NIS. We are planning to tie the resolution of the issue, inter alia, to debt reprogramming and interest rate write-off. However, it does not mean we are going to become a shareholder of Srbijagas. The logic is similar to the one applied to Petrohemija - we are not experts in the area of gas. Has there been any progress in relation to the property of NIS in Kosovo and Metohija? The situation is difficult, just like in Croatia, as succession has been awaited for five and a half years, but there has been no progress. When petrol stations in Kosovo and Metohija are concerned, we have completed property valuation in cooperation with Eulex. I hope we will start negotiating leasing or selling NIS assets soon. We have more than 20 petrol stations in Kosovo. Do you fear there may be a change in the state policy on the minerals resource rent, which amounts to three per cent when NIS is concerned? There is a government resolution stipulating that the minerals resource rent for NIS will remain the same by 2023. If there are any changes, we will adjust our business strategy to such a decision. There is no doubt that it will result in a considerable aggravation of the Company's financial indicators. According to our estimates, we are talking about 30 to 35 million euros per year, which is 10 – 15 per cent of our profit. The practice applied in the region when this issue is concerned should also be taken into consideration. For instance, the preferential tax treatment in this area with the interest rate lower than 3% lasted for more than 15 years in Croatia, in Romania – for the period of 10 years. For its part, Serbia has been using various mechanisms to support major investors – by means of preferential tax treatment and state subsidies for Fiat and U.S. Steel. Nowadays, we produce around 500 million cubic metres of gas per year, most part - about 80 per cent - for internal consumption of the Pančevo Refinery, and the rest is sold to Srbijagas at prices lower than the market ones. Domestic gas did not use to be of sufficiently good quality, but we have rectified the matter by 2015 by implementing our investment programme. Does that mean the gas will have an economic price in the future? That is a matter of negotiation. What is happening with the refinery in Novi Sad? The idea was to use the production site to construct a base oil production complex. We have come across a rather complicated problem. During the NATO bombing, the refinery was hit by cluster bombs, 10 per cent of which did not explode. It could take three years to have them deactivated and it is a very expensive procedure. We are looking for the shortest possible route to solve the issue. By the end of February, we will have a decision on what to do next. Construction work cannot go ahead until the issue is resolved. How do you comment on the decision to abandon the construction of the South Stream? I am not responsible for the South Stream, but for the business operations of NIS and I cannot comment on the position of the Russian state and the European Union. I did not take part in the negotiations on the sales of NIS, so I cannot comment on speculations whether or not NIS was a part of the deal together with the construction of the gas pipeline. I started managing NIS in early 2009 and I am responsible only for progress in business operations of NIS.