Transcript of the beginning of the meeting:

Vladimir Putin: Mr Alekperov, you and I recently attended a meeting of the Russian Union of Industrialists and Entrepreneurs. One of the issues raised there was staff training. When I toured your oil rig in the Caspian Sea, you told me that you agreed with your colleagues from other major Russian companies that each will have its specialisation. Yours is offshore drilling, to my knowledge. How is this work progressing?

Vagit Alekperov: We've done a great job with our partners building a training centre in Astrakhan, which I will inaugurate on Monday. This centre will be available not only to the staff of our company but also our partners from the Emergencies Ministry and border troops. The centre can accommodate 60 people at a time. It has the necessary infrastructure to simulate rescue operations at sea, for example, swimming pools where rescue teams practice lifting people from the depth of up to four metres using helicopters. We have all the necessary simulators. These are the most advanced systems. We developed them with international specialists, including from Scotland, who have vast experience of working in the North Sea. All the systems have been assembled already. The swimming pool is deep enough for a helicopter to submerge fully so that people can get out under water.

All our trainers have taken advanced courses and are ready to start working with the first group of 26. This is the most advanced centre in the world. Each new centre is more advanced than the previous one.

Vladimir Putin: Sure.

Vagit Alekperov: On Thursday, we signed an agreement with Rosneft, following your instruction. Mr Igor Sechin was there. We have already drawn up a joint action plan.

Vladimir Putin: Yes, I saw you hugging there. What will follow next? What are the deadlines and the scope of work?

Vagit Alekperov: We have until September 1 to prepare our proposals. On August 1 we will formalise all our structures. We are considering joining efforts with other companies on the shelf of the Caspian, Azov, and Black Seas – I will show it on the map later – as well as offshore areas in the Arctic.

Vladimir Putin: So, basically, it’s going according to your plan, right?

Vagit Alekperov: Yes. We are set to build a strong partnership through this consortium. I’d like to note that it is the first time in history that two Russian oil companies are creating a consortium without international partners. We are merging our financial and mineral assets to set up a new system that will benefit each market participant. It is a great stimulus and a major step forward for us. The new consortium will be able to handle the most challenging, technology and capital intensive projects.

Vladimir Putin: Still, what do you plan to start with?

Vagit Alekperov: Probably with geological prospecting on the Black and Caspian seas. We are currently reviewing the prospects for two sites, a cluster of oil fields at Timano-Pechora, for which we have already built the export infrastructure, and several other prospective oil fields. These are actually Rosneft’s fields… Anyway, the thing is that building an oil pipeline of a small diameter on its own would be unprofitable for either company. Together we can create a strong infrastructure. These are the three regions where we can implement our projects. (Shows them on the map.)

Vladimir Putin: You mentioned international partners. What international projects are you participating in?

Vagit Alekperov:  We’ve recently started drilling in western Africa, expecting to discover a rich oil field in Ghana. We have already drilled our first borehole as an independent operator. There are three more on the way. The water depth is 2,000 metres there, so we’ll be using the best drilling technology.

Vladimir Putin: The same as in the Gulf of Mexico…

Vagit Alekperov: Yes, as in the Gulf of Mexico. That’s the maximum drilling depth in fact. And we do have the technology to drill that deep.

We are running a project in Iraq. Our team has already built a worker’s settlement there. The security system is quite good. The site is guarded by our forces and the Iraqi oil police. We have ensured maximum security for our staff there. The settlement is completely protected, and has all the necessary engineering facilities. So our staff has already begun to work on that site. We expect oil production there to start in 2013. There are several obstacles, of course, and not everything is going smoothly, but we hope for success.

Vladimir Putin: How much did you produce last year?

Vagit Alekperov: A total of 98 million metric tonnes. This year we expect to produce 97-97.5 million. We’re trying to keep it at this level. Production could fall slightly this year, but it will grow as we launch new fields. Currently we employ 3,000 highly qualified specialists, and have four institutes and one research centre here in Moscow. We have focused on the development and adoption of new technology. We are drilling a horizontal borehole in the Caspian Sea – 2,000 metres in the vertical direction and 5,000 metres horizontally.

The well at Korchagin, which you visited, is already 5,000 metres deep. Our institutes are providing engineering support for this project so we can use the existing rig there without building a new one.

Vladimir Putin: How many people do you employ?

Vagit Alekperov: A total of 145,000.

Vladimir Putin: What’s the average wage?

Vagit Alekperov: About 55,000 roubles. It’s a pretty high salary, but that’s because many employees work in the extreme north. The oil sector hasn’t faced the problem of social tension in recent years. We keep in touch with our employees, and know their attitudes.

Vladimir Putin: I know. What’s the aggregate value of the orders you’ve placed with Russian companies, for example engineering companies?

Vagit Alekperov: The value of all our orders stands at some $5 billion. Russian companies account for 85% of it. They mainly produce drilling units, pipes, and other equipment for us. We purchase telemetric and robotic equipment, as well as generating equipment from international companies, like Siemens and General Electric. But I hope there will soon be a plant in Rybinsk.

Vladimir Putin: Yes, we are working on that.

Vagit Alekperov: These are quite big orders. LUKoil is probably the second largest customer for Russian manufacturing industries after Gazprom.

Vladimir Putin: I have one more question for you. We discussed fiscal policies at the latest Government meeting, and I took a few questions on this subject at the meeting with State Duma members this week. How heavy is the fiscal burden on your company, including all taxes, local, federal, quasi-federal and export duties?

Vagit Alekperov: Over 60%. It’s a very heavy burden in fact. I’d like to give one example.

Vladimir Putin: Please.

Vagit Alekperov: We produce 6% of our oil outside Russia, but it generates 20% of our total return.

Vladimir Putin: Because taxes are lower there?

Vagit Alekperov: Because we can take advantage of production sharing and venture capital there. And there is no turnover tax. So production is more profitable there.

Vladimir Putin: So you generate 20% of your return on 6% of the oil produced?

Vagit Alekperov: About 20%.

Vladimir Putin: And in Russia, the total fiscal burden on the oil sector is about 64-65%?

Vagit Alekperov: Yes, and it’s quite high. The Government has set several requirements for us, first of all, to stop gas flaring. We’re spending a great deal on that, not on production proper but on environmental issues. But we are doing everything as required, and will meet this goal this year, I think.

Vladimir Putin: Your investment will certainly payoff a bit later.

Vagit Alekperov: Yes, but the investment is much bigger than the return.

We also need to bring our operations into compliance with the new regulations, building new systems at our plants and modernising them. New technology is to be adopted between 2012 and 2014.

Vladimir Putin: And there are no funds left to invest in further development and modernisation?

Vagit Alekperov: We have enough funds, but at the same time we have to take out loans. Even though ours is a very stable company, we have already borrowed $9 billion from Russian and Western banks.

Vladimir Putin: Russian and Western?

Vagit Alekperov: Yes but it’s not that burdensome. It’s a small liability for our company, but at the same time…

Vladimir Putin: What’s your turnover?

Vagit Alekperov: Some 90 billion annually.

Vladimir Putin: Dollars?

Vagit Alekperov: Yes.

Vladimir Putin: Good.