Vladimir Putin's opening remark at a meeting on the development of the oil and gas sector:

Good afternoon, dear colleagues,

Today we will discuss the development of the oil and gas sector. I am very glad to see a representative team of regional leaders, the heads of major companies and my government colleagues.

The sector has been growing steadily in recent years. Last year Russia became the biggest oil producer in the world. We have been the biggest gas producer for several years now. Last year we moved into first place as oil producers.

At a glance, everything is going well. However, there are some trends that give cause for concern.

The growth of oil production has slowed from 11% in 2003 to a little over 2% in 2007. We already see negative dynamics in the beginning of this year (a drop of output by 0.3% in the first quarter).

It has been our goal all along to develop the manufacturing industries faster than the extractive industries, which is what we see today. It is true that the manufacturing industries account for a bigger share of the GDP than the oil industry or other extractive industries. But surely we have not sought such an effect resulting in the stagnation of the oil and gas sector and of the energy sector as a whole.

Obviously the Russian oil industry, and indeed the gas industry, has approached a serious watershed. The potential for growth provided by former reserves and technologies has actually been exhausted.

The future can be assured only by a serious effort at retrofitting current centers and the formation of new strategic oil and gas extraction centers. I mean Yamal, Eastern Siberia, the Timano-Pechora province. And of course, the future belongs to the development of vast offshore reserves.

We will hear a separate report today on the preparation of a government programme for offshore development.

It is extremely important to set long-term goals for the industry, to form a system of incentives for its development.

Preparation of the policy documents must be completed this year, starting with the Energy Strategy to the Year 2030. General designs for the development of pipeline transport and the gas industry must be tied in with the strategy. It will enable the oil and gas companies to make their plans for exploration and development of new fields with confidence.

We have no doubt that today, in the medium and long term, we will fully ensure the needs of the rapidly growing Russian economy and meet our commitments to our foreign partners. As before, we will behave in a responsible way.

Our energy policy will be understandable, transparent and liberal. We are not going to slide into "economic egoism." We will continue to take into account the legitimate interests of our partners. But of course, we will be guided above all by our national interests. We are not going to adjust ourselves to anyone. Those who want to work with us, should adjust their policies to ours, based, of course, on transparent market principles.

Let us take a closer look at what is happening in the industry.

The current customs and tax scheme, especially with inflation growing, has become a brake on investment activities. For every rouble invested we take away from the industry 85%. That is, of course, too much, especially in present-day conditions. We have already cut taxes on oil companies. You know that the Federation Council today passed a comprehensive package of documents that would remove this excessive load. Experts are talking about 130-140 billion roubles a year, which the industry will keep, your enterprises and your companies will keep. We expect that the extra financial resources will be directed towards development. That is the whole point of the steps I have mentioned.

Additionally, proposals are being prepared on granting "tax holidays" as well as some other strategies regarding taxes on the development of remote fields in the Sea of Okhotsk and the Black Sea, as well as in the Yamalo-Nenets Autonomous Area.

In response to these government actions, the oil companies - as my colleagues told me today - have committed to redress a drop in production by the end of the year. I would like to hear from the heads of our companies today. I see some of them in this room. I would like to hear your opinion on the measures taken and what the government is planning for the near future.

Of course, administrative barriers should be removed. Above all we are talking about a mechanism whereby the producer, after obtaining a license to exploit the field, would not have to spend years to obtain other permits, including land rights. But the Federal Agency for Natural Resources will strictly monitor compliance with all license requirements. The corresponding procedure must be prepared and introduced as soon as possible.

The state is prepared to contribute to broadening the resource base of the fuel and energy sector. The government has approved a long-term programme for the exploration and reproduction of the mineral and raw materials base to the year 2020. I talked with the Finance Minister just this morning. He assured me that everything has been agreed with the Ministry of Natural Resources. Is that so? I would like to hear from Minister Yury Trutnev today. As far as I know, there are still some hitches. I would like the final decision to be made quite openly.

We cannot progress without introducing modern resource-saving technologies, without more effective use of raw materials.

Indeed we have been lamenting the barbarous burning of accompanying oil gas far too long. All the necessary instructions on this have been given, and they must be fully implemented. This refers to transportation and energy network access by resource producing companies.

I would like to draw the attention of Alexei Miller (Gazprom CEO) to the fact that oil and gas companies still experience some problems accessing your networks. Don't shake your head. They do. If this situation remains we will go on burning the accompanying gas in huge quantities. And you will be spending huge resources to increase your own company's output. It is in the corporate interest. Controlling the networks requires that you bear in mind the country's interests. Please keep this in mind, and proceed accordingly.

Let me remind you that we have set a goal for using 95% of accompanying gas effectively by 2011. The Ministry of Natural Resources proposes to extend the deadline by another year. I would like to hear the argument in favour of that position today.

I believe that we should make more active use of economic incentives and require all market participants answer for the irrational use of this valuable material.
Further, the formation of a stable market for petroleum products is emerging as a priority.

A curious situation is developing. It should be more profitable, considering the transportation cost, to sell petroleum products in the domestic markets than to export crude oil.

One would think that supply in the home market would increase. However, the country is increasingly short of quality fuel.

What should be done to solve the problems of the domestic market? Above all, competition should be promoted.

More concerted measures are needed to saturate the market and remove unnecessary middlemen. Of course, the middleman performs an important function in a market economy. But there should be no speculation. The government's efforts must be aimed at establishing understandable and transparent pricing rules.

First, the Federal Antimonopoly Service must actively join this process. You must all consider, together with producers, the possibilities of selling leftover oil and petroleum products by open tender. What do I mean by leftovers? After the companies have met their commitments under long-term agreements, export contracts and to strategic reserve, all the rest must be sold in the market.

Secondly, it is necessary to follow through on all earlier made decisions to develop and stimulate exchange trade. And also to form a market of derivative financial instruments for which the main commodities are crude oil and petroleum products.

Perhaps even government should place its orders for petroleum products on the exchange floor. As it is, the Defense Ministry, the Interior Ministry, the Transportation Ministry, the Agriculture Ministry and other agencies buy oil and petroleum products in large quantities at some kind of tender. And as we all know, these tenders are by no means always conducted properly. The exchange is the most valid instrument. It has been created and we must start using it. By the way, I'd like to draw the attention of the Finance Ministry representatives to this: for the exchange to work effectively it is necessary to create incentives for companies to come to the exchange. Please think about it.

Payments in the exchange, under our laws, must be made in the national currency, in roubles. But I want the heads of our big companies to remember that our major oil and gas companies are obviously international companies today. They are more integrated into the world economy than other companies. In effect they are international companies, but still they are Russian companies. I stress this and I put it to you that we must simultaneously expand the sphere of the use of the national currency in signing contracts with foreign partners. Wherever possible today and in the short-term perspective, see what can be done.

Third, I would like to mention the problem of aviation fuel. Jet fuel prices here are the highest in the world. In the Russian oil production center - for example in Surgut - one ton of aviation fuel costs 36,000 roubles. At the airports in Paris, London and Beijing the price is the equivalent of 32,000-34,000 roubles. And in our country, in Yuzhno-Sakhalinsk, the price is 38,000 roubles. This is unacceptable. Why is this happening?

First of all, it is necessary to put an end to the monopoly of the fueling complexes (TZK) at airports. It sounds rather drastic, but it is fair. We should introduce the practice of long-term direct contracts between airlines and fuel producers. Simultaneously we should see to it that the TZKs continue to provide fuel storage and quality control services. In case prices for these services grow, alternative TZKs should be formed.

The head of the Federal Antimonopoly Service is not present here today, but I am sure he will hear what I am going to say. The Federal Antimonopoly Service must wake up and start performing its functions effectively. Unless this is done in short order, dismissals may follow. Please bear it in mind. I am absolutely serious.

Fourth, we should learn to use state reserve to promptly respond to fuel supply problems that arise in the regions. Of course, the state reserve has been created for certain purposes. We must see how to use its potential in a more flexible way.

Fifth, it is necessary to build new oil refineries, including those that are independent of major oil companies, independent of producers. That is, to provide refined product at market prices. If necessary the state could help implement such projects, at least with respect to the creation of the infrastructure.

Sixth, it is necessary to promote the so-called "competition between fuels." That is, to create conditions for widespread use of gas and synthetic fuel for motors. We should introduce high technologies.

Let me repeat, the fuel and energy complex is in need of modernization and an overhaul of outdated production facilities. That applies above all to the extraction of oil and its deeper conversion.

So we must increase investments in domestic research and acquisition of new foreign technologies and personnel training. The competitiveness and strategic outlook for our energy companies hinge on this.

Finally, we should see how to enlarge the range of instruments for investing the accumulated part of the working pensions in that sector of the economy, above all in the infrastructure. What I mean is that this sector has been and remains a reliable way of saving and earning additional profit. I give the floor to the Energy Minister Sergei Shmatko.

Sergei Shmatko, the Minister of Energy of the Russian Federation, addressing the meeting on the development of the oil and gas sector, has proposed to set up a Government Center to monitor investments in the fuel and energy complex. "I propose creating a center for investment in the fuel and energy sector which will monitor the effective use of investments in the sector," the Minister said.

"The Government is not indifferent to where and how effectively the money invested in the fuel and energy sector works," Shmatko stressed. He predicted that private and public investments in the sector would amount to 15-17 trillion roubles in the period between now and 2020. "During the last three years investments have almost doubled from 700 billion to 1.2 trillion roubles," the minister said.