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President of Russia Vladimir Putin: Could you begin with a review of the sector’s overall performance?

Energy Minister Alexander Novak: Certainly.

Vladimir Putin: Go ahead.

Alexander Novak: Thank you, Mr President. I want to sum up the results for 2014 and outline the main tasks for the year ahead. But let me start by giving a preliminary report on the situation over this latest autumn-winter period, seeing as it has been four months now since we began the heating season on October 15. One of the Energy Ministry’s main responsibilities after all is to ensure reliable and uninterrupted energy supplies for all consumers – households, industry and the economy in general.

Overall, the autumn-winter period is going as planned. The thermal, hydroelectric and nuclear power stations are all working as normal. Electricity supply to consumers is reliable and we have the needed fuel reserves – fuel oil and coal – for the autumn-winter period, as well as ensuring sufficient generation capacity and the energy grid’s normal operation.

As part of our preparations for the autumn-winter period, we carried out necessary repairs of basic infrastructure and equipment working over this period. This ensures reliable operation throughout the heating season.

Our reserves of coal and fuel oil are higher than the norm: 180 percent for coal, and 140 percent for fuel oil.

In 2014, we brought 7,400 megawatts of generating capacity into operation – a record result for recent years. Overall, we have brought around 20,000 megawatts of capacity on line over the last three years. This is under the programme that began in 2008 and the agreements on power supply. Now we have reached the stage when we are bringing new generating capacity into operation every year. This comes to 10 percent for the last three years.

Vladimir Putin: How much investment is involved?

Alexander Novak: Total investment in the sector came to 3.5 trillion rubles.

Regarding the electricity sector, 830 billion rubles – a considerable sum – was invested in 2014. We have total annual investment of around $25 billion.

It is important too that we have essentially modernised and renovated 10 percent of basic stock over the last three years. This makes the sector more reliable and increases our reserves. The only issue that requires particular attention now and that we have made our objective for this year is the question of decommissioning old and inefficient facilities. 

We have around 15,000 megawatts of generating facilities that do not make the grade today but that are nonetheless still needed for supplying power to rural areas and cities.

Vladimir Putin: Where are these facilities located for the most part?

Alexander Novak: Mostly in Siberia and central Russia. These are old facilities that came into operation in the 1950s-1960s and in some cases even before the war.

They have been fully depreciated today and now we need to either modernise them or decommission them, including in the regions.

One of the things that marked last year was low water levels, especially in the Baikal basin, where the water levels were 42 percent lower than usual. This affected hydroelectricity production, with electricity production down by around 9 billion kilowatt-hours. We had to compensate by increasing production at the thermal power stations, and this required us to increase too the fuel supplies for these power stations – coal, gas and so on. However, the sector has coped with these demands and we hope that this next year will be a better one. 

Another thing that stands out is that the average temperature was 3.9 degrees higher on average this year. This meant that we often had temperatures above zero during the winter period, which creates conditions for ice formation on electricity transmission lines. We had to double the amount of work to de-ice electricity transmission lines compared to last winter. We had cases of abnormal weather such as ice rain too, but the electricity sector has been up to the task.

We increased our tree-clearing work by around 30 percent this year, so as to prevent trees from falling onto power lines. Overall, the number of accidents in the grid network as a whole decreased by 14 percent last year. But there was a 7 percent increase in accidents at the generating facilities, mostly due to human error.

There were two major accidents, although they did not result in power being cut off to consumers and had no economic consequences. Still, over the last four months, we have had 61 accidents, or technical incidents, to be more correct, which have caused power blackouts of more than 10 megawatts. We monitor and investigate figures such as this – higher than 10 megawatts.

Overall, as I said, we had fewer accidents than last year, but there were nonetheless two accidents that I wanted to bring to your attention. One of these was the technical incident that took place at Rostov Nuclear Power Station on November 4.

Human error on the part of personnel during repairs to power lines at the Yuzhnaya Power Station in Rostov disrupted the station’s normal operation, shut down 500-kilovolt power lines and cut Yuzhnaya off from the rest of the grid.

Normal operations were restored within four hours, but this was nonetheless an incident that stood out in 2014, and so we set up a special headquarters to examine the situation and find solutions to ensure that such cases do not happen again.

The second case concerns Surgut-2 Hydroelectric Power Station, one of the biggest in Europe. A fire in the turbo-pump set oil alight, also caused by human error, leading to the collapse of around 1,300 metres of the facility’s roof, and this in the winter, on January 4. A headquarters to coordinate repair work was set up immediately and the affected zone was isolated from the rest of the facility and thus did not affect the station’s generating capacity overall.

The different services all responded swiftly and repairs are underway. The accident did not affect energy and heating supply in the region, but we are currently investigating the situation in order to make sure that a repeat does not happen.

Mr President, we are already planning for the next autumn-winter season and are currently improving the legal base in this area. As things stand today, the Ministry does not have official powers to lay down rules for liability if energy companies fail to prepare for the autumn-winter period.

In other words, we exercise these powers at our own initiative at the moment, and so we are proposing an amendment to the law in order to clarify the relevant powers of the Government and the Energy Ministry in this area.

Another important issue in our work is that the laws have changed somewhat since electricity reform began, and today, we have no clear set of technological standards for the electricity sector’s operation. In other words, we have no technical standards that set reliability criteria for equipment, the power grid, software and automated systems.

We have therefore drafted a document that will systematise everything at the national level and introduce a common set of standards for the whole country. This is an important document and we are currently discussing it with the market operators. 

Unfortunately, not everyone agrees with it, because it sets standards, and as we know, meeting standards is not always easy and involves financial costs and the corresponding obligations to make funds available and bear responsibility carrying out these demands.

Our objective this year is to have the Government approve and issue these standards. We have already done the drafting work. This is a big step.

Finally, we are putting in place the conditions and laws that we need to be able to decommission inefficient equipment.

Mr President, regarding the fuel and energy sector’s work, although the second half of the year was rather difficult in terms of ensuring financial resources, raising loans and making credit available to companies, I think that the electricity, oil and gas, and coal sectors have nonetheless succeeded in reaching their set objectives.

As far as production figures go, in 2014, the sector produced 526.7 million tonnes of oil, which is 3.3 million tonnes more than the previous year. This sets another record for the post-Soviet period and represents an increase of 0.6 percent.

Investment in oil production comes to 980 billion rubles, which is up by around 10 percent on 2013. This is sizeable investment that is enabling us to increase production in the strategic areas that we set as our objective and which you included in the tax reform provisions.

In particular, production in Siberia and the Far East increased by 4 million tonnes from 52 million to 56 million tonnes. We also had an increase in production of hard-to-access reserves of around 1.6 million tonnes, taking the total figure from 31 million to 32.6 million. These are the first results of the changes to the tax system.

Offshore oil production is also benefiting from the tax system changes. We drafted a facilitation plan in this area. Offshore oil production has increased by around 1 million tonnes.

Of this total increase, around 700,000 tonnes were produced by the Sakhalin-1 project and Rosneft in the Sea of Okhotsk, and around 300,000 tonnes was produced last year at the Prirazlomnaya platform, which has already begun operation in the Pechora Sea. 

Another of the results that I want to note today is the start of offshore operations by the joint venture between Rosneft and ExxonMobil, which have drilled their first exploration well. Last year, they discovered the new Pobeda field with large reserves: around 500 million tonnes of oil and big gas reserves.

Also, acting on your instruction to expand Transeft pipeline system’s capacity, we invested last year in expanding the ESPO-1 pipeline’s capacity from 50 million to 58 million tonnes of oil. This made it possible to increase oil supplies to the port of Kozmino and raise its throughput.

In the oil refinery sector, as I said in my report, we brought 13 facilities into operation and had total investment of 290 billion rubles. We have modernised and commissioned 47 facilities over recent years. This has made it possible to increase production of class-5 petrol to 65 percent of total petrol and diesel production.

This in actual fact puts us ahead of our target, but the most important thing is to continue this work, seeing as we have set the ambitious goal of having 100-percent production of class-5 petrol as from January 1, 2016.

To give you a few other results in the oil and gas sector, I’d like to note the figures on the degree of processing at our refineries. This is a complicated process that will see us abandon production of heating fuel in favour of production of higher quality petrol. We increased the figure from 71 to 72 percent over the last year, but as we continue bringing new facilities into operation, the figure will reach 85 percent by 2020 and our refineries will be producing only high-quality finished petroleum products.

Mr President, in the gas sector we are seeing a positive dynamic in carrying out our plans. But I am sure you understand that we faced somewhat volatile markets and this has meant that production was down by 24 billion cubic metres last year and came to a total of 642 billion cubic metres.

Our exports came to 186 billion cubic metres, which was less than in 2013. We had a figure of 203 billion in 2013, so there was a drop. But we implemented our plans and reached our goals with regard to developing the domestic market and carrying out your decisions on construction of the Power of Siberia gas pipeline in line with the contract signed with the People’s Republic of China. We are continuing to develop gas production for the Asia-Pacific region and build liquefied natural gas plants. Work on the Yamal LNG project continues and investment is being made. 

Among other positive developments, I would note the launch of a gas exchange here in Russia last year. Previously, we traded only petroleum products, but now we have an exchange trading gas too, and this helps to increase competition.

Vladimir Putin: Who are the players on this exchange?

Alexander Novak: Gazprom and independent companies are taking part in the trading.

Vladimir Putin: Which independent companies?

Alexander Novak: There is independent company NOVATEK, for example, and LUKOIL. Rosneft and Gazprom are state-owned companies. The buyers are our consumers, for the most part gas-fuelled thermal power stations.

The exchange covers most of the country. Gas supplies are coming from 17 different fields. The gas sales are made at three points from which the gas enters the gas transport system.

Unfortunately, the volumes are small for now. Only 800 million cubic metres have been sold on the exchange so far, but this is just the start of our work and we will develop it further. Under the Government regulation, up to 35 billion cubic metres of gas can be traded on the exchange. Of this total, Gazprom can account for half of the supplies and independent companies can supply the other half. In short, we are only at the start of this work today.

I’d like to say a few words about the coal sector, too. The sector continued to develop last year, despite the economic difficulties it faced. Even with the difficulties, 60 billion rubles of investment was made and several new projects were carried out in the Kuzbass region to develop new open pit mines, where coal production began last year.

Coal production came to a total of 356 million tonnes in 2014. This was an increase of around 6 million tonnes on the figure for 2013; in other words, we achieved our goal of keeping production at 350 million tonnes. Our objective is to reach 380 million tonnes by 2020 and 480 million tonnes by 2035.

We are working at the moment on developing the coal chemicals sector, the domestic market, and new projects, especially with our partners who want to take part in joint development of fields in Eastern Siberia and the Far East, such as the Ogodzhinskoye anthracite coal deposit and the Yerkovetsky brown coal open pit mine.

We will see these plans through in order to make sure that coal is mined and supplied not just as a raw material but that it is processed into coal chemicals or electricity and provides us with higher value-added products.

Vladimir Putin: You need the transport and infrastructure.

Alexander Novak: Yes, one of the tasks before us is certainly to work with the Transport Ministry to increase throughput capacity on the Baikal-Amur Mainline and the Trans-Siberian Railway. It is the Ministry’s task to ensure electrification of these expanded lines. Together with the Federal Grid Company and Rosseti company we are carrying out this project now and it is one of our priorities.

Vladimir Putin: You must make sure that the exchange operates as exchanges should, that more independent companies take part and that everyone complies with trading regulations. This is absolutely crucial, otherwise it could just turn into a fiction, and there would be no point at all.

As far as electricity generation facilities are concerned, I hope you have made all the necessary plans. You should go over everything again to make sure that we don’t end up in a situation where facilities are decommissioned before there is anything to replace them. This must not happen. We have new facilities coming into operation, new hubs in the grid, but it is essential to make sure that there are no unexpected surprises for consumers.

Alexander Novak: We plan to improve the work of both the wholesale and retail markets. Solvency and timely payments by our consumers are another important aspect for the sector’s reliable operation and for making all the needed preparations for the winter season.

Unfortunately, the situation in this area has worsened somewhat over the last months as consumers have been unable to fully cover financially for all of their financial and economic activities. But we have drafted a series of measures to correct this situation.

I want to note that debts on the wholesale market have decreased over recent years. This is a result of the measures we have taken and of the introduction of financial guarantee mechanisms for consumers buying electricity. We are now working on the retail market too, to ensure the needed level of solvency and make sure that payments are made on time.

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