Vadim Yakovlev, Chairman of the Board of Directors of NIS: «NIS –MORE THAN A BUSINESS PROJECT»

June 27, 2017

The main operator in the energy market of Serbia - «Petroleum Industry of Serbia» (NIS) - which has been governed for eight years by the Russian company «Gazprom Neft», has been providing its shareholders with direct profit for the past five years - that is, profit in the form of dividends. This year, approximately 4 billion dinars will be allocated among «Gazprom Neft», the Government of Serbia and two million citizens of Serbia. We have talked with the Chairman of the Company's Board of Directors, Vadim Yakovlev, about how the company managed to maintain profitability and stability of business, even in today's complex external conditions, and in general, about the past, present and future of NIS. - The situation in the world oil market is still not simple, the price «blocked» at a rather low level of $ 50 - how reasonable is it to pay out dividends in such circumstances? Wouldn't it be more right to create financial reserves? - «Gazprom Neft» entered the shareholder structure of NIS eight years ago, and all these years we have been trying to ensure that changes in the market conjuncture are not considered a destabilizing factor of the company's operations. Since 2009, more than EUR 2.5 billion has been invested in the development of NIS with the largest part of these funds directed towards the introduction of new technologies in the production, the modernization of the refining industry, the development of distribution networks, that is, towards overall efficiency increase. The company's management system has also been subject to cardinal restructuring, which is why NIS faced the present situation with a business model that is resistant to negative trends in market conditions, above all, to a decline in oil prices. So, the level of efficiency and of technology at which the «Petroleum Industry of Serbia» is today, enables the Company to operate under much worse external circumstances. - The circumstances present in the 2008 crisis, when NIS was in a critical situation? - I would not say that the circumstances in 2008 were more complex than they are today. The company's problems arose, primarily due to the absence of a clear development strategy as the business operations of such a global holding company relying solely on solving current operational tasks – lead to a dead end. This proved to be true during the 2008 crisis. At the time of privatization, NIS owed nearly $ 1 billion and had an annual loss of approximately half a billion euros. If you take into account the decline in oil production each year, inefficient refining, undeveloped distribution network, then you do not have to be a major economic expert to anticipate the future of such a company. At the time, the Serbian government did not have any funds to solve the situation in the company. Today, NIS is - the largest and most efficient company in Serbia, which forms almost 15% of the country's budget and which needed a few years to transform from a national player exclusively in the oil and gas market to a successful regional energy holding. And this was achieved through the proper selection of the strategy. - How does «Gazprom Neft» see the basic directions of further development? - It seems to me that the question formulated in such a way is not quite right, because NIS has two major shareholders that define the path of development of the company. In addition, Serbian assets should not be understood as one of «Gazprom Neft» departments - it is an independent business structure that operates in accordance with the existing economic conditions, fiscal and investment environment formed in the region. And this situation is very different from the one in which «Gazprom Neft» operates in Russia, so this is exclusively about the participation of Russian shareholders of NIS in solving strategic issues. The strategy itself is «plotted» in the company's business plan for the period between 2017 and 2019, which projects investments in development projects of NIS in the amount of over 100 billion dinars, or over 800 million euros. As far as concrete directions are concerned, in refining these are, of course, the projects of the second phase of the refinery modernization. For example, approximately 300 million euros will be invested in the «Deep Refining» project in the next few years. The project involves the inclusion of a delayed coking technology in the production chain at the Refinery in Pancevo. If you add to this more than 500 million euros already invested in the modernization of the factory, you will see the obvious overall transformation conditions. The result is an absolutely European line of petroleum products, not only when it comes to the range of products, but also quality. And when the indicator of refining depth of 98% is achieved in the following period, the factory in Pancevo will be among the best refineries in the world. The most important thing is that these projects significantly increase the efficiency of production, which in crisis conditions becomes a key factor of competitiveness. By the way, in this sense, a project of constructing a new generation of power plant for the needs of the Pancevo Refinery is very indicative, which will also enable the reduction of the costs of energy supply and increase of the reliability of power supply. All in all, the company strongly continues to develop the energy direction. The developed sales network of NIS under strong brands, which we have been building since 2009, ensures safe realization of petroleum products in the domestic market as well as abroad. However, the company will not stop there, the development of the sales network will continue, the branded fuel line will expand, and serious attention will be paid to the improvement of the quality of services. - How do you plan to develop «upstream»* segment? (*«upstream» - exploration and production of oil and gas) - Bearing in mind that Serbia, and the Balkans as a whole, can hardly be included in large world oil production centres, the key to success is in increasing the efficiency of exploration and production, as well as in the application of modern production technologies. - NIS is sometimes criticized for the application of hydraulic fracturing methods in Serbian oil fields... - First of all, hydraulic fracturing technology can hardly be classified as new. In Serbia, this technology began to be applied in 1976 in Banatsko Karadjordjevo field. Since then, this technology has undergone many phases in its development. And these fracturing methods, which we apply today in both Russia and Serbia, are very technologically advanced and safe methods. So much about empty hypes that fracturing is dangerous for the environment. So far, no one has presented real facts confirming the danger of hydraulic fracturing; however, this method is applied everywhere, where standard technologies are not effective - in oil shale fields in the USA, when acquiring assets of complex geology in Russia, in the development of poor fields in Europe, including the Balkans. And this is an objective reality - there is almost no more light oil in the world, and in order to acquire the reserves which are hard to reach, new technologies are required. But, I will tell you one more thing - if modern hydraulic fracturing technologies were not applied, the current level of oil production in Serbia would be several times lower. Without modern technologies it is impossible to produce oil. Of course, the introduction of such technologies is accompanied by special safety measures. - What are these measures? - For instance, prior to carrying out a hydraulic fracturing operation, the pressure integrity test of the well must be conducted. Otherwise, prior to the implementation of any project, the possible impact on the environment is assessed, which is clearly prescribed by the applicable Serbian legislation. In addition, not only does NIS carefully control its activities, but also corrects mistakes made even before the privatization of the company. - What kind of mistakes? - In the past few years, NIS has recultivated nearly 120,000 square meters of land in Serbia that was contaminated by petroleum products in the period prior to privatization and liquidated almost 200,000 tonnes of production waste which had been accumulating for 30 years. - Now, the company does not leave behind such evidence of its activity in terms of historical pollution? - Today NIS is applying a method called «dry location» at all its drilling sites, that is, the need to form waste containers on the site is excluded, and since 2016, the locations where drilling is performed have been covered by a special film, which completely eliminates the possibility of waste protruding into the soil, and especially into groundwater. Just one data: in the period from 2010 to 2016 NIS invested more than 11 billion dinars in ecological projects. Even at today's rate that is almost 100 million euros. I think that any further comment would be superfluous. - Improving the efficiency of the development of the deposits means, among other things, the acceleration of the process of oil production? Because the company's critics also say that oil from Serbian deposits is being rapidly pumped out and that in the coming period, oil reserves in the country may be exhausted... - This argument is strange and ridiculous, because the goal of every energy company is to provide maximum efficiency in operations with oil in the whole chain - from exploration, through production to realization. So, NIS is being accused of conducting its business well, producing oil fast, in a high-quality and cheap manner, and, ultimately, providing shareholders with profit, and the state with the largest possible tax. In other words, it would be better to operate «as before», leaving the bulk of oil in the country? In this case, it would be easiest to stop production altogether and procure all oil abroad, spend budget on that, and not earn it. But then we should forget about the energy security of Serbia and reasonable prices of fuel. - Critics talk primarily about methods of production that are not used in the world and allegedly not applied by «Gazprom Neft» to its Russian assets. - At Serbian deposits, as well as at many other deposits in the world, even in Russian sites of «Gazprom Neft», oil is pumped from wells using electric submersible centrifugal pumps. Precisely through the use of modern technologies, our company has managed to include in the production a large amount of resources that had been practically written off - what kind of benefit would Serbia have from them if they remained trapped in the country? We are guided by a very simple logic: effective oil production implies, at the same time, that we must effectively restore reserves through conducting geological explorations. Following precisely this logic, NIS has increased the company's resource base by more than 50% over the past few years. In other words, you should not be afraid that "all the oil will be pumped out" - reserves are not being decreased, but they are being increased. In addition, now we do not explore only in Serbia, but in the whole region - in Hungary, Romania, Bosnia and Herzegovina. - Is the story about the Serbian budget losing significant funds due to the benefits granted to NIS with regard to the payment of mineral royalties true? The term "benefits" in this case is not quite proper. At the time of the privatization of NIS, the mineral royalties stipulated by law amounted to 3%, and the state extended the right to pay this tax rate for large investment projects of the company until reaching their profitability. In other words, this is not a benefit given to «Gazprom Neft», but a logical and, in my opinion, a very correct policy of the Serbian government, which is fully in line with the provisions of the interstate agreement of Russia and Serbia on energy cooperation. Oil production in Serbia, taking into account the quantity of oil, its quality and geology of the deposits, is a complex and expensive work, which requires serious investments. Without the support of the state, NIS would not be able to invest so much funds in the development of projects, as it has invested over the past eight years, and it would not be able to reverse the apparent downward trend in production volumes and, as a result, payments to the state budget would continue to decrease. And thanks to a favourable investment climate, NIS increases them every year. In 2016, RSD 145 billion was paid to Serbia's budget, whereas in 2008, that amount was only 55 billion dinars. Even when you adjust these amounts in terms of the decline in the national currency over the past eight years, that is 1.2 billion euros compared to the previous amount of 580 million euros. The difference is obvious, and this is precisely the result of a global, strategic understanding of the situation, once shown by the authorities of this country. However, when it comes to new or complex projects, these forms of state support are common in many countries around the world. For example, in the United States, mineral royalties as such do not exist at all. In Russia, mineral royalties are zero percent for projects for the development of reserves hard to reach or for projects that are implemented in remote areas, in severe climatic conditions. After all, we do not have to go that far. I will remind you that in the neighbouring Romania, during the privatization of Petrom, the government of this country froze the mineral royalties for Austrian OMV for 10 years. A similar step was taken by the Hungarian government, reaching an agreement with the national oil company MOL on the freezing of mineral royalties for 15 years at a time of crisis. So it is a common practice for the state to encourage companies when it comes to complex conditions of oil production. - In other words, NIS is not just a business project? - The work of a national energy company cannot be just a business project in a pure form, because the effectiveness of this work is a matter of the country's energy and economic security. But the key to success is just applying the concept of business approach, namely, the most modern and most effective one. «Gazprom Neft» follows this approach when it comes to NIS governance, enabling the creation of one of the most powerful and most competitive Serbian energy holding companies in Eastern Europe with diversified production, a resource base that is developing and that enables the production growth, with modern refining and sales in several countries. In addition, NIS - means 11 thousand jobs and a strong social investment program. - What is the goal of social investment? - NIS is a strategic asset of «Gazprom Neft» and in cooperation with the Government of Serbia, we have great plans for the development of the company. We came to Serbia to stay in it for a long time, and we always treat the countries where we are doing business very responsibly. That's why we are investing serious funds in the development of cultural and social projects - in cooperation with Emir Kusturica every year we hold the festival of classical music «Bolshoi», we have restored the Russian cemetery in Belgrade, we participate in creating a unique mosaic for the interior decoration of the Dome of St. Sava Temple. I have mentioned only the biggest projects, in fact there are many more. So, of course, NIS is not just a business project. It is, without any doubt, a very clear example of successful cooperation between two closely related countries - Russia and Serbia. Published on "Sputnik" portal: