No.4, 2005

Oil of Russia magazine talks to Alexander Filipenko, Governor of the Khanty-Mansi Autonomous Area

Currently, over 50% of all the oil produced in Russia comes from the Khanty-Mansi Autonomous Area (KMAA). In the opinion of the majority of leading Russian experts, over the coming decades, the Area will remain Russia's main energy base. In order to maintain its leading position as the country's oil «granary, » however, a new impetus is needed to speed up work on all sectors of the oil and gas industry.

Q: Today, for a number of objective reasons, expenditure on prospecting works in the Russia has fallen. What do you see as the solution to this problem?

A: In my opinion, a state system needs to be built up that would guarantee a steady increase in the volume of hydrocarbon reserves and thus ensure the long-term prospects for the production of this valuable raw material. Hence, first of all, the federal government should shoulder part of the funding of this activity, above all that of strategic prospecting works. Second, a relevant regulatory and legal base is needed. The relevant federal legislation should envisage legal measures to encourage subsoil-users, and some sort of system that would «compel» them to engage in prospecting works and a constant increase in reserves. In this context, one step that might be taken is to introduce so-called «universal E&P licenses,» when the permit issued to a given company for prospecting works work might, on discovery of an oil field, be converted into the right to develop it. It seems to me that this would constitute a serious incentive for, primarily, oil companies, as well as other investors, to invest more actively in exploration of the subsoil. I can say that the temporary pause, when the process of involving new participants into prospecting was suspended as a result of administrative barriers, is now over.

A: My own assessment can add little to that given by the experts of the International Rating Agency Standard & Poor's. They recently raised the rating of the investment attractiveness of the Khanty-Mansi Autonomous Area. Moreover, last year over $4 billion of foreign investments were attracted into the oil industry of Yugra alone. What makes the region's investment climate favorable is its political and economic stability. The KMAA also has a very high share of economically active population - 866 thousand out of 1.4 million inhabitants. Note, also, that the average age of the residents of the KMAA is 30 years.

Q: What, in your opinion, are the prospects for an improvement in the quality of international cooperation in the oil and gas industry of the KMAA?

A: The following companies, with a substantial foreign stake in their capital, currently participate in the oil and gas production business of the KMAA: TNK-BP, Shell Salym Petroleum Development NV (a subsidiary of Royal Dutch/Shell) and Khanty-Mansiyskneftegazgeologiya (Marathon). Every year, more than 30% of all the oil produced in the Autonomous Area is exported and the revenues from its sale in 2005 will amount to over $32 billion. In the KMAA, the companies Schlumberger and Halliburton hold firm positions in the sphere of the provision of services for the oil and gas industry (databases, horizontal drilling, hydrofracturing, measures to enhance oil recovery). Major companies, which are particularly active in contracting loans, annually acquire oil industry equipment worth millions of dollars. Considering the proposed changes in the subsoil legislation, it is currently difficult to predict future development trends in international cooperation in the oil and gas industry. At the same time, one cannot but agree with the opinion of a Western company's top manager who has said that it is wrong to separate local from foreign investors and that they all should be divided into good and bad investors instead.

Q: You are the initiator of organizing a Khanty-Mansiysk regional crude oil exchange, but so far all attempts to set one up have failed. Are you sure that the idea is still valid for the Area and for Russia as a whole?

A: Such an exchange is needed. This is also shown by the fact that our initiative has the support of federal ministries and all the key players on the energy market - a number of major oil companies, JSC Transneft and JSC UES of Russia. I would like to emphasize that the idea is not to set up an oil exchange, but a fuel and energy exchange, where transactions would be concluded for the sale and purchase of crude oil, petroleum products and electricity. In the future, this list may grow. The task is to elaborate civilized rules and conditions for the interrelations between producers and consumers of power resources. It is important that this project is not restricted to a single region. I hope the exchange can operate internationally. Representatives of Azerbaijan and Kazakhstan are already willing to cooperate with us. The work of the exchange will most likely begin with the petroleum products section, followed by liquefied and natural gas. We would have to start with much smaller amounts, of course, but I think exchange trade would gain popularity quite fast. Small and medium-sized enterprises, whose sales opportunities are currently limited, both have an interest in this. It may be also attractive for those big oil companies that have production volumes substantially exceeding their own refining capacity.

Q: As you have stated recently, in 2005, over 270 million tons of oil would be produced on the territory of the KMAA but admitted, at the same time, that unless measures were elaborated on the federal level to include small and medium-sized companies in the oil production process, in a few years the industry might find itself in crisis. In your opinion, what needs to be done to support such companies?

A: It would be more correct to speak not of small and medium-sized businesses in the oil industry but of what are called in the West independent companies, which do not belong within the structure of big, vertically integrated companies. Today they produce up to 1 million tons of oil a year in the KMAA. In order to provide for their normal operation, I believe conditions should be established under which the anti-monopoly legislation would operate to the full. These companies are quite capable of surviving on even our, extremely monopolized resource market. Such companies are oriented, above all, on developing nearly exhausted and small fields, as well as with reserves that are hard to recover. In this sense, a special tax regime needs to be set up. As a result, the number of idle and unprofitable wells could be substantially reduced. I am convinced that the independent companies could ensure full recovery of the oil fields of the Khanty-Mansi Autonomous Area and increase the efficiency of subsoil use. The KMAA government, for its part, is willing to promote their involvement in the oil production industry and is already holding negotiations on this subject with federal structures. The development of business of this level is extremely important for oil production - especially since there are such opportunities in the Area. I also raised this issue with Russia's President Vladimir Putin during a recent meeting with him. The result was that the head of state entrusted the federal government with elaborating this topic. I am sure that we will soon be able, by our joint efforts, to ensure participation by small and medium-sized enterprises in developing oil fields that are not profitable for the big companies. We have given our support to the initiative put forward by domestic oil industrialists concerning the need to pass a federal law On Small and Medium-Sized Business in the Oil and Gas Industry of the Russian Federation. In addition, it is proposed to introduce into the practice of interrelations between big and small subsoil users the transfer of wells for long-term trust management. It is also recommended that amendments be introduced into the draft of the new law On the Subsoil, making it possible to assign rights to use individual wells to small enterprises without a tender, under condition of agreement by the owners of the license and the authorities that issued it. At the present time, there are about 15 thousand idle development wells that are classed as being of low profitability on the territory of the KMAA. This is cause for concern. We in the government of the KMAA see small and medium-sized business as a real opportunity to resolve this problem, as the main factor in diversification of the fuel and energy complex of the Area.

Q: It is known that over 70% of all tax revenues into the budget of the KMAA come from five oil producing companies, including JSC LUKOIL. How would you assess the current level of cooperation between the KMAA and LUKOIL?

A: It is well known that the Khanty-Mansi Autonomous Area includes LUKOIL's historical place of origin. It was here that, in 1991, on the basis of the oil producing enterprises of Langepas, Uray and Kogalym, this company was formed and it soon went on to gain leading positions in the country's oil industry. In September last year, in Uray, I took part in the opening ceremony of the historical complex Sukhoy Bor at the Trekhozernoye field. This is the place where, 41 years ago, the first well, R-6, was sunk, giving Western Siberia's first commercial oil. Today, LUKOIL holds a license to develop 54 oil fields on the territory of the KMAA and the oil produced in Western Siberia accounts for 65.4% of all the Company's total oil production. Our cooperation with the Company is now based on thoroughly elaborated agreements that clearly define out mutual obligations on a broad range of socio-economic, environmental and ethnic issues. On September 8 this year, in Khanty-Mansiysk, we signed a new cooperation agreement with the Company's President, Vagit Alekperov. This agreement outlines future joint efforts of the KMAA and LUKOIL to introduce the latest world technologies in the sphere of exploration, production, treatment and refining of hydrocarbons, implementation of projects to protect the environment, encourage investment on the territory of the Area, and implement high-efficiency joint projects. It has been determined that, in 2005, LUKOIL alone will contribute 960 million rubles to the financing of participatory construction of social facilities on the territory of the KMAA municipalities. We are impressed by the way that, in its activities, the Company sticks firmly to the principles of socially responsible business. I can emphasize once more that LUKOIL participates most actively in the life of the KMAA, helping us resolve many acute problems involved in environmental protection, education, healthcare and culture.

Q: Not long ago, ecologists stated that the environmental situation in certain parts of the KMAA, such as Samotlor, was lamentable, owing to oil pollution of the territory. What is your assessment of the Area's ecology today?

A: The environmental situation differs from one part of the Autonomous Area to another. A substantial part of Yugra is essentially «ecologically healthy. » The task is to avoid damaging and to maintain the current state of the environment. We have done a lot to expand the recreational and natural conservation areas. According to the conception we have elaborated, these should cover at least a third of the KMAA territory. We intend to provide for a fauna and flora restoration regime.There are also, however, territories that have been subject to intensive industrial use, as a result of which an unfavorable situation has taken shape in a number of them. Serious steps need to be taken here for the contaminated soil remediation. Of course, preventive measures are also required in order to preclude the barbaric attitude toward nature that, just a decade ago, was simply the norm. Enormous funds should be spent to reduce man-made impact on the environment and minimize the risk of discharges connected with the operation of pipeline systems and other likely sources of environmental pollution. A system is required for controlling, monitoring and imposing the harshest sanctions on offenders.Regrettably, there seems to be no logical explanation for some of the things undertaken in recent years at the federal level. Radical cuts in the nature protection services have meant that, if we had not filled the breach with our own resources, above all financial ones, we would essentially be speaking about a crisis in nature protection activities. In this sense, both the federal government and we, in the regions, need to pay more attention to such reorganizations, because nature is in need of serious protection.