Prime Minister Vladimir Putin holds a meeting in Novokuibyshevsk on the draft general strategy for developing the oil industry till 2020


“The oil industry has successfully weathered a difficult economic time, and even managed to increase production.”

Vladimir Putin's opening address:

Good afternoon,

We have gathered for a serious event today - to review and adopt the draft general strategy for developing the oil industry until 2020. By doing so, we will essentially finish work on a whole package of strategic documents regarding our fuel-and-energy complex.

The new draft of Russia's energy strategy was approved in November of last year. Later on we revised the plan for the construction of electricity generating facilities and approved the draft plan for the general development of the gas industry, as well as the national energy conservation programme.

The common goal of all of these documents is to create the necessary conditions for the most effective possible use of the country's energy resources.

Everyone understands what this entails. First of all, the national fuel-and-energy complex must fully meet the demand of both private consumers and businesses.

Second, we hope to achieve a significant cumulative effect from our work to develop our fuel-and-energy complex. We hope that it will create new jobs in the industry itself and related sectors, that our mechanical engineering plants and other plants will receive large contracts and the government will collect more in tax revenue.

Third, Russia must maintain its lead in world energy markets.

Fourth, the fuel-and-energy complex must generate innovations and develop as a research-intensive, high-tech industry.

Now I'd like to say a few words about the challenges in store for the oil industry. It has successfully weathered a difficult economic time, and even managed to increase production. It grew 1.2% year-on-year in 2009 compared, and this is a good result considering the crisis and the overall decline in production throughout the economy.

The industry was helped along by government support measures, such as changes in how duties are calculated, fiscal benefits and help in securing loans.

Moreover, we have continued implementing our infrastructure projects and launched large-scale development of the new, Eastern Siberian oil basin.

What should our focus be on in the near term? First of all, we should finish work on the integrated pipeline system in order to diversify supplies to both domestic and foreign markets.

Among the large infrastructure projects we are currently working, perhaps the most important is the completion of the Eastern Siberia-Pacific Ocean oil pipeline. It is already in operation - part of the pipe is ready. We are transporting it to the Pacific by rail, and a good port has been built. The leg from Skovorodino must be extended to the coast. The second extension of the Baltic pipeline system is also very important for us.

In addition, the Samotlor Purpe and Zapolyarye-Purpe oil pipelines will be built. I have just signed a government resolution on beginning construction on the latter. Mr Sechin had reported to me on this issue, we reviewed it and I signed the resolution.

These new sections will connect the deposits of the Yamalo-Nenets Autonomous Area and the north of the Krasnoyarsk Territory to the integrated pipeline system. Needless to say, Transneft should not limit itself to the implementation of major new projects. It should modernise the existing system, remove the bottlenecks, fulfil the requests of oil companies to be connected to new facilities - deposits or oil refineries - and reduce the costs of transporting oil by using new technology (modern pumping equipment, pipe coatings and so on - experts know what I'm talking about).

All this is very important because we must build the necessary infrastructure in order to have a flexible and competitive market of oil and oil products.

The procedure for connecting oil producers and refineries to main pipelines must be transparent. This is the aim of the recent resolution regulating the procedures for disclosing information about the transfer of oil and oil products by Transneft and other natural monopolies. They will have to publish detailed information on their costs and investment programmes, and, most important, on their tariffs and requirements for obtaining access to the system. It is my hope that our natural oil monopolies will operate with greater transparency and accountability.

Our next goal is to carry out projects to develop new oil basins, primarily, in Eastern Siberia, Yamal, the Caspian Sea and the Arctic shelf.

East Siberian deposits, such as Vankor, Verkhnyaya Chona and Talakan are already up and running, as is the Korchagin deposit on the Caspian Sea.

The general strategy includes a list of priorities for deposits. I hope you've read through it. If not, please do so.

Another area of great potential for the oil industry is enhancing the recovery factor and developing the fringes of small and medium-sized oilfields, especially those in areas with advanced infrastructure.

Added together, an increase in known reserves, the development of new oilfields and enhanced yields at old deposits will allow Russia to maintain current production levels, roughly 500 million tonnes a year, for several decades to come. This will be enough to meet the needs of the domestic economy and to sustain exports.

I would also like to note that the Russian oil industry has long been an integral part of the global energy industry. Roughly 25% of the share capital in our industry is owned by foreign partners. Russian companies, for their part, own major deposits and processing plants abroad. This is why we should accelerate our transition to international accounting standards, in particular how we assess mineral deposits. The Russian industry should be judged by standards accepted throughout the world.

We are also thoroughly modernising our oil refineries. Today, the average processing depth is 71% at our basic refineries, and I know that major companies have investment modernisation plans worth 780 billion roubles in total. This is a Rosneft-owned plant. I have read its plans and visited the facility. These plans have been in the works for some time now. They were drawn up several years ago under the previous CEO. I would like to wish the new boss success in implementing these plans. On the whole, what I have seen makes me optimistic.

Unfortunately, Russia still has about 250 outdated companies that hardly deserve the names of refineries, with a processing depth of 40% or slightly more. Their products are not intended for the final user, as everyone knows. They are only semi-processed for export - heating and furnace oil, and straight-run petrol. These companies make decent money on the differential between export duties for crude oil and refined products.

These plants need to be thoroughly modernised, and this should be a constant focus of the government and the Ministry of Energy. In particular, to get the modernisation process going, we have decided not to connect new refineries with a processing depth below 70% to main oil pipelines.

Moreover, all our refineries are to transition to manufacturing Euro-3 petrol before next year. The government commission for the fuel and energy industry will evaluate each application for an extension on a case-by-case basis.

We certainly support the efforts of Russian petroleum companies to improve their situation on foreign markets, whether their plans concern the development of new oilfields or oil refining.

Such projects bring our companies closer to consumers abroad, while the exchange of assets and investments enhance confidence in the global energy industry, make it more predictable and sustainable, and level out supply and demand.

The announced development plans for the oil industry require a big investment. On the whole, we have to invest more than 8.6 trillion roubles in the industry before 2020.

Obviously, oil and natural gas make up a critical part of our budget revenues, so the Ministry of Finance and the Ministry of Energy must strike a careful, healthy balance - the golden mean - between oil companies' demand for investments and stable budget revenues.

We have positive examples of such decisions. For instance, drastic cuts in mineral extraction tax rates for old and depleted fields have spurred oil production in the Volga Federal District. It has increased from 93 million tonnes to 102 million tonnes these past several years. Some oilfields are operating entirely tax-free. Similar incentives plus zero export duties for new oilfields in East Siberia allowed Vankor to begin operating, which I have mentioned, as well as Talakan and Verkhnyaya Chona. These new fields helped to prevent a decline in oil production countrywide. More than that, it slightly increased even during the downturn, as I said in the beginning of my address.

We are evaluating additional measures to streamline taxation of several projects, which cannot be implemented without the broadest possible state support. I have just had a long discussion with a representative of the Ministry of Finance. We will provide this support by introducing a taxation scheme hat would help minimise costs during the initial stage - the most difficult stage of any enterprise. When a company achieves peak yields, it will pay back to the budget what it could not afford to initially. Later on, when the field is depleting, taxes might be lowered again a bit.

One of these proposals calls for an extension of reduced export duties. For instance, we have agreed to extend it for four months for Vankor. Another proposal concerns similar measures to boost oil production on the Caspian shelf.

On the whole, proposals for a new taxation system for the oil industry are being developed. The Ministry of Energy has done a great deal of work on them, and the Ministry of Finance and other relevant agencies should join in to get the job done as soon as possible. These proposals include special fiscal arrangements for new oilfields, differentiation of mineral extraction taxation, levelling out export duties for light and dark petrochemical products and, later on, transitioning to windfall profit taxation in the oil industry.

I would like oil industry representatives to speak about this today. However, I expect our esteemed colleagues in the oil business not merely to seek out tax breaks, develop oilfields and later concentrate on dividends, though these are, to be sure, tremendously important. It is even more important, however, for small shareholders to see what they are getting for their investment in this or that company. Still, nothing matters more today than investing in development.

I would also like our companies to take thorough stock of their business activity - for instance, get rid of economically unsound intermediaries in supplies and servicing. As you know, intermediaries are necessary in a market economy. Traders are especially important in the oil industry. What I mean is when these intermediary companies are engaged in economically unsound practices - there are some, you know.

Final proposals on the new taxation system, with exact tax rates and the date on which they will be introduced, must be drawn up soon. The relevant agencies should coordinate them before the end of the year. The ministries and departments involved in this work will certainly cooperate closely with industry representatives. I hope the proposals will be put down on paper by next summer, formulated as amendments to laws, and submitted to the State Duma for investors to see what conditions they will be working in and what the rules of the game are, and draw up their long-term plans and strategies accordingly.

Last but not least, I would like to talk about developing exchange trading. The relevant infrastructure is available and becoming stronger. The St Petersburg Raw Material Exchange is opening branches in the Russian regions and abroad. We have made a decision on the mandatory sale of up to 15% of crude oil and petroleum products through exchanges. This work is very important for the future of the market and for creating the conditions necessary to promote the lasting progress of the entire Russian fuel and energy industry. I call on the Federal Agency for Subsoil Usage to include requirements on the volume of exchange trading in license agreements.

Let's get the video conference underway so we can see and hear how these critical oil projects are doing. We will start with the oil pipeline I have mentioned, the Purpe-Samotlor, which is part of the pipeline network lying north of the Arctic Circle. This will allow oil to be transported from the fields of the Yamalo-Nenets Autonomous Area and the Krasnoyarsk Territory's north to be exported through the Eastern Siberia-Pacific Ocean pipeline. Its construction began in March 2010.


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Vladimir Putin's closing remarks:

In conclusion - or rather, to return to the point I made in my introduction - I would like to say that this issue is critical to our economy. Certainly, the main development goal for our country is to modernise the economy, implement high technology and change the economic structure accordingly.

There are many aspects to this work. The development of the oil and gas industry is one of the most important goals - perhaps the most important one, considering the critical role the oil industry plays in terms of budget revenues. It accounts for more than 40% of budget revenues. This is a hard fact. So the oil industry should certainly be modernised.

We have talked about its impact on the other aspects of the national economy - particularly on the steel and engineering industries. The development of the oil industry promotes their development, sets them new targets on a fundamentally new, current level, and so has an indirect influence on economic modernisation as a whole.

Let me call your attention to increasing oil yields - the yield for the first nine months of this year exceeded last year's by 2.4%, though the increase for the entire year will be slightly less, about 2%, or 1.8%, to be precise. This year's yield will exceed 500 million tonnes. We should be able to maintain this level, or it might be higher depending on the domestic and global economic situation. But this is will not be simple.

I am pleased by the situation in the industry. I would like to thank company CEOs, industrial managers and all our colleagues in oilfields and industrial plants. Not only did the industry survive the crisis without major losses, it is, in fact, making good progress. This is a welcome signal for our entire economy, and it ensures the stability and progress of the entire Russian economy.

We will amend the draft report and the general scheme for developing the oil industry till 2020. I expect us all to work hard to implement these plans.

I would like to thank everyone in attendance and all our colleagues around Russia and abroad for the teamwork today.

I wish you every success.

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