Kirill Kravchenko, Deputy Chairman of the Management Board and Deputy CEO for Foreign Asset Management of Gazprom Neft, in interview with FOCUS News Agency

FOCUS: Mr. Kravchenko, what is the general outlook for the Balkan petroleum products market and how does Gazprom Neft fit in that environment?

Kirill Kravchenko: The South-East European energy commodities market has fairly good prospects, which are not fully appreciated at this junction. The Balkans is a region with a good economic growth potential. That was exactly the logic behind Gazprom Neft’s acquisition of Naftna Industrija Srbije (NIS) two years ago, the company’s first asset in Europe and its first step in developing business in the South-Eastern Europe. Our next step is Bosnia, where we started oil and gas prospecting this year. Naturally, we are not going to confine ourselves to that and we are looking into whatever opportunities there are in the Balkans. Other than Serbia and Bosnia, Gazprom Neft is interested in doing business Bulgaria and Romania, as well as Montenegro, Macedonia and to some extent Croatia. These countries, as we see it, offer great opportunities for the wholesale and retail sales. In Romania, Hungary, Montenegro and Bosnia we see potentials in the field of exploration and production of hydrocarbons.

FOCUS: The Balkans has long been recognised for its role in transit of energy resources. What is your take on this?

Kirill Kravchenko: Indeed, the strategic and geographic vantage position between the West and East, in addition to its European business culture are the region’s advantages, which we greatly benefit from. Strong historic bonds between the Balkan countries might serve as an additional impetus to regional players’ cooperation and competition. Along these lines in March, Gazprom Neft and a Slovenian oil company Petrol signed a Memorandum of Cooperation in supply and sales of petroleum products to the countries of Southern Europe and the Balkan region.

FOCUS: What are your plans regarding Serbia – NIS Gazprom Neft?

Kirill Kravchenko: Gazprom Neft, having the controlling stake of NIS (56%), together with its strategic partner, the Government of Serbia, which owns 30% of NIS shares, has devised a long-term clear-cut development strategy for the Company by the year of 2020. This strategy anticipates that NIS petroleum products sales volume through premium channels will reach 5 million tons in 2020, while the crude refining volume will grow by 75% and crude oil output by the amazing 306%. NIS strategy envisages for the company to become a leader in the Balkan market.
Over the course of the past two years we made the first steps: the company gained financial stability, increased its efficiency and initiated a revamp of one of its refineries. More importantly, we rid the company of its longstanding losses. In 2010, we made a profit to the tune of an equivalent of 160 million Euros as against an equivalent of 47 million Euros in losses identified in 2009.
Other than that, we started a release of European quality petroleum products, and phased out the production of leaded gasoline. Along with that the increased crude oil and natural gas output reached almost 1.2 million TOE, which accounts for a 30% increase in comparison with 2009. We intend to pursue this pace throughout 2011 as we anticipate 1.5 million tons output. Last year’s refining output reached approximately 3 million tons. In these two years we managed to reduce company’s debt to banks by 50 per cent. Also within the last two years within the process to overhaul its own filling stations network in Serbia, NIS has reconstructed and set up as many filling stations as for the last seven years. Never the less a lot needs to be done.
However, we have achieved the most important – we set out key elements in developing Serbia’s NIS. Priorities among them are investments in company’s refining complex, gas and oilfield performance boost and filling stations network revamp.
In specific terms, the 2011 and 2012 priority is the successful completion of a Serbian refinery revamp to the tune of more than €500 million, which would result in petroleum products output compliant with all European standards. The Refinery revamp is by the same token a major environmental project with the earmarked €90 million, €60 million being allocated by Gazprom Neft.
In parallel, we are going to invest in the retail network. We have actively been implementing novel technologies in sales and new filling stations concepts: unmanned filling stations and car self-service. One of our pivotal priorities are new marketing programmes of client loyalty, co-branding projects.
As NIS is a springboard for Gazprom Neft’s further business expansion in the South-Eastern Europe, we are looking into the possibilities of taking our retail network beyond the boundaries of Serbia.
I had mentioned that in the wake of the Refinery revamp as much as 5 million tons of European quality fuel will be produced which by far exceeds Serbia’s market demand. Once it achieves this Serbia’s NIS will bring its production of an exquisite European quality to the external market, thus placing itself on an equal footing with the majority of its counterpart competitors in Europe.
Gazprom Neft considers a possibility to boost oils and lubes business by additional investments. At this junction NISОТЕК is our own motor oil brand and we plan further production.
In a few months following a market research we will make a decision to enter an investment cycle either on our own or to pool efforts with a partner company from Japan or Sweden experienced in refining crude oil with higher than average viscosity. Gazprom Neft-applied technologies will facilitate us in this.

FOCUS: What is the share of the Refinery in Pančevo (a town adjacent to Belgrade) in Serbia’s petroleum products market? Can its market share be increased?

Kirill Kravchenko: At this junction, Serbian refinery’s share in petroleum products market in the Republic of Serbia makes up 66 per cent, in retail sales – 34, 5%.
The increase of our market share directly depends on the refinery complex revamp currently under way.

FOCUS: What is your company’s investment volume in Serbia?

Kirill Kravchenko: Gazprom Neft committed a €500 million investment credit pursuant to Agreement of Purchase and Sale of NIS Company. The Agreement stipulates 4 years for Gazprom Neft to meet its investment commitments, specifically by the end of 2012. Through this credit facility Gazprom Neft has so far invested more than €200 million into the hydro treating and hydro cracker unit.
Speaking about the investments from our own operational cash flow, NIS has posted a two-fold growth. In 2010, NIS invested €50 million from its own resources into the production reconstruction projects and retail sales expansion in Serbia.
The year of 2011 shall see an extremely vibrant investment activity: €436 million have been earmarked. These do not include NIS’ anticipated investment in merger and acquisition deals within our core business in the region, which we plan.

FOCUS: What are your plans for Bosnia-Herzegovina?

Kirill Kravchenko: We commenced our business transactions in Bosnia-Herzegovina, to be precise in one part of its territory – the Republic of Srpska. In late 2010, together with Russia’s Neftegazinkor oil company NIS incorporated Jadran Naftagas, a joint venture company for exploration and production of oil and gas in the Republic of Srpska. Pursuant to that arrangement this year shall see geological, specifically, 2D and 3D geologic exploration aimed at obtaining a preliminary configuration of reserves. Next year we planned to drill the first investigation wells, in 2014 the production should start. Our preliminary estimate is that the reserves make up approximately 10 million tons. We have allocated $47 million for the research of this project alone, while the planned capital investment to the tune of around $600 million are conditioned on the results of exploration and production achieved. We are sure of the potentials of that territory and we are also interested to carry out geologic exploration across the whole Bosnia-Herzegovina territory, i.e. B-H Federation.

FOCUS: Do you have any plans concerning Bulgaria or any other countries in the Balkans? Can you fill us in on them, if any?

Kirill Kravchenko: In regard of petroleum products sales Bulgarian market is considered a priority target market, in which Gazprom Neft together with NIS plans to expand its retail network.
Drawing on NIS logistics capabilities and in line with agreements reached with prospective partners on Bulgaria’s market, at the outset we intend to supply to the Bulgarian market as much as 200.000 tons of European quality motor fuel. This volume is anticipated for sale during 2011 through 2013 period, which chronologically coincides with the planned completion of the revamp process of the Serbian refinery.

FOCUS: Gazprom Neft evidently makes use of its extensive international experience in its business operations in the Balkans. Can you elaborate on the specifics?

Kirill Kravchenko: As for the oil processing industry, during the recent 10-15 years spell Gazprom Neft has incorporated state-of-the-art technologies into its oil exploration and refining and we have been making efforts to implement them in our operations in Serbia along with the application of innovative business attitude as well as environmental standards. By combining the experience we have so far acquired and the emerging technologies NIS has been successful in bringing significant improvements to its business operation.
Being an international company commanding a vast corporate government experience, two years ago Gazprom Neft applied a new corporate governance system to NIS, which ranked this company among Serbia’s top businesses, thus facilitating Gazprom Neft in efficient management of a 56% share strong business.