Rosneft’s President and Chairman of the Management Board Igor Sechin took the floor at the plenary session of the 12th international investment forum “Sochi 2013” with the following address (script):

Igor SECHIN:

Good afternoon, Dmitry Anatolievich [Medvedev]! Good day to you all, dear colleagues!

It goes without saying that the use of budget as an instrument of economic policy is very important and topical within the backdrop of the ongoing economic slowdown because of certain crisis elements. There are two possible options for development: either to reduce budget spending, or to create conditions for expedient growth. This is exactly what Dmitry Anatolievich spoke about earlier today.

Still, it is common knowledge that the main growth driver is investment. Speaking of the investments and investment planning by our company, it would be wrong not to mention the terms, which the government has been enforcing since the approval of the 60/66 taxation principle for the oil sector, as well as the four-lateral agreements that we have entered.

The government is taking new decisions to freeze tariffs. All these measures in total have provided an incentive to invest in oil production, improvement of the rates of refinement, and the increase in the production of high-quality oil products. And as I have mentioned it did not take long to see good business results. For instance, the investments into the oil sector of Russia by nine largest Russian companies reached 1.5 trillion rubles in 2012 alone. Rosneft’s share accounted to 45% of the total, by the way.

However, it is not surprising, because the quite recent past of the 1990s had clearly shown that even relatively short period of underfunding of the oil sector development inevitably leads to a prolonged and sometimes dramatic reduction of key performance indicators, including oil production, stock replenishment and subsequent worsening of financial results. For example, the oil production plunged to 300 million tonnes in 1995 from 520 million tonnes in 1989.

As it was mentioned not once, the latest changes in the taxation of offshore and tight oil products have created favorable conditions for investments. And Rosneft has really huge investment plans. The anticipated investment through 2022 totals 9.5 trillion rubles, including 80% into exploration and production of hydrocarbons, partly in offshore and new East Siberian fields. Our expertise of developing offshore fields in the Sea of Okhotsk, where we managed the Vankor field, makes us certain that the fulfillment of national-level tasks, such as the production of oil and gas on the Arctic shelf, the development of East Siberian resources, the completion of modernization program and the development oil refinery and petrochemical businesses, does not only ensure high profits for the company, but also creates points of growth almost in all sectors of the national economy.

The investment portfolio of the company includes lots of effective oil and gas production projects. The investments into hydrocarbon exploration and production on land will amount to 6 trillion rubles until 2022, including 2 trillion rubles into new field development. We expect the launch of new fields into operation, particularly those in Eastern Siberia, will provide a significant synergetic effect, thus opening new vistas for the long-term use of the ESPO pipeline and facilitating the overall development of East Siberian and Far Eastern regions.

The company is engaged in a variety of offshore projects in almost all seas washing the territory of Russia. The work is under way under 44 licenses, with the total recoverable stocks estimated at 42 billion tonnes of oil equivalent. The oil and gas resources in our licensed Arctic fields alone are worth 34.6 billion tonnes of oil equivalent. The anticipated contribution of Arctic projects thus accounts for 80% of the total stocks. Importantly, we have plans to localize the production of up to 70% of equipment as part of our offshore projects. It means that offshore field development will help create from 300,000 to 400,000 high-skill jobs in various sectors of the Russian economy. It is indeed a good way ahead for the development of innovations and high technologies in our country.

Assuming that Russia is bound to take the lead in the development of Arctic fields and the export of innovative oil-servicing technologies, we understand that the modernization of our oil refineries is yet another critical section of our investment plans. As soon as the upgrade is over, we are sure to see a growth of oil refinement, with a subsequent increase in the production of high-quality oil products. Our flagship project here is the VNHK (Far East Petrohemical Company) facility in the Primorye region.

Rosneft is looking forward to achieving the maximal effectiveness of its operations, and a synergy from its new acquisitions in the amount of more than $12 billion, taking into account the discounting effects. Presently I can inform you that we have obtained the assessment of the fair price of all assets and commitments of all companies of the former TNK-BP group. The assessment was made by Deloitte&Touche at the time of the deal. Based on it, the fair price of net assets of the company amounted to 1,934 billion rubles – up 167 billion rubles from what had been paid as reimbursement. The sum will, of course, be revealed in the preliminary results of the company operations for the nine months.

We expect the subsequent increase of dividends for our shareholders in compliance with the dividend policy. It is clear that the oil sector will remain the most important driver of the economic and technological growth in Russia in the next decade. The trend persists in many parts of the world, and lots of projects in Australia, Nigeria, in the Northern Sea, in Alaska and the Mexican Gulf attest to that as well as a number of shale gas initiatives.

Thank you!

Slides to the speech by Rosneft President and Chairman of the Management Board

Script of the discussion at the plenary session

About shareholders

Dmitry MEDVEDEV: Instruments are the most important leverages of investment climate. However, it would be wise to look at ourselves first. I have just said that the state-controlled companies are doing a lot. Here is one of the heads of the largest company, where the government has got a control stock, Igor Sechin. It is important that the government should demonstrate exemplary responsible behavior. Including where the operations of the companies it controls are concerned, such as Rosneft, Gazprom, RXD and others. It should show examples of correct corporate values. Indeed, we used to have unending corporate conflicts in some sectors some time ago. The conflicts resulted in capital flows and changes in the charter capital. And Rosneft was not an exception. So, I think the government should start from itself – demonstrate correct corporate standards and corporate values. Actually, I know that the issue of TNK-BP minority shareholders has not been settled by Rosneft yet. Has it, Igor Ivanovich [Sechin]?

Igor SECHIN: No, Dmitry Anatolievich, it has not. We inherited it from TNK as a result of the asset buyout.

Dmitry MEDVEDEV: That’s it! It means another shareholder – the control-stock holder – is responsible for the development of the company. And the control stock is held by the government. I believe it would be wise for the government to demonstrate an example of a correct behavior and come out with a decision to ensure a better investment climate with respect to the concrete company’s minority shareholders. Why not redeem their shares? If you are ready, I will sign the respective resolution today. What do you think, Igor Ivanovich?

Igor SECHIN: Dmitry Anatolievich …

Dmitry MEDVEDEV: It seems like there are many minority shareholders in the audience here. You all are getting so excited.

Igor SECHIN: Dmitry Anatolievich, taking into account your solicitude, I believe the company will fulfill your suggestion voluntarily, despite there are no legally binding commitments on our part to redeem those shares.

Andrey SHARONOV: Thank you!

Igor SECHIN: The Rosneft board of directors will discuss the issue and make the decision soonest to take over shares from these shareholders on fair term, which will be coordinated with international experts in order to take into account the interests of minority shareholders. We suggest setting the average weighted price of a share on the basis of stock exchange quotes for the last 18 months. This period will embrace the prices prior to the time when BP announced the withdrawal from the asset, so it will take into account both ups and downs, and will reflect the fair price of the shares. The bonus to the current price is likely to be 20 or 30%.

Dmitry MEDVEDEV: Do you have enough money for that?

Igor SECHIN: We have money, Dmitry Anatolievich.

Dmitry MEDVEDEV: Good! Then do it, voluntarily.

Igor SECHIN: Thank you very much!

Dmitry MEDVEDEV: Thank you!

About taxation

Andrey SHARONOV: I ask Igor Ivanovich to take the floor for a brief speech. We have started speaking of instruments. Taxation is by far the most critical instrument. Taxes have at least two functions: a fiscal and a stimulating one. You have long worked for the government and have most likely been enforcing the fiscal function. But now you are working at the company and you are naturally more interested in stimulation. Tell us a couple words about it, please. As far as I got it, you have some more news.

Igor SECHIN, President and Chairman of the Management Board of Rosneft: Thank you very much! I’ll be very brief about taxes. I believe that taking into account the long term of projects in the oil and gas sector with decades and decades of working on them, the most important thing is the stability of taxation. The taxation will determine investments to the extent, to which the stability and predictability are ensured. In my opinion, we have had a very constructive and mutually beneficial dialog as far as tax bonuses to offshore projects are concerned. As a result, the Russian laws on offshore field development are the best in the world. Now we are working on hard-to-recover resources with the Finance Ministry and the government, seeking to find new approaches to taxation in the area. We believe our new projects will ensure a multiplying effect, which can be used as a pattern to develop a model of consolidated groups of taxpayers with equal taxes within the sector. We are working and will continue working on that. However, I repeat the most important thing is the stability of taxes for our projects. We have just received news, after your information about the directives, Dmitry Anatolievich, you have signed. Rosneft’s shares inched up 0.61% in just 15 minutes, while the market has gone down 0.7%. This is a real effect.

About management

Andrey SHARONOV: Igor Ivanovich!
Igor SECHIN: Thank you very much! I am looking forward to proving that the professionalism of managers does not depend on the type of ownership of the company they manage. I am going to set up the best managerial team ever on the basis of Rosneft.

Keywords: Igor Sechin, International Investment Forum, Sochi