Prime Minister Vladimir Putin’s opening remarks:
Good afternoon, colleagues. Today we will speak about the situation in the oil industry.
The diversification of the Russian economy is a prerequisite for its further development. Modernisation, diversification and innovation, as well as decreasing Russia’s dependence on the export of raw materials are all priorities. At the same time, the oil industry and all industries engaged in power engineering are the goose that lays golden eggs for Russia. Power engineering itself must be in the focus of our modernisation and innovation efforts, since it holds a huge promise for future development. The vast resources that the oil companies are investing in upgrading their enterprises, or should invest – we will address this shortly – provide a foundation that can contribute greatly to our modernisation plans.
I have already mentioned how proud we are of what you are doing and what you have achieved. That’s a fact, and there’s nothing to be shy about. Our country is proud of the oil industry’s accomplishments, and I will say more about this later. However, we are here today not to praise each other, but to discuss our numerous problems.
First of all, I suggest that we focus on the supply of petroleum product to Russia’s domestic market. I am talking about high-quality products sold at reasonable and economically justified prices. Two and a half years ago, in February 2009, we discussed support for oil production in this auditorium. We developed and approved specific measures to promote the development of new fields, including in East Siberia.
As you know, Russia became the world’s largest oil producer last year, producing a total of 505 million tonnes. This volume of production is capable of fully covering our domestic needs and fulfilling our obligations under export contracts. I have already said that this is the production level that we should maintain. This is exactly the level that helps us solve all our problems. You no doubt know the numbers, but I will repeat for those who are not involved in the oil industry: in 2009, Russia produced 493.3 million tonnes of oil; in 2010, 505.2 million tonnes; after the first six months of 2011, total output stands at 252.4 million tonnes. What does this mean? It means that this year output may be even higher than last year, around 508-509 million tonnes in total.
However, we’ve been routinely running into domestic supply issues of late, which is absurd for a country that is the world’s largest oil producer. That tells me that we have some systemic problems. Overall, we understand the nature of these problems. Russia refines less than half of the 500 million tonnes that it produces. And even this amount undergoes only primary processing to make fuel oil and other basically raw products. As for secondary processing, including making high-quality petrol, diesel fuel or jet fuel, we can say there is a shortage of such production facilities in Russia.
Keep in mind also that the production and consumption patterns of petroleum products have changed significantly over the past five years. The production of petrol was up 12.8%, but consumption increased by 22.6%. The production of diesel fuel rose by 17.4% (obvious growth), but consumption grew even more, by 20%.
I would like to say a few words about fuel oil, or fuel oils, as you say in the industry. What’s going on with fuel oils? Domestic production rose by 28.7%, which is almost a third, but domestic consumption fell by 20%. Where are you sending it? You are sending it abroad for further processing. We are obviously seeing a disparity between production, refining and the supply of petroleum products on the domestic market.
Production facilities at most refineries are growing outdated. We have seen the facilities here in Kirishi (I’ve also been to other production sites and enterprises) and, indeed, there’s good progress. The depth of conversion is good and a lot has been invested in the industry. Mr Bogdanov, how much has been invested? Up to three billion dollars in all, correct?
Vladimir Bogdanov (CEO of Surgutneftegaz): Three billion in secondary processing and another three billion into the primary processing. In all, six billion dollars in investment.
Vladimir Putin: That’s big money, and this is just one company. I know that other companies are working on it, too, but they don’t do enough. Primary processing is clearly outpacing secondary processing. In terms of the output structure, our refining industry has fallen back to the 1950s levels. It’s a shame. In 2010, Russia produced almost 145 million tonnes of diesel fuels and fuel oil as compared with only 45.2 million tonnes of petrol and jet fuel.
This has led to a very low market stability margin. Any accident at a given refinery or an unscheduled stoppage, any repair work or seasonal maintenance result in volatility in supplies, destabilising the situation and causing shortages and surges in price, as was the case in late April – early May when the TNK-BP-owned Ryazan refinery began unscheduled repairs of its facilities. I hope that it wasn’t done specifically to aggravate the situation, but it did happen and it did aggravate the situation.
Russia’s demand for petroleum products has already increased to almost 90 million tonnes, and it will keep growing. I would like to emphasise that the shortages of petroleum products and unstable prices should not stand in the way of economic growth or cause problems for the Russian people. We need a clearly understandable material balance of production and consumption for the main types of fuels and petroleum products. I would like the Ministry of Economic Development, the Ministry of Industry and Trade, and the Ministry of Energy to prepare appropriate estimates. I know that this may be a difficult task, but we should quantify the situation.
I would like to make an important point. The economic profitability of the production of petroleum products and their sale on the Russian market is equal to that of exports. This fact entitles the government to develop measures that would preclude any possibility of shortages on the Russian market.
Colleagues, I would like to remind all of you, including the main shareholders of our oil companies and the management, that you work in the Russian Federation. You obtain licenses to use the mineral resources, but these resources are owned by the Russian people. This is our national inheritance under the law. Even when you obtain a license for mineral use, the mineral resources remain the property of the Russian people and the Russian state. Certainly, we need to organise this work based on modern market principles, so that it remains profitable for the companies. However, the state will exercise its right to regulate these activities, and the companies should be responsible for making high-quality petroleum products available on the domestic market. Colleagues, please take this as an absolute priority. Remember, we all work in Russia.
We need to improve the conversion depth so as to be able to cover domestic needs. Some companies export crude oil in huge quantities, earning good and occasionally even windfall profits, whereas others have to fill the gaps in the domestic markets. This isn’t fair, either.
I believe that companies’ obligations to provide domestic supplies should be proportional to crude production volumes, which, in my opinion, is fair and justified. Please, think about how we can incorporate such a requirement in the mineral use licenses for fields that produce 5 million tonnes of crude and up. We can leave small operators out of the picture, as they say.
We should seriously think about increasing refining volumes, specifically secondary processing, including such processes as isomerisation, reforming and cracking. We have taken a careful look into the latter here in Kirishi. All these processes make it possible to produce high-quality products that enjoy market demand. They ensure deep conversion levels and the world-class quality of our petroleum products. We will not put up with certain colleagues who are trying to pass off the construction of so-called samovars or kerosene stoves for genuine modernisation.
It should be admitted (I say it with regret, dear colleagues, for we’ve known each other – nearly all of us here – for years) that most of our oil companies have failed to meet their obligations on the depth of processing, yet have benefited from the state privileges offered in return, including reduced customs duties on petrochemicals.
Let me remind you that our customs duty on crude oil is $445 per tonne starting July 1st; the rate is $207.8 for dark petrochemicals and $298.2 for light.
In return, the oil companies promised to invest in increasing the depth of processing, using the extra revenue they gained thanks to the difference between duty rates on crude oil and dark petrochemicals. But they’ve largely failed to deliver on their promises. No modernisation of refineries has taken place. On the contrary, there’s been a sharp increase in the amount of exported fuel oil and sub-standard diesel fuel for subsequent processing abroad.
The Russian budget incurs heavy losses as a result of such outsourcing. But the Russian refining sector does have investment potential. In a market economy, a company’s dividend policies are determined by its top management. We [the government] don’t want to interfere, but we don’t want to turn a blind eye, either. Some $8 billion was paid to major companies in dividends in 2010. Sure, decent dividends should be paid to increase a company’s capital value and make it more attractive to investors. But in the period between 2008 and 2010, those companies underfinanced their secondary processing commitments by $2 billion.
These companies’ investment decisions, including with regard to infrastructure sites, often lack justification. One example is the decision to build an Urengoi-Purpe pipeline parallel to the Zapolyarie-Purpe pipeline that is currently being built by Transneft. This makes no economic sense, as you know.
We should finally put an end to the protracted debate on narrowing the gap between the duty rates on crude oil and dark petrochemicals. I propose that we do it incrementally, and I expect draft resolutions to be submitted to the government within the next two weeks.
I propose that, at the initial stage, the duty on crude oil should be brought down to 60% and the duty on petrochemicals be set at 66% of the rate on crude. And, starting in 2015, we should level out the rates on crude and fuel oil.
Experts warn that such moves may send up the prices of petrochemicals. By decreasing the rate on crude oil, we’ll encourage companies to sell off most of their crude abroad, with very little left for processing at home. So I’d like the Federal Anti-Monopoly Service to closely monitor prices on the domestic market and to take tough measures in the event of overpricing. If such measures fail to work, we’ll have to bring the duty rate back up.
If we see exports disproportionately exceeding domestic processing, we’ll have Transneft’s export plans revisited.
Consolidation in the oil sector has led to the emergence of industry heavyweights that our nation can be proud of. Their core shareholders are all important people, who, it seems, have little idea of what goes on below the top level of management. And profit appears to be the only motive behind all the work being done down there.
We’ll proceed to streamline the adopted resolutions together, discussing all the relevant particulars. But I’d like the top management and all the major shareholders to watch what happens at the lower levels so that we don’t have to resort to any disciplinary measures, such as a review of export schedules.
We need to continue working together to encourage the production of quality, environmentally-friendly petrochemicals. In so doing, we should be mindful of the interests of our agricultural producers, of the millions of motorists who drive old cars. Also, the Defence Ministry still uses a number of older vehicles that operate on low-octane petrol.
So, as we introduce higher requirements for the quality of fuel, we should also take measures to renew the pool of vehicles in circulation. The Ministry of Industry and Trade and government agencies in charge of finance should address this issue together.
On the whole, the upgrading of oil processing should be brought under close scrutiny, both on the part of the government and of the top management. All the companies should submit concrete programmes for the renovation and development of oil refineries. I would like those programmes to be considered in detail by the government commission for the fuel and energy sector. We should then constantly monitor how companies keep up with their plans for the development and renovation of refineries. Those plans should be spelled out in legally binding documents. I support the idea of such agreements being concluded between specific oil companies and the Federal Anti-Monopoly Service, the technology watchdog Rostekhnadzor, and the Standardisation Committee.
I’ve been told that Rosneft, Gazpromneft, Gazprom, Tatneft, Lukoil, Rosneft, Alyans, Surgutneftegaz, Bashneft, Zarubezhneft and TNK-BP have already signed up. Thank you for this responsible approach. I’d like the head of the Federal Anti-Monopoly Service, Igor Artemyev, to report on how other companies are progressing in this regard.
We are ready to meet these companies halfway, but only if they commit themselves to cooperation. If companies fail to comply with the new technological requirements for petrochemicals once those requirements are introduced, we’ll respond with appropriate measures, including the appropriation of windfall profits.
This is a legally justified measure because the state offers privileges that allow companies to make additional profits. This refers to technical regulations and some other elements. But, of course, such agreements should be confirmed by corporate boards.
On the other hand, to meet their secondary processing commitments, companies will have a lot of expert examinations to undergo and a lot of permits to obtain. So I expect all government bodies to guarantee expedience and efficiency.
As we know, construction does not suffer from delays only in the oil sector. So does industrial construction at large. Mr Bogdanov and I just discussed one such case in which it took a company four years to pass an expert examination.
Mr Voskresensky (Deputy Minister of Economic Development Stanislav Voskresensky), please have your ministry work out at least two possible ways of addressing this issue.
Or perhaps we should set up an interdepartmental body that would bring together representatives of all these organisations. How many of them are there? Nineteen, I think. That way, they could make fast decisions, working under the one-window scheme.
Or we could introduce an application procedure, with financial commitments attached.
Please feel free to propose any other solutions.
But we should make sure that there’s no more foot-dragging. It’s ridiculous to wait four years for an expert examination. And then there’s a construction permit to obtain.
How long will it take to develop measures for dealing with this problem, do you think?
Stanislav Voskresensky: Give us a couple of weeks, Mr Putin.
Vladimir Putin: Fine.
Now on to another important issue. At a recent meeting in Yekaterinburg, we discussed the support of small and medium-sized businesses in oil production. Of course, we should ensure that such companies have access to oil processing. I’m asking you to scrutinize this problem.
If we obtain additional processing capacities, independent of vertically integrated oil companies, the market will stand to benefit. We’ll then be able to get an objective price indicator both for oil processing and for finished petrochemicals.
Besides the development of oil processing, we’ll also need efficient market instruments to cushion us against seasonal price fluctuations. In many countries, commercial oil and petrochemicals reserves are used for this purpose.
We’ve had some similar positive experience in using grain from the intervention fund; as a market instrument, it proved quite efficient.
I know the stance of some of my colleagues who argue that Russia is an oil-producing country, so it doesn’t really need any such reserves, especially given that this would incur additional expenses. Fair enough. But the United States, also an oil producer, does have such reserves and knows how to use them effectively. So I’d like the Ministry of Energy to examine the issue carefully.
Another important problem has to do with expanding and improving commodities exchanges. We should adjust exchange mechanisms in such a way that they would allow us to establish objective market prices rather than serve as a veil for shady dealings and economically unjustified prices.
We should consider how to make sure that the purchase of petrochemicals for government agencies, regions, and state companies is made in a more transparent and efficient way. This is a problem facing many of the Russian regions these days. Many large oil companies offer competitive prices and discounts and have an ample resource base of their own; yet, they often find themselves pushed aside under various pretexts when contracts are up for grabs. Bogus companies in no position whatsoever to fulfill their obligations end up winning the bids instead.
I’m asking the Federal Anti-Monopoly Service, the Ministry of Energy, and the Ministry of Economic Development to reexamine the situation.
We also need to bring the retail trade of petrochemicals under close supervision. There cannot be fuel shortages at Russian filling stations. It’s an absurd situation for an oil-producing country like ours.
In conclusion, I’d like to call your attention to the necessity of preparing in advance for the coming autumn-winter season. I’d like the Ministry of Energy to monitor these preparations, ensuring that the fuel stock is replenished on a daily basis and that no breakdowns occur.
In this regard, let me remind you that scheduled repairs at oil refineries should be timed so as to avoid overlaps, which would lead to the destabilisation of the market, creating supply disruptions and shortages. As far as I know, repairs to primary and secondary processing facilities are scheduled for the same time – 95 facilities in September and 113 in October. Please look into this together with the Ministry of Energy.
All repair schedules should first get a stamp of approval from the Ministry of Energy and Rostekhnadzor. Also, when planning repairs, it would be expedient to set aside additional fuel in advance. I hope you take the matter seriously.
Now let’s get down to discussions. Mr Shmatko, please have your say.
Sergei Shmatko: Thank you. I’ll report to you briefly on the state of Russia’s oil processing sector – on current problems and on possible solutions.
Mr Putin, in your opening remarks you clearly formulated two systemic problems in the industry: significant disparity (the disproportion between the current oil production levels and the refining capacities) and a real threat of high quality petrol shortages on the Russian market. Indeed, over the past eight years the oil industry has increased its output by 10%, which is 2.5 times higher than the average growth internationally, and propelled Russia to its current leading status in this industry. The oil industry has almost doubled its drilling volume, which is a major industry-specific indicator, and invested vast amounts of money into the development of new oil fields. As you mentioned, Mr Putin, crucial decisions were made in this auditorium which are known as the Kirishi Protocol.
I don’t want to focus further on oil production issues now, but I still want to say that, overall, oil production goals are being met. Unfortunately, the picture is absolutely different in the refining business. As you know, international oil industry operations have traditionally been divided into two production stages: upstream and downstream. The latter has acquired a literal meaning in Russia these days.
The refining sector is weighing us down and poses an increasingly serious threat to consistent growth in the oil industry and the entire economy.
We heard some indicative numbers today that provide a good description of the refining business. Certainly, fuel oil and light petroleum production wear the yellow shirt of an anti-leader. Admittedly, we have been increasing the production volume of a product that has zero demand on the domestic market and took it abroad for sale as a semi-finished product. You could even say that we were the ones who destroyed the beneficial value of crude in the economy, since crude exports meant much more to the state budget than the export of dark petroleum products.
In addition, and all too frequently, existing deep-conversion capacity was not used at all. Why? Because today the export of fuel oil and vacuum gasoil are more lucrative than making and marketing fuel. So what is the systemic problem, the cause? The reason is that the current fiscal system encourages the production of dark petroleum products and discourages investment in deeper refining processes. Atmospheric distillation and visbreaking, which are the most basic refining processes available, are the most appealing and profitable businesses now. The internal profitability levels here are as high as 30% and up. This system was established in 2002 and primarily sought to increase revenue from oil production and secure the growth of gross petroleum product production. This goal was effectively achieved, but has already run its course.
Mr Putin, you have mentioned that the industry has basically failed to meet its modernisation commitments and hasn’t followed through on the planned investment programmes. I would like to give a few numbers. In 2008-2010, it was planned to invest 254 million roubles in refining and conversion alone, but managed only 177 million. Many processes were put off until 2011-2015. The upshot? Instead of getting 8 million tonnes from deep conversion processes at the end of the three-year period in 2010, we ended up with as little as 3.5 million tonnes. What has been done? They have commissioned a catalytic cracker at Lukoil FSI with the capacity of 2 million tonnes, an isomerisation plant at Gazpromneft’s Omsk refinery with the capacity of 0.8 million tonnes a year, and an isomerisation plant at Angarka, Syzran refinery (that’s Rosneft).
We have made some progress in changing the petrol production structure over the past five years. Effectively, in 2005 our regular petrol '80 was 41%; this year it is down to 12%. But we have failed to produce an alkylation plant, whereas the plan called for 290,000, any catalytic reforming plant, petrol hydrotreatment or catalytic cracking plant. I would like to point out once again that it’s all due to the existing taxation system, which…Mr Putin, this might be a better way to look at it: these are the primary processes that are very profitable as they are...
Vladimir Putin: I saw it.
Sergei Shmatko: …and the processes that we need today are below the established profitability range. As we agreed, Mr Kutyin (head of the Federal Service for Environmental, Technological, and Nuclear Supervision) will report on the outcome of the investment programmes implemented by our oil companies.
Notably, as you mentioned, the retail market is seeing steady increases in high quality petrol consumption. For instance, we have good reserves of diesel fuel and we even export more than half of it, but in petrol we have come close to the ceiling of the production potential given existing processing capabilities. We have already run into isolated instances of such shortages, and before you know it, it could become a systemic challenge and a serious impediment to economic growth.
Today’s key goal is to proceed with the investment programme as outlined for 2011-2015, a programme that is designed to upgrade petroleum refining and includes the earlier planned investment projects and holdovers from the previous three-year period. By the way, this programme is synchronised with the master plan for petroleum industry development, which we reported on in Novokuibyshevsk in October 2010. What do we need to do?
Vladimir Putin: Excuse me, Mr Shmatko. We have a draft decision from today’s meetings. We will make copies and pass them out so that everyone can take a look and provide their comments about the draft. Please excuse me.
Sergei Shmatko: What do we need to do? This is what we are going to have by the end of 2015, if the investment programme is implemented within the established timeframe: 255 million tonnes of crude will be processed; petrol production will go up 19% from 37 million to 44 million tonnes; diesel fuel production will increase by 20% from 70 million tonnes to 85 million tonnes; and jet fuel production will increase 56% from 9 million tonnes to 14 million tonnes. Also, and this is very important, fuel oil production will decrease by almost 17%. The production of Class 4 and 5 petrol should go from the current 12% to 84% in 2015, and Class 4 and 5 diesel fuel should also be up from the current 25% to 82% in 2015.
The programme is vast and intense. Its total cost is conservatively estimated at 569 million roubles. There are certain fine points to it, and I would like to draw your attention to them. For certain plants, such as the isomerisation plant, we will need to commission 50% more capacity during the next four years than we had on January 1, 2011. In other words, we will need to build 50% more isomerisation capacity in four years than we actually have now. We will also need to build twice as many alkylisation plants and four times as many hydrocracking plants. The latter is a very important but simple refining process for manufacturing dark petroleum products and high-quality diesel fuel.
What does this mean? This means that in addition to financial problems (we think we’ll be able to address them effectively) we will also run into other resource-related problems. For example, according to our conservative estimates, we will need 10,000 designers to work hard during these four years in order to complete this programme. That’s a tall order, indeed. Why? Because, on the one hand, we are not sure if we can find that many skilled designers. On the other hand, we have a serious problem in the refining industry related to equipment and production processes. Almost all of these projects (the plans include commissioning 91 plants by 2015) will be implemented using foreign manufacturers’ licences. We in Russia don’t have a single joint venture that makes high-quality equipment for the refining industry. This is a very important point.
Not so long ago we met with you, Mr Putin, to discuss power engineering machinery manufacturing. Back then, this issue was in the spotlight, and I should admit that the power engineering industry made far better progress than we did. Here, in Kirishi, we see, if I’m not mistaken, that the hydrocracking plant was built under a Chevron license, and the equipment was imported from Korea.
Remark: Mr Putin, 55% of the equipment was supplied domestically, and 45% was imported. We do not make reactors or columns, because… The Izhora plant recently began producing them.
Sergei Shmatko: Mr Putin, I was about to add that Taneco, that is building the hydrocracking plant now, later than Mr Bogdanov (Vladimir Bogdanov, CEO of Surgutnefetgaz), has already ordered the hydrocolumns from Izhora. These are the very first steps.
From the standpoint of this programme’s relevance to the economy, we should look at the material enforcement measures involved in its implementation. The most important thing is to quickly amend the existing tax system. We have developed (and this is a big step forward) a 60-66 system that applies an adjustment coefficient equaling 60 for calculations of the customs fees for crude oil. This translates into an approximate 5% discount on crude oil customs fees. On the other hand, we plan to increase the export duty for dark petroleum products up to 66%. In other words, we will even them out with the duties levied on light petroleum products.
What will that do for us? That will significantly change the investment model for such projects. I’m talking about investment in deep refining processes. For example, the existing catcracking plant with a capacity of 2 million tonnes has an APP below 10%, (even lower if adjusted for inflation). However, under the 60-66 arrangement, the APP will be up at 19%. That’s a rather lucrative and appealing investment.
On the other hand, we are working on differentiation of excise taxes for various petrol classes. Actually, we do have the differentiation already, but it is insignificantly small. The difference in excise taxes for high-quality fuel and low-grade fuel is about 300 – 500 roubles. In our estimates, for us to be able to create genuine economic and financial stimuli for investment, we need this difference to increase to 1,500 – 2,000 roubles. Only then will the companies that heavily invested in the modernisation effort get their money back.
Mr Putin, given the importance of this programme for the country, we believe that current economic stimuli are not enough. We need to think of additional enforcement measures. We are very pleased that our companies went along with the idea of signing such legally binding agreements. That means that the companies have a similar opinion of the situation in the refining industry and agree with the need to accelerate the modernisation work.
We believe that building reserves is very important if we want to secure stable prices throughout the transition period. The Ministry of Energy developed a reserve-building system upon the instruction issued by the government commission. I’m here to report that we plan to build such a system based on state-owned Rosneftegaz company. We have talked with oil companies and they are in agreement. We have launched the subscription programme. We believe that this system will help us keep in check seasonal fluctuations and isolated price surges that could materialise in individual regions for various reasons. This is important not only for the transitional period during modernisation, but also from the viewpoint of having a stabilising system on our retail market. This is a very important infrastructural element.
To conclude, I would like to say that we understand the problems that led us to the current status in the oil production and refining industry. I would also like to emphasise that we have reached a consensus with federal executive bodies and oil companies in how we should tackle these problems. Our primary task today is to organise and implement this vast investment programme that the companies have outlined for themselves for the next four years. Once implemented, these measures should, in our opinion, secure guaranteed supplies of high-quality petrol to the Russian retail market in order to avoid any shortages. Thank you.
Vladimir Putin: Thank you.
* * *
Exchange of opinions:
Vladimir Putin: Mr Khudainatov, go ahead, you raised your hand.
Eduard Khudainatov (Rosneft President): I would like to add that 80-octane petrol is more expensive due to the fact that Rosneft has complied with the technical regulations. We have discontinued the production of 80-octane petrol at Achinsk on January 1, but evidently, there is a certain imbalance between customer needs and the modernisation programme requirements. What we have here is a success story, which unfortunately is having a negative impact on the consumers who have not yet switched [to different petrol grades].
Vladimir Putin: We have just been discussing this, hopefully, after signing these agreements on modernisation and technical regulations, this issue will be resolved.
Would anybody else like to speak? Yes, please, go ahead.
Remark: Mr Putin, this may be somewhat off topic, but it has to do with oil producers. The farmers wanted me to convey to you their gratitude for your decision back in May to hold prices fixed during the planting and harvesting seasons.
Vladimir Putin: The gratitude should also go to oil companies, with whom we worked jointly on this project.
Remark: Mr Putin, it should be noted that the oil companies fully complied with your decision, which allowed us to conduct a successful planting campaign and to prepare for harvesting. I am specifically referring to the Leningrad Region.
No less important is the fact that the arrangement proved to be financially viable. In the Leningrad Region alone, nearly 100 million roubles have been invested in agriculture. Surgutneftegaz and LUKoil are the oil companies in the Leningrad Region and we are very thankful to them.
And secondly. Given that 92-octane and 80-octane petrol have been discontinued (you mentioned this in your opening remarks), we may need to come up with an arrangement similar to the one used for the car scrappage programme. I am referring to state support through hire purchase supplies to the agriculture and the timber industries plus the army, etc. Thank you.
Vladimir Putin: We are currently studying this issue, specifically with regard to agriculture, as I mentioned earlier.
Yes, Mr Golubev.
Valery Golubev (Deputy Board Chairman of Gazprom): Today, we are not just discussing oil refining and modernisation issues, but also the need to ensure a stable fuel supply for the domestic market. Therefore, I believe our draft resolution should include at least one section on natural gas engine fuel. Especially since, in accordance with your instructions, we have been developing the federal programme of switching to gas jointly with the Ministry of Energy. All our regions have natural gas sources, and natural gas production plants are quite affordable today. Natural gas is significantly more environmentally friendly in terms of emission standards, even compared with Euro-5, and it is cheaper than petrol.
Vladimir Putin: Yes, we can do that. Today, we are discussing oil industry problems and shortages in the domestic oil market, but, I agree, we can add that point. Colleagues, please, who else wants to speak? Please, go ahead.
Remark: Mr Putin, this is with regard to the minutes of our meeting. It does not contain any record of the instruction related to excise duty differentiation that has been thoroughly discussed today, and I suggest that we add these details.
Vladimir Putin: Yes. We will make that correction. We need to act carefully, keeping in mind the Economic Development Ministry’s comments about the impact on consumers. But we have taken note of your comment. Thank you for drawing our attention to this. Anybody else? Please, Mr Popov, go ahead.
Nikolai Popov (State Secretary and Deputy Minister of Natural Resources and Environment): I would like to draw your attention to two points in Paragraph 4 of the minutes. Since the licence should reflect the law on mineral resources, the possible amendments to the license may require changing the law. Given the fact that this falls within the competence of the Ministry of Natural Resources, I request that the Ministry be assigned the responsibility for reviewing this issue.
Vladimir Putin: That’s fine. We will include the Ministry in the list of those in charge of implementation. What’s the other issue?
Nikolai Popov: The other comment is in reference to Point 11. It requires drafting regulations introducing administrative liability for oil companies that shut down refineries for repairs without obtaining prior authorisation. The liability may well be introduced, but only after the appropriate prohibition provision is stipulated in the law. With that in place a failure to comply with the law will result in the appropriate penalty. I suggest that we make these corrections.
Vladimir Putin: I don’t think it’s all that complicated. We have signed an agreement under which the companies enjoy certain privileges, including the ones on technical regulations. It allows them to make a respectable profit. Should they violate the agreement, we will confiscate these profits.
Nikolai Popov: But that would not be administrative liability.
Vladimir Putin: What would it be, then?
Nikolai Popov: This point provides for the introduction of administrative liability. And administrative liability can only be introduced provided it is prescribed by law.
Vladimir Putin: Yes, you are right.
Nikolai Popov: Therefore, I believe we need to revise this point and suggest introducing an appropriate law that will stipulate liability for this violation.
Vladimir Putin: Yes, I agree. We should do that.
Grigory Elkin (Head of Federal Agency for Technical Regulation and Metrology): Colleagues, I have a comment on Point 12. But first I wanted to remind everyone that the technical regulations we have been discussing today are more than just government resolutions. This is a document that goes through stages of public discussions and is essentially the result of a consensus. Three years ago, everyone agreed to meet the deadlines set in the document, and I wanted to remind the oil companies about this.
I would like to support Mr Golubev. The provision governing the octane rating is included in an appendix to the technical regulations in effect. Currently, the deadline in the technical regulations for 80-octane and 92-octane petrol expires on September 6, and the deadline for grade three petrol expires on January 1 next year.
Such a regulation does not exist anywhere else, and this appendix needs to be removed from the existing national technical regulations as well as from the draft technical regulations of the Customs Union. The appropriate Customs Union commission has already submitted the draft technical regulations to the government and it is currently going through the intra-governmental review process. This will also resolve the September 6 issue.
As for Point 12, it provides extended deadlines for the companies that have signed the agreement. It will be very difficult to comply with. Even if the oversight agency detects that a petrol station sells petrol of a certain grade (and by law, inspections should be conducted at the point of sale), finding out on the spot who the petrol producer is and whether or not it signed the agreement will be all but impossible. This is first.
Second. We need to adopt the Customs Union regulations by January 1 next year. This is an international document that has been agreed to by three countries. It would be rather difficult to specify that some companies have signed an agreement and enjoy certain privileges, while others do not.
Hence, I suggest moving the provision regarding the companies that have signed the quadrilateral agreement to Point 13. Later, when establishing differentiated excise duty rates or differentiated taxation, we should add the following clause: “provide benefits for the companies that have been in compliance of the agreement.”
I believe this is also important, as it allows the companies to avoid an extra burden. Having signed these agreements, they have already undertaken the responsibility to modernise and, as low grade petrol producers, will be bearing the additional excise duty burden. Under the terms of the Customs Union that we are entering next year, they will face tough competition and risk losing out to Kazakh companies. So I would list this as a differentiated tax break or a differentiated excise-tax rate.
And the last thing that I would like to say is linked with petroleum oversight. The Federal Agency for Technical Regulation and Metrology now employs fewer than 600 staff inspectors. Of this number, we need to transfer a number of employees to the Ministry of Economic Development under the draft resolution. This is linked with accreditation, although accreditation has nothing to do with oversight. Of course, this country needs far more than 500 inspectors. To be clear, this includes petroleum oversight, as well as the oversight for the mandatory requirements as stipulated by the standards and everything. In my opinion, such oversight must be expanded, and I fully support a proposal to study the issue of delegating authority to the regions and municipalities. Let’s just think this over. We along with the city hall of Moscow examined this question some time ago, but some legal nuances make it impossible. As I see it, this should be discussed, no matter what. Such authority should be delegated, and oversight organised along with the regions. Thank you very much.
Vladimir Putin: May I mention the last point? Some of your remarks deserve additional study. We need a process to determine where the product has arrived from, or have not arrived… Product volume is stipulated in the contract, even for a retail petrol station, rather than that owned by a vertically integrated company. Are the contracts available? Where do the products come from? For example, it’s obvious that Rosneft supplies these products. Rosneft has completely monopolised some regional markets. Is it so hard to clarify this there, just by way of example?
Grigory Elkin: The inspectors now work under extremely strong authority, and these tough local leaders won’t allow this.
Vladimir Putin: This must be allowed. Please make the necessary proposals regarding this.
Grigory Elkin: In that case, we need to amend the oversight system’s regulatory documents.
Vladimir Putin: Please think along these lines, so as to make this an effective tool. Yes, please.
Grigory Elkin: Good.
Alexander Korsik: My name is Alexander Korsik, the President of Bashneft.
Vladimir Putin: Yes, excuse me, you mentioned the delegation of authority absolutely correctly, we need to think this over. Please.
Alexander Korsik: Mr Putin, the introduction of the 60/66 system is a positive change for an overwhelming majority of companies. Unfortunately, Bashneft is sustaining financial losses as a result of this system. This is a paradox. The situation with oil refining is okay. We have done everything in accordance with state requirements. We produce grade three fuel, we convert to grade four/five fuel on time, and we refine 87% of our crude oil. This percent will reach 94% and will be the same as Europe’s in six years. At the same time, we are suffering because we are buying oil, and because oil prices will increase due to reduced customs duties. So, we have discussed the possibility of zero severance tax for an oil deposit with high sulphur content exceeding 4.5% for quite a while. Our estimates show that the budget will lose nothing. I would like to ask you to advise the departments to re-examine this issue and to include this recommendation in the protocol. Thank you.
Vladimir Putin: I agree, this is fair. We need to think this over, note this in the protocol and examine the issue at least. This is justified.
Who else wants to take the floor?
Vladimir Kapustin, Director General of the Research and Design Institute for Oil Refining and Petrochemical
Industry (VNIPINeft): Mr Putin, I think this protocol lacks one more paragraph linked with the construction of new refineries. Valery Golubev has just explained in great detail how India pulled forward so quickly, and completely overhauled the global petroleum market.
We would like to build a refinery with a capacity of 14 million tonnes in Nizhnekamsk. The forms and records are ready. Tatneft currently refuses to build this refinery because it is prevented from doing so by the new tax pressures. Quite possibly, this is the wrong approach because we need to have new, modern refineries with state-of-the-art technology at new locations. Of course, we would like to settle this issue… Maybe you could make a separate decision on this refinery because Russia has not built a single refinery with a capacity of 14 million tonnes in the past 20 years… Thank you.
Vladimir Putin: What tax pressure are you talking about? What do you mean?
Vladimir Kapustin: Tatneft now considers the 60/66 share to be completely unprofitable because no new refinery can immediately attain 95% capacity. It is built stage by stage. They should retain their current breaks pending the facility’s completion.
Vladimir Putin: Good. Let’s take a look then. You too, then work with the ministry. We need to assess the statistics. Mr Sechin is telling me that there is no pressure, that you will not suffer, and he is showing me a chart. Please meet with him and sort things out, OK?
Shafagat Takhautdinov (Tatneft Director General): I agree completely with our colleague’s statements. We have discussed the possible losses for Taneco during construction of a facility with a capacity of seven million tonnes and Tatneft’s possible gains. Taneco is a shareholding company, and Tatneft is a different company and our subsidiary. We don’t have enough construction workers to quickly build another facility with a capacity of seven million tonnes, even if the funding were available. You visited our refinery during construction for the first time. At that time, the project employed up to 12,000 construction workers. And it took us three and a half or four years to spend 200 billion roubles’ worth of investment. When we start building another refinery, we will produce only 33% of light fractions during the initial stage. The share will increase to 62% during the second stage. And it will take four to five years to achieve complete equalisation. There will be some ups and downs and time losses during the production of dark petroleum.
Vladimir Putin: There should be incentives. And, of course, nothing should be hindered here. I agree, do some figuring.
Shafagat Takhautdinov: Loans, of course, come second. We have already borrowed over $3 billion, have invested our own assets, etc. We need some time to repay part of our debt and to take out new loans. That’s the problem.
Here is what I suggest, Mr Putin. Paragraph four notes that certain oil supply obligations should be stipulated for deposits containing six million tonnes of extractable oil, as well as for current and newly issued licenses. Quite possibly, it would be appropriate to add that six million tonnes of residual oil should be extracted from operational deposits, and another six million tonnes should be extracted under newly issued licenses. This would facilitate normal compliance.
Vladimir Putin: Six million tonnes?
Shafagat Takhautdinov: We extract the residual six million tonnes from our operational deposits. This will immediately create a discrepancy, an equal understanding – six. And we extract residual amounts from previously exploited deposits, and two or three million tonnes could remain.
Vladimir Putin: Mr Shmatko, please have a look (Addressing Minister of Energy Sergei Shmatko).
As far as financial problems and loan issues, etc. are concerned, we don’t know the objectives of your loans. Maybe, you wanted to build a poultry farm. This is your own loan policy.
Shafagat Takhautdinov: We will build the first facility with a capacity of seven million tonnes. Construction will be completed in 2015. Second, we still have trouble taking out loans.
Vladimir Putin: We will help you to take out loans. German Gref, President and Board Chairman at Sberbank, visited me either yesterday or the day before yesterday. They don’t know where to invest their assets and are looking for good and reliable borrowers. Tatneft is a good and reliable borrower. The project has good prospects. Let’s talk to our banks with state capital. To be honest, I don’t see any problems with this today. They will be only too happy. The price issue is quite important, but their interest rates are very good now. Yes, Mr Voskresensky.
Stanislav Voskresensky (Deputy Minister of Economic Development): I would like to say a few words about the protocol resolution exclusively. Paragraph 14 specifies the purchase of a refinery for Rosneftegaz. It describes the refinery in great detail. As I see it, the framework should be extended somewhat because we can neither confirm nor refute such parameters today. We need this for additional manoeuvring. And here is another small but probably important point. Another paragraph calls on the Ministry of Energy and the Ministry of Economic Development to facilitate the implementation of oil company programmes. This probably implies state involvement because we will hardly be able to facilitate corporate proceedings in private companies. Can this be specified?
Vladimir Putin: Yes, I agree. Anyone want to take the floor?
Vladimir Charchiyan: My name is Vladimir Charchiyan, First Vice President of the St Petersburg International Commodity and Raw Materials Exchange. I would like to say a few words and to draw your attention to price manipulation and manipulation involving selective transactions, mentioned here today with regard to us. I would like to tell you that joint specifications have now been introduced in line with the recommendations and orders received by our regulators. A joint agreement has been introduced and signed by every oil company. Changes have also been introduced in the matching system. This implies a collapse in prices. For example, yesterday’s transactions specify a seller’s price, and current transactions envision the buyer’s maximum price. And a new system has been introduced. This shows that the manipulation system has become impossible.
Vladimir Putin: So, you admit that this was possible until now, and that it is currently impossible?
Vladimir Charchiyan: You see, the exchange is a new institution which continues to evolve. Experts from the Russian Trading System (RTS) and the Moscow Inter-Bank Currency Exchange (MICEX) are involved in this work to the greatest possible extent. All the instructions, remarks and orders of the regulators are being fulfilled. Fifteen-minute commodity-trading delays have now been introduced. This means that all prospective buyers involved in the trading session place their orders within 15 munutes, which are subsequently assessed by the market. Such orders are filled, no matter what.
Vladimir Putin: Look, you don’t need 15 minutes in case of preliminary collusion. All you need is just a few seconds to push the button. That’s all right. You don’t have to go on. Have you got any proposals regarding our draft resolution?
Vladimir Charchiyan: Yes.
Vladimir Putin: Yes, please.
Vladimir Charchiyan: I would also like to say that we have created a special division to register transactions being concluded outside the exchanges. This issue was mentioned earlier. That’s how all companies are welcome to join in, this is a workable option, and Gazpromneft has launched this process.
Vladimir Putin: Is this all?
Vladimir Charchiyan: Thank you.
Vladimir Putin: Thank you very much. Anyone else have some other remarks? Concerning the protocol? No?
This means I have said almost everything in my introductory remarks. In my opinion, we have had a rather detailed and substantial discussion. I would like to note once again that we need to promote the development and retooling of the industry while maintaining current production levels. If possible, we must expand production and saturate the domestic market with this essential product and sell it for economically justified prices.
Esteemed colleagues,
The oil industry has come a long way. Russia inherited a sound base from the Soviet era. But we must take dynamic steps and actions, so the oil industry can take new steps forward. You and I can accomplish this. I am calling on you to work efficiently, seek cost-effective performance and high corporate profits. At the same time, we must promote the state’s interests. Hopefully, you and I will work effectively, just like we do when we need to accomplish some important objectives, including those mentioned today by Leningrad Region Governor Valery Serdyukov. For example, when it becomes necessary to sow or harvest crops, we find the solutions, act quickly and efficiently and allow companies to make a profit. But the problems we talked about today are of a long-term, rather than short-term, nature. All those who consider Russia their homeland, who want to work here, not to feel like some kind of a “crony”, who consider themselves masters of the land but who are not trying to squeeze out every last drop from rusty old nuts, bolts and pipes, are interested in the success of these agreements.
I hope very much that we will work in a well-organised, efficient manner. Thank you very much for today’s work.