Rosneft CEO Says He’ll Develop Arctic Oil With or Without Exxon

Bloomberg News interview with Igor Sechin, chief executive officer of OAO Rosneft, the world’s largest publicly traded oil producer by output, conducted Sept. 26 on a research vessel on the Kara Sea.

On exploration in Russia’s Arctic Kara Sea:

“The drilling at the structure Universitetskaya-1 is of exceptional significance, showing that Western Siberian deposits continue into the Arctic.”

“This is the world’s northernmost oil well, the northernmost project in the history of global oil and gas, with unique demands on technology and ecology.”

“We have fulfilled all our goals and the results even exceeded our expectations.”

“The drilling of a vertical exploration well that reached a depth of 2,113 meters, testing, logging operations, core samples, their study, gives us the ability after an initial study to confirm that on the basis of this first structure, Universitetskaya, a new field has been found — oil and gas condensate, as we say, with roughly the following resources: about 340 billion cubic meters of natural gas and over 100 million metric tons of oil.

‘‘That is almost a billion barrels of oil.’’

‘‘Our first result was very successful. And we want to call this deposit Victory.’’

On the commercial potential of the discovery at Universitetskaya:

‘‘We of course have to go through registration, additional studies, appraisals to confirm this resource base. As soon as we do this — it will be done over the next several months – we will put this field in our books. And, naturally, they will be commercial reserves by that point and they will boost the company’s capitalization. Just think: we put this resource base in our accounts, on the company’s balance sheet — and of course the company’s shares will grow.”

“I think we will orient the market based on our models. The minimum timeframe is five years, the general timeframe is seven years. I repeat, it all depends on the situation in the market.”

“Oil production will start here in about seven years. But if the market wants it from us faster — we can accelerate it.”

On oil price estimates:

“Mature oil fields in use around the world are declining, and this oil is high quality so the market should definitely give us the kind of price that justifies our investments. I think in five to seven years we will be talking about $140, $150 per barrel. But time will tell.”

“The oil we found, by its chemical parameters, is similar to Siberian Light. This is premium oil and it will cost more than Urals, about as much as Brent I think. All our investments will be justified in any case.”

On strategy if Exxon Mobil is forced to halt work in the Kara Sea:

“If Exxon is forced to stop its work, it does not mean that we will no longer cooperate with Exxon.”

“Of course we will do it on our own and attract the necessary technologies and different partners who don’t have limitations on cooperation. But, as I said, we won’t stop working with Exxon. The project’s operator is our joint venture with Exxon and we’re not planning on changing the venture’s ownership structure.”

“They will always have the possibility of returning to the project, as soon as the regulatory bodies allow.”

“We are in contact with our American partners. There are exchanges on all levels including our legal department and other units. And of course we discussed these questions and we will act in strict compliance with the regulatory demands placed on the company.”

“We plan to work next season. As I said, now we have drilled only the first structure — at Universitetskaya. There are more than 30. We will continue working no matter what.

‘‘We’ll continue drilling here next year and the years after that.’’

‘‘We’re going to take into consideration all aspects of the law, but the market will be our guide. Market relations are more multi-polar and provide us with more opportunities. Any oil and gas company would be interested in the resources that we confirmed today. This work will be absolutely in demand from the market. Those who want to collaborate will work with us. Absolutely.’’

On the possibility of new partners in the Kara Sea project:

‘‘Unlike politicians, corporations act on the basis of contracts. The contract for the development of the deposits in the Kara Sea is signed by Rosneft and Exxon. It seems to me that’s enough for understanding. Here in the Kara Sea, we work through our operating company in which the shareholders are Rosneft and Exxon. There isn’t anyone else there.”

On sanctions:

“Any restrictions make both work and life more difficult. And everyone suffers from sanctions. The biggest mistake is that sanctions moved from the political level to the corporate. This significantly expands the list of parties in this conflict. The biggest problem is that it destroys the foundations of the legal system and market relationships. Our work is based on fulfillment of the contract. If it is impossible to challenge a contract violation in court, then it practically annuls the independence of courts. And it is not my place to explain that destroying the foundations of law and market economics ultimately undermines everyone’s well being. It’s necessary to think about this. Оf course I hope it will be resolved and after some time we will have the ability to work normally.”

On rising costs:

“I want to remind you that, by its production and financial results, Rosneft is one of the leaders of the global oil and gas industry. We have the best resource base — our reserves by Russian classifications are 122 billion barrels of oil equivalent. We are first in reserves growth. We have one of the best production costs. In short, even by this measure we have the best position in the world at $4.5-$5 a barrel. I won’t name other companies but for comparison I will say that, for other leaders, costs can be at $15, $16 a barrel.”

On access to capital, liquidity, development plans:

“We are generating very good liquidity which, by public reports, is about $18 billion. These resources allow us to continue to work normally.”

“Money never hurts. We have many projects. The company has 48 licenses on the Russian offshore and 35 international projects. We are participating in projects in the Gulf of Mexico, Alaska and Canada, off the coast of Vietnam and so on. That scale of work creates a new synergy. Of course, additional sources of financing would help develop all directions of our business. The financial condition in which the company is in and the financial resources that we have allows the company to work in any condition. Some projects we probably will move to the side and start to realize them a bit later. But current operations, debt service, we will handle without any problems.”

On debt service:

“We have enough liquidity to service current credit lines. You have oriented yourself only on what is on balance but we are continuing to work and generate cash every day.”

On the dividend outlook:

“Of course, absolutely. We are paying dividends to our shareholders. There is no problem. This is our sacred obligation.”

On borrowing from the Russian Government:

“We are not depending on government support to settle our debts. Our request concerning debt issuance is meant to help with the realization of our company’s new projects.”

“This is the Far East Petrochemicals Plant, a number of new fields in East Siberia, infrastructure. This concerns only new projects.”

“The support will be determined by the resources of the budget and the plans of the government. If that comes about, that means we will continue developing all our projects. I remind you that we are the largest tax payer in our country. This year we will contribute 3 trillion rubles to budget revenue. In connection with this, the sum that we are asking for, not for capitalization but for debt — loans — is much less than we annually contribute to the budget. I think our request has grounds.”

On the cost of funding for Rosneft:

“Our company does not at this stage need any urgent loans or financial resources. So we are working in line with our standards. But in the market as a whole there is now a deficit of funds and their cost has increased of course. Some time in the future, it will increase for us.

‘‘But we have created reserves and taken measures to optimize our spending: we have also a plan for localization of production on service materials, including technological equipment, these measures will be directed at lowering our costs. So in some sense you could say that sanctions have helped us with a number of decisions that will cut costs.’’

On plan to buy Morgan Stanley’s oil trading unit:

‘‘I want to talk about our intentions. They are unchanged, and we are in contact with Morgan Stanley. But, as the saying goes, ‘man proposes, God disposes.’ Clearly, the contradictory position of the American regulators doesn’t allow us to say with any certainty that we will close this deal. On one hand, the regulators demanded that Morgan Stanley sell this business. Morgan Stanley found a buyer. And now the regulator won’t allow the buyer to conclude this deal.”

“There is a contradiction here. Of course we are confused by this tendency. And of course we would like to complete this deal. It isn’t closed yet, the issue isn’t closed, and we will continue working to get a positive result. But for now our hands are tied by the decision of the U.S. regulatory bodies that are still conducting a review.”

“This is a commercially viable project for us and for Morgan Stanley. That’s all that I want to say. We’re able to carry it out once we get the necessary approvals and we’re continuing to work on it.”

On Rosneft’s strategy:

“Our strategy is aimed at getting maximum efficiency at all stages and in all elements of our work. We’re sometimes criticized for having the government as our controlling shareholder. The character of ownership does not impact efficiency, the exacting work of management, professionalism, perseverance, decency, the use of new technologies. That’s what affects efficiency. And we, of course, will aim to boost efficiency.”

“We know what we need. We’re now creating our own oil services, there’s a deficit of such a service on the Russian market, we’re implementing a strong gas program. And if earlier we weren’t able to monetize gas that we have in our resource base, now we’re stepping up this business. And here we also see serious potential.”

On Rosneft’s place in the Russian market:

“Our own resource base is sufficient for the work of our company, for conducting geological exploration for more than 20 years. Moreover, aside from mergers and acquisitions, which are normal for an international market, the company is showing powerful organic growth. We’re boosting efficiency of output and not just making acquisitions. We’ll be working with those market offers that we receive. But, as I said, our own resource base is sufficient for implementation of the work for more than 20 years. So it’s not seen as some super-task. That’s not an issue.”

On state control:

“The type of ownership isn’t a key factor, the company’s efficiency on the market is. And in the case of our company, the presence of the state as a controlling shareholder allows us to get licenses to work on the shelf without lots of competition. Because only Gazprom and Rosneft, according to Russian law, have an opportunity to work on the shelf. I think for our shareholders this is a blessing.”

On Gosneft nationalization:

“That’s impossible. It is simply impossible. There are companies, their shareholders, there are obligations to partners. Rosneft is an international public company, whose shares belong to the biggest corporations, funds. BP owns 19.5 percent of our shares. Our stock trades on the London Stock Exchange. We comply with all the rules. So you can’t do that. So it’s impossible. Theoretically impossible.”

On OAO Bashneft:

“If we worked in the Academy of Sciences, then we could debate theoretical problems like ‘Is there life on Mars?’ I take a more grounded position. If no one has made us such an offer, then we don’t consider it.”

On the risks of privatization and Bashneft:

“I want to congratulate shareholders of Rosneft that Rosneft didn’t acquire anything during privatization. That’s why our company doesn’t have such risks.

‘‘The market knew about Bashneft’s problems. It was known that there are privatization risks, there are risks of tax claims, there is a criminal trail. The market has known about the skeletons in the closet for a long time. I think that is precisely why we never considered buying this asset. But Vladimir Petrovich Evtushenkov is a very wise man, an experienced entrepreneur. I think he has weighed all of these risks when deciding to buy.

‘‘But I think it’s appropriate to recall the idiom that ‘free cheese is only found in a mousetrap’. I hope that this issue will be also resolved lawfully. In turn, we continue to work with Sistema. It is our telecommunication operator. We get logistics and infrastructure support from them. We cooperate with a bank that is a part of AFK Sistema. This cooperation is beneficial and mutually profitable.”

On Mikhail Khodorkovsky and Evtushenkov:

“Evtushenkov doesn’t have blood on his hands. And this, at a minimum, is a very important fact. He is a businessman, a big businessman. Everybody has problems. But he is not a criminal. He never eliminated his competitors, and that was a practice at Yukos.”

“There are court verdicts: killers were found, murders were proved. Some of these killers got life sentences. Therefore, there are completely different circumstances and different grounds. It’s impossible to compare.”

On Sechin’s alleged role in the Evtushenkov arrest:

“It’s a myth. In general, I recommend you not rely on rumors and focus on the facts. There are special people who work with rumors. Positive rumors can boost capitalization of the company, negative rumors can reduce it. For business people, this is a way to make money. If you look at those who have been buying shares of Bashneft during this volatile period you can make conclusions without me as to who is spreading these rumors and why. Some agencies have a method: distraction with a red herring, and in this case the red herring is me.”

On Croatian privatizations and INA:

“Risks regarding privatizations aren’t only in our country. They happen in other countries, including European ones. And possibly one of the most striking examples is linked to the sale of Croatia’s share in the company INA. There, they have dealt with the situation. No one is saying that this situation has destroyed the investment climate in Croatia. Just the opposite, some heads of state bodies are held, investigations are continuing. And this market is considered highly transparent, lawful and safe for business. I think it’s necessary to treat this situation this way.”

On privatization:

“I’m not saying privatization results should be reviewed. What I’m saying is if there is corruption we have to fight it, like it’s being done around the world, and not to accuse law-enforcement agencies of wrongdoing. That’s it. It’s nothing scary that there is a fight against corruption.”

On corruption:

“I believe the struggle against corruption is under way. Businesses feel its effects. Rosneft is no exception. We do not pay money to anyone. And no one has asked us for it. We wouldn’t have paid anyway as all our money is accounted for.”

On Sechin’s future as Rosneft’s CEO:

“That’s a very interesting question for me. There were periods in my life when I engaged in totally different activities. But in recent years, especially when I was with the government, I’ve been focusing on the energy sector. Now I’m trying to use the expertise I gained, hopefully to the benefit of Rosneft. My contract with Rosneft expires in May next year. What does that mean? It means that I’m a hired manager and so it’s impossible to say that for me this will last forever. I’m a hired manager and find the job interesting.”

“The decision is up to the shareholders, who may make different offers. But if an offer is made to me, I will think it over.”

On his attitude toward the possibility of becoming prime minister:

“I work where I work. I find my work interesting. The government is headed by a respected prime minister with immense experience.”

“We need this bond borrowing. And we have asked Dmitry Anatolievich Medvedev to support this proposal.”

On sanction retaliation, including seizure of foreign assets in Russia:

“Sanctions and counter-sanctions are very harmful ideas that pull a large number of subjects, companies and individuals into the conflict. That’s very damaging for everyone. I am opposed to both sanctions and counter-sanctions. I advocate cooperation and friendship.”

On cooperation with foreign oil and gas companies:

“We are open to cooperation. Russia’s oil and gas sector is 25 percent owned by foreign companies. There’s nothing unusual about that. We have been inviting partners. We have been seeking to swap assets. This strategy has helped stabilize our position in the market, ensure transparency and mutual interests. That’s the right thing to do. We have been dealing with Chinese, as well as U.S., Italian, Indian and Japanese companies. We are not in for any kind of collusion, we follow open-market principles. We are open to all cooperation proposals.”

On sanctions and Russian asset seizures abroad:

“Everyone should respect the law and hold oneself financially responsible. That’s all. If a business is lawful, I wish everyone success, progress and new acquisitions. Yet one should hold oneself financially responsible. There should be compliance — I insist — with applicable laws and principles.”

“When I buy shares I hold myself financially responsible. If I have the money and chance to attract resources, I do that. Well, I hope everybody does that. If buying is allowed, it means it is not in any way forbidden. If you have lawful funds for that, then there is no problem.

‘‘I have no assets abroad. All my assets are based in Russia. If somebody has the need or the desire, why stop him? Let them work. They must only observe the law.’’

On the failure of Communism:

‘‘Communist ideology made all people the same. But all people are different. And the ideology discouraged people from taking action. God made us all different and that should be kept in mind. Some people are active at work, others seek to be creative. There are also those who want to lie under a palm tree waiting for a banana to fall. Well, those principles of equality discourage active people. Active people are more useful to society and I think their contribution to social development should prompt understanding that they can afford something for themselves with their lawfully earned money.

‘‘God willing, I wish all of them good health, luck, wellbeing and wealth.’’

On personal sanctions:

‘‘I was banned from visiting the U.S. This limits my ability to work with American partners, limits opportunities to work with enterprises, to familiarize myself with technology, to visit deposits, to gain experience. Of course, I suffered from the sanctions but they did not affect my finances because I don’t have any assets in the U.S., nor anywhere else abroad. And of course they deprive me of creative development.This is simply unjust. I have nothing to do with the conflicts. I was not involved in decision making. That’s why this is groundless.’’

On whether he’d ask President Vladimir Putin to change policy on Ukraine due to sanctions:

‘‘Russian President Vladimir Putin is a very busy man. He has a huge, difficult job. I wish him all the best. I am watching what he’s doing with hope. First of all, I have neither the ability nor the right to try to distract him from his work. Secondly, he will never let himself be pressured into making a decision, as far as I know him. No use even trying. That’s all I have to say about it.”

On the economic implications for Russia of Arctic discovery:

“Developing offshore projects is a capital intensive business that implies a huge multiplying effect for the economy. Every dollar invested in offshore development generates $7.70 in other sectors of the economy. To me, this is a key aspect that justifies support for offshore projects. Undoubtedly, it will boost economic growth and the construction of new ports, infrastructure, airports, equipment and sea platforms.

‘‘There are 34 oil and gas structures in the Kara Sea alone, as I said. A drilling platform should be installed at each structure. All this work should be done. This is work that should give a boost to major spheres of the economy.

‘‘I’ve already made parallels with the nuclear or space programs. The strategic development of offshore oil fields will be more important than the projects I mentioned. The multiplication effect will be much higher. This includes the production of sea-floor equipment, the production of power equipment. It requires metals, ports, aircraft, helicopters and vessels.

‘‘Undoubtedly, these projects will have a multiplying effect on Russia but also our partners in the West and East.’’

Bloomberg