Kravchenko: Region of SEE can attract up to 15 billion euros

October 3, 2013

“In Montenegro, we are more interested in oil exploration on land rather than at sea. Along with Bosnia and Herzegovina, Romania and Bulgaria, we analyze the possibility of conducting business operations in other countries. If the first project for producing oil from oil shale proves to be good, we will discuss the opportunities to expand our business, because that is not the only site in the region worth of exploration.” Interview by: Miša Brkić for regional portal Biznis plus An investor who now invests in new power plants, gas storage facilities, refineries, petrol stations and renewable energy sources in the countries in the Balkan region will definitely generate more profit at later stage than the companies which have already entered developed markets. Mr. Kirill Kravchenko, NIS j.s.c. CEO, bases his forecasts on the fact that the Balkan region has some specific advantages for investing in the energy sector. “One of the most important advantages is underdeveloped energy sphere in the first place. When we speak about central or western Europe, everything is connected there, there are interconnections for gas and electricity, pipelines, storage facilities for electricity and gas, many refineries, the market is liberalized ... When we look at our region, we see lots of possibilities: the market of over 20 million consumers, the space for power consumption growth, poor existing capacities and infrastructure for energy generation, insufficient for the economic development of the region ... All these circumstances are favorable for investors to participate in the development of energy infrastructure which has been completed in other parts of Europe 20-30 years ago. This means that those who have managed to engage in energy production at the beginning have already the advantage of it and will generate higher revenues than those who have already entered developed markets. Another advantage includes skilled and relatively cheap work force, and the third advantage is stimulating tax policy which the regional countries apply to investors, as well as legislation which is highly aligned with the European Union”, says Kravchenko. Kirill Kravchenko, CEO of NIS j.s.c What Regional Energy Projects are Interesting and Prospective? First, the capacities for electricity generation. On the one hand, there is a great potential, while on the other, the facilities are very old. This means that in the near future much of the capacities will need to be modernized, and also new ones must be built. The Balkan region has an advantage in terms of non-renewable and renewable energy sources. Serbia, for example, has designated 80 percent of sites where such capacities could be constructed, but the Government still must do lots of work in order to enable a fast start of construction. Second, energy efficiency. The region consumes lots of energy, it has very old industrial plants, and the electricity market will be soon liberalized in the countries where it has not already happened and the pricing will be free, so we must invest lots of resources to increase energy efficiency. Third, the renewal of capacities in the oil business. NIS has modernized and built new facilities in Pančevo Oil Refinery and now produces motor fuels of European quality. But this is not the end of our efforts. We have the refinery in Novi Sad which we want to keep and in which we want to invest, and with respect to which we have adopted the decision to start the project of base oils production. This is a unique project which will meet the demands of today's market and which is in line with the expansion of NIS business operations. In addition, we have invested lots of efforts and made capital investment in the development of logistics and operations of the Company. Today we work in the market with two brands in different areas, we have a developed network of warehouses and the well-developed logistics infrastructure. Fourth, finding new energy resources in the region. We have started to develop the project of non-conventional resources use, but we also analyze the technological project of oil shale exploration. If these projects prove to be efficient and cost effective, NIS will start the exploitation and thus increase the energy safety of the region. Is NIS Ready to Explore Oil Shale in other locations in the region? We have engaged in the explorations of the deposits near Aleksinac for one year and a half, we have taken samples, refined them in our refineries in Russia and arrived at certain conclusions. We have preliminarily decided that since we have a refinery in Serbia, oil shale refining can be cost-effective. We are now in the process of the project harmonization with NIS shareholders. I think we have a project which can be efficient, given the fact that we have a modern refinery. If we did not have a refinery in Serbia, it would be difficult to make the project cost-effective. If this project proves to be successful, NIS will discuss the possibility of extending the explorations of oil shale to the region, because the deposits near Aleksinac is the biggest one, however not the only ones in the region. NIS explores crude oil deposits in the outskirts of the Pannonian Basin in the neighbouring countries and it is also interested in crude oil explorations in Montenegro? We want to become a regional leader in all the business activities we engage in. We have lots of potential exploration projects in the region, and we have already entered three projects in Romania, two projects in Hungary and one project in Bosnia and Herzegovina. We further analyze other projects as well, not only in Montenegro, but also in other countries in the region, and time will tell whether they are cost effective. As far as research in Montenegro is concerned, there is an open database there and we have entered it, we analyze it, and by the end of the year we will decide whether we will participate in the next phase of the project. At this moment we are not ready to move to offshore oil exploration, we have concentrated on the mainland. We know about the concessions that Montenegro will grant for oil explorations on land and sea, and we are interested more in land than sea oil explorations. But our parent Russian company can support also oil explorations at sea, and we analyze potential data in that respect What does it mean to be a regional leader? Our wish is to transform NIS into the most efficient company and to be better than competing companies in each of these segments. For example, we have entered the energy sector only after we have made a comparative analysis of the gas and electricity market and realized that the use of exploited gas for electricity generation is much more cost-effective than its sales through pipelines. We have decided to monetize gas NIS produces by using it for electricity generation, and we have designed several projects. One project includes 14 small power plants we want to build up to the end of 2014, and the other project includes two thermal power plants for a green-field power plant of 200 MW in Pančevo. We have signed the contract with the company, Gazprom elektroholding. We have negotiations with the Government in relation to participation in the modernization of thermal power plant Novi Sad, and the negotiations unfortunately last for more than a year. We live in Europe and we are obliged by the law to comply with the allowable emission requirements and to pay for CO2 emissions. We have taken into consideration what would be more profitable for us: to pay compensation for emissions or to produce electricity from clean, renewable sources, and we have chosen renewable resources. Having conducted detailed analyses, we have decided to produce electricity from wind, we have entered into the agreement with the Government for the investment worth of 160 million Euros, and started the construction of a wind farm in Plandište which will be completed by the end of next year. I must point out the fact that our success is based on the willingness of our shareholders, the Government of the Republic of Serbia and Gazprom Neft to invest in the development of the Company. Therefore as of 2009 we have invested about two billion Euros in NIS development, and over the next three years, the scope of investment will amount to another 1.5 billion Euro. Today, NIS is a company which pays dividends to its shareholders, and at the same time it has the highest income in the region as regards the dividends. I can say freely that NIS is now a stable source of income not only for the minority shareholders, or about two million citizens of the Republic of Serbia, but also for the majority shareholder. For example, the amount of total taxes collected from NIS has increased by 20 percent each year on average since 2008, while in 2008 NIS allocated 49 billion RSD, and at the end of 2012 this amount was 91.4 billion, or nearly twice as much. In the first half of this year alone, NIS contributed to the national budget in the amount of 52.2 billion RSD on account of taxes and other public revenues, which is by 14 billion, or 38 percent more year over year. Does NIS have similar plans for other countries in the region as regards energy business? No, for the time being. Is NIS interested in the right to gas use in the Slovenian company Nafta Lendava? We have not considered such possibilities yet. NIS is engaged in oil and gas exploration in the Pannonian basin, and if we discover reserves for exploitation, then we will decide what is more profitable for the company: the sale of gas or re-building plants to produce electricity. For the time being, we are focused on the electricity business in Serbia. What about the retail network for petroleum products? We want to establish our retail network in neighboring countries, but only where we can directly deliver our goods from Pančevo Oil Refinery. I do not want to go to the markets where we have no direct deliveries from Pančevo. And these countries are? Bosnia and Herzegovina, Romania and Bulgaria. We analyze other countries in which we can expand as well, but the decision will be made by shareholders by the end of this year. There is a very intensive friction In Croatia between the Government and the Hungarian company MOL, partner in the oil company INA, and there have been occasional insinuations of the possibility that "some Russians who are ready to acquire MOL" become involved in resolution settlement. Is it perhaps Gazprom Neft? Or NIS? Definitely, NIS is not the one. I can say that for the time being NIS does not consider the possibility of joining the company INA. But Gazprom Neft analyzes different opportunities in Europe and it is possible that we take an interest in something else in the region. The insinuations have appeared lately that Slovenia could privatize its oil company Petrol due to budget problems. Is Gazprom Neft interested in this option? I'm familiar with the situation and so far there is no final decision by the Slovenian government to sell its share in Petrol. Given this situation, we have analyzed this variant, but we are ready to consider it once Slovenia is ready to sell Petrol. For the time being, we do not want to waste time on something that is not certain to happen. What is necessary to create a better environment in the region for making investments in the energy sector? First, we need more flexible legislation, too many permits are required, the time for their issuance lasts too long... Macedonia is an example of a country which issues building permits rapidly. Second, more control is needed. For example, the market of petroleum products in Serbia is characterized by pronounced trade on the black market and smuggling. There is a good will of the political leadership of the country to solve this problem, but at the same time there is no control and equipment when this will needs to be implemented. So, if a country wants to improve investment environment, it must enhance the enforcement of laws in practice. For the time being, unfortunately, a lot of good laws remain only on paper. Tax policy is more or less normal. If the legislation becomes more flexible and easier to control its application in practice, this is already enough to improve the investment environment. The key things to attract investors include, in my opinion, the control of compliance with market rules, reducing the gray market of petroleum products, as well as maintaining stability in the political and economic spheres. You designated energy as a significant field for attracting regional investments. What are your projections regarding the capital which could be invested in those energy projects? If we take into account all electricity generation facilities to be replaced in Serbia alone over the next seven to ten years, the investments worth over five billion Euros are needed. The oil and gas business, exploration and production, modernisation of refineries and petrol stations in the region require five billion Euros of investments. According to our preliminary projections, nearly 15 billion Euros of investments are needed for the Balkans' energy sector in the next seven to ten years. I have not included the South Stream Gas Pipeline in this sum, the cost of which is nearly 17 billion Euros. Investing in this field requires far greater resources than any other industry. Do you believe that there are sufficient resources for these investments? In principle, yes. Major investors from Europe, Russia, China, etc. have expressed an interest. And in order to achieve this, a faster response from the governments is needed as regards the elimination of legislative issues and the law enforcement, which I have already mentioned. Would a common strategy and energy agreement of the regional governments accelerate investments? Yes, certainly it would. Particularly if the synergy effect were used to connect the governments which is the case in the Central Europe. This would be more cost-effective than each country acting separately. What is the extent of the European Union’s influence on such processes of stronger regional association? Could NIS j.s.c. contribute to this as well? The application of European laws in liberating electricity, oil and gas markets is important. NIS j.s.c. hires foreign consultants; we study the experiences of other European countries and inform the representatives of regional governments thereof. NIS j.s.c. can attract investments from several regional countries for joint infrastructural projects, given the fact we have a partner in each energy project. The financial standing of NIS j.s.c. is quite good as compared to the countries' budgetary deficits. The largest regional companies show considerable interest in collaborating with NIS j.s.c. on joint projects which are incorporated in the European Union's Energy Policy. What significance for NIS j.s.c. has the Europe's Energy Community Ministerial Council Meeting scheduled for late October in Belgrade? It is an opportunity to share ideas and present Serbia energy sector investment options and the potential of synergy with other regional countries. I hope that we will attract interest of the European partners in investing in Serbia and the Balkans. NIS j.s.c. Regional Business Strategy requires certain investment resources, and you have them. What about the required human resources? The company already has an international team of managers and experts coming from 30 countries around the world, but we constantly strive to attract young people to NIS j.s.c. Over the past four years, NIS j.s.c. hired over 700 young persons holding a university and secondary school degree through the NIS Chance Programme, which helps prevent brain drain. The Serbian Association of Managers has declared NIS j.s.c. the country’s best employer, which is also confirmed by a recent survey of university students. And not only that. More and more young people are interested in the oil and gas sector. For example, the Oil and Gas Engineering Department of the Belgrade’s Faculty of Mining and Geology has become one of the most successful and popular departments with more than 90 candidates applying for 30 available places this year, which is three times more than last year. Undoubtedly, this interest of young people in the energy sector has also contributed to popularising the Russian language, so NIS j.s.c. has organised the first Russian Language Olympiad where 80 of the best secondary school students in the region had the opportunity to demonstrate their knowledge of the Russian language. Such good results certainly come from years-long work on the human resources management strategy to which NIS j.s.c. devotes assiduous attention. It is no secret that NIS j.s.c. has the best Collective Agreement in the region, nor the fact that the Company provides its employees with numerous social benefits. Even upon leaving the Company, they are not left to fend for themselves. For example, the Voluntary Redundancy Scheme entitles NIS j.s.c. employees to the gross amount of 560 Euros per year of employment and one and a half salary, which is twice as much as what other similar schemes in the region offer. Furthermore, as part of the Voluntary Redundancy Scheme, employees can count on the write-off of up to even 70% of due debt for the housing loans granted with NIS j.s.c. subsidy. It is the most comprehensive social programme ever implemented in the Balkans.