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Meeting with Energy Minister Alexander Novak

July 25, 2016, The Kremlin, Moscow

Vladimir Putin had a working meeting with Energy Minister Alexander Novak to discuss the situation in the fuel and energy sector.

President of Russia Vladimir Putin: Mr Novak, let’s discuss the sector’s results for these last 6 months. Are the indicators good?

Energy Minister Alexander Novak: Mr President, we have prepared a detailed presentation of the sector’s results, but let me try to give a brief account of the main results.

Let me start by saying that the sector’s companies showed stable performance over the first half of 2016, ensured our energy security, the supply volumes needed, and the range and quality of energy products and services.

As for the production results, we produced 270 million tonnes of oil over the first 6 months, which is an increase of 2.1 percent compared to last year. Our coal production was up approximately 6 percent with a figure of 186 million tonnes.

Electricity generation rose by 1 percent, which shows that there is demand for electricity and an increase in consumption. This is a positive thing.

In the gas sector, we saw a drop of 1.3 percent over the first half of the year. This is linked to the fact that hydroelectric power plants were working harder and also the warmer winter. We expect to reach a similar figure to last year by the end of 2016.

Vladimir Putin: What about production?

Alexander Novak: We maintained our leading position on the export market, despite the fact that competition is particularly fierce right now.

Vladimir Putin: [ Gazprom CEO] Miller said there was even an increase in exports.

Alexander Novak: Yes, our gas export volumes were up by around 6 billion cubic metres compared to last year, which represents an increase of 6.8 percent compared to the first half of 2015.

Vladimir Putin: That’s a good result.

Alexander Novak: The increase was 6.2 percent for oil and 8.2 percent for coal, despite the fact that, as you know, China has reduced its imports and we are continuing our work with them on simplifying quality control procedures.

But Mr President, our total coal exports to Asia exceeded our exports to Europe for the first time this year. Exports to Europe used to be the bigger market, but this year, we now have 51 percent of exports going to countries such as Japan, South Korea, India and Vietnam.

This Asian market is developing and we are developing our port infrastructure too. Exports are growing despite the price difficulties. We still have quite low prices for oil, gas and coal.

But let me note too that our energy sector companies are coping well now with the fierce competition today and are holding their own on global markets.

Let me add that we have set the goal of not just meeting domestic demand and maintaining our leading position on markets abroad, but have also set the priority task of diversifying energy sector companies, modernising work, and producing higher value-added goods that will make it possible for us to build new facilities in Russia, sell finished products, and reduce our dependence on some types of imports.

This year, we have also increased production of gas chemical products as part of the programme to develop the gas chemical industry. This year, we already see and forecast a 15-percent increase in production of bulk polymers that are processed and then used in the production of chemical goods.

This year, starting from July 1, we made the full transition to using fifth-class oil products in Russia. In other words, our companies have modernised their refineries and the 12 new facilities that started operation this year meant that we were able to complete the transition by the deadline of July 1 that we set.

Vladimir Putin: This modernisation you speak of now, we talked about the need to carry out this work 5–6 years ago now. The companies already had some plans then. Do you think these plans are being carried out?

Alexander Novak: Mr President, these plans are being carried out as far as concerns the transition to environmental fifth-class products. But the financial difficulties last year meant that the launches of 16 facilities have been postponed. This year, we are bringing 12 facilities into operation and another 36 will start operation over the period through to 2018 inclusive.

This minor postponement will not affect our ability to produce quality products. Most important is that in just five years we have ensured the transition to fifth-class products and this reduces harmful emissions hundred-fold or thousand-fold.

This took European countries 10–15 years. We have done this in very quick time, over which our companies made very substantial investments.

Vladimir Putin: We discussed this at one of the meetings in Kirishi.

Alexander Novak: You adopted the programme in 2009 and we are carrying it out. We will continue to monitor it, of course. All 135 facilities will be brought on line in order to complete the modernisation of our oil refineries.

Let me add here that the modernisation work has led to a drop in fuel oil production. The drop was 21 percent this year. These are low-quality oil products. This year, we will produce only 56 million tonnes, whereas we used to produce 78 million tonnes.

This means that these more than 20 million tonnes will go through deeper refining and be used to produce products such as high-class petrol and other goods such as bitumen for roadworks, higher quality products in other words.

We are doing the same in other areas. In the coal sector, we are introducing new enrichment methods. A world congress just took place at the Mining University in St Petersburg. This event takes place once every three years and studies coal enrichment.

Russia is one of the leaders here and is increasing its share of enrichment every year. We currently have a figure of 51 percent. Not so long ago it was 30 percent. We plan to bring it up to 85 percent. This is deeper processing of the coal that will then go on the market.

Vladimir Putin: Mr Novak, how has the tax manoeuver affected the sector?

Alexander Novak: Mr President, we are monitoring the situation with the tax manoeuver. Of course, at the time when this was all calculated oil was at around $100 a barrel.

The price is lower now – $50 a barrel – and the parameters set through the reduction in the export duty and increase in the tax on subsoil resources production differ somewhat now to those originally foreseen.

But there has been no substantial negative impact on the sector, although some oil companies have lost out from the tax manoeuver because with the lower prices we now have, the higher subsoil tax rate remains stable and applies to all production, but the lower export duty is collected in lower volumes.

We think that this tax manoeuver should end and that, starting from January 1, 2017, final parameters should take effect, the third change to parameters, with a 30-percent reduction in the export duty and an increase in the subsoil tax. It is important to change the decisions that were taken because the companies plan their activities based on the decisions that were taken.

Let me say that decisions taken back in 2009 and implemented through laws and regulations have encouraged development of difficult-to-access oil deposits.

Production in this area increased by nearly 15 percent this year. Our companies continue to work despite the difficulties with raising financing and getting foreign companies to take part.

I want to say a few words about import replacement. All companies have got actively involved in this work and, working with the state companies and state management system, have drawn up individual import replacement programmes and long-term contracts with Russian companies, and we are now seeing the fruits.

I can say, in particular, that in the electricity sector, one of the problems we had was that we were completely dependent on imported generation equipment, especially the hot section blades.

This year, in Yekaterinburg, ROTEK Company, working at the Urals Turbine Plant, has mastered the repair and maintenance of these blades at our gas turbine generator facilities.

Vladimir Putin: So, our energy companies are increasing their orders with our industrial companies?

Alexander Novak: Yes, and our companies are now taking this entire market. Companies such as Siemens and General Electric, seeing this situation, (they used to hold 100 percent of this market), are now opening facilities here in Russia.

Transneft, for example, opened a plant in Chelyabinsk to produce large Russian-made pumps together with the Italians, and the production is now localised in Russia.

Vladimir Putin: It used to be in Ukraine?

Alexander Novak: Yes, we mostly purchased this equipment in Ukraine, from the town of Sumy.

I can give you a positive example from the oil production sector. In this sector, we often use foreign technology, especially guided rotor equipment, for horizontal or directional (slant) drilling.

Today, Gazpromneft has tested Russian-made models produced by Russian companies and St Petersburg research organisations at the Vyngapurovsky deposit.

Once these tests are completed by 2019, industrial production will begin and we will be freed in full from dependence on imported technology.

Work is underway now on software and telecommunications equipment, the kind of modern technology we used to buy abroad, in other words. These are just a few examples of what we have accomplished of late under direction from you and the government. We are carrying out the programme to reduce dependence on foreign technology, and this guarantees our companies’ stability and keeps them busy.

Vladimir Putin: Good. This means that our economy’s high-tech sector is developing.

Alexander Novak: I would like to say a few words about investment. Despite the low prices and the problems with raising investment from external sources, we forecast an investment level of around 3.6 trillion rubles in the sector this year. The figure last year was around 3.1 trillion rubles, and so this is an increase of nearly 15 percent.

We see investment growth in the oil sector and in the gas sector. As we know, Yamal LNG increased investment in 2016. In 2015, they already invested a little over 400 billion rubles, and this year will invest even more.

Investment is up in the coal sector too, in the oil sector, and in electricity generation. We see that companies continue to invest and find money even in the current situation. This year, nearly 6,500 megawatts of electrical power will come on line. 1,400 megawatts of capacity came on line in the Chelyabinsk Region during the first half of the year.

Vladimir Putin: This is a lot; it’s at the level of previous years’ records.

Alexander Novak: The entire GOELRO [electricity development] programme adopted 95 years ago planned to bring on line around 3,500 megawatts. We are doing in a year what earlier was done over 5–10 years.

Overall, the programme for modernising capacity that you adopted in 2009 has been 85-percent completed. In other words, we will have brought on line nearly 26,000 megawatts of new capacity by the end of this year, and the remaining capacity and new facilities will come on line in 2017–2018.

The task now, of course, is to develop not just new fixed assets, which this programme has modernised by 10 percent, but also decommission ineffective old facilities and put in place the conditions for modernising old facilities.

We will not have to develop total installed capacity further over the coming few years, but we do need to continue internal modernisation and decommissioning ineffective capacity. For this work, we can propose a separate programme to the one adopted in 2009.

The last point I want to note is that one of our objectives is to increase competition between companies on the domestic market and ensure a transparent pricing mechanism.

We are developing an exchange mechanism to ensure competition. It is a positive development that over the first half of this year we have trading in natural gas increase two-fold. More than 58 companies now take part in buying and selling gas.

Vladimir Putin: This is very good because it means that independent producers’ possibilities will develop too.

Alexander Novak: Independent producers are already taking part in this trading. Rosneft is taking part and so is Novatek. Gazprom accounts for 56 percent of trading and the rest is independent companies.

We are also continuing this kind of trading in oil products too and we now have around 20 percent of trading happening this way, which sets a benchmark for oil products as a whole. This has helped too to keep prices at the petrol stations down. Prices have increased by 3–4 percent since the start of the year, which is the lower than the consumer price index. The oil product trading has played a big part in this.

Now, together with the Federal Antimonopoly Service, we are developing an exchange platform for oil too. One aspect of this work was to establish a benchmark for Russian oil, in other words, establish the trading benchmark – Urals. We briefed you on this and you gave the instruction to go ahead with it.

Now, the first trade in supply contracts will take place on the St Petersburg exchange by the end of this year. There are around 45 million tonnes of oil at the port of Primorsk that can be sold, and we will be trading Urals oil for the first time.

Vladimir Putin: This is an important development because it will also have an impact on price formation.

Alexander Novak: Yes, there is the price formation aspect, and then there is also the discount of between one and three percent that we get from pegging the Urals price to the Brent price. It should come down further and our companies will thus gain extra profit and this will bring more tax revenue and revenue in general for the country. Most important, it means we have stable price formation that is not dependent on manipulations with the Brent brand.

I wanted to speak too about what I think is one of the important areas of work now. We are also developing and simplifying procedures for getting connecting to the energy infrastructure. You know the results we have had in the electricity sector, where we have moved up from 183rd to 29th place in just a few years. Now, we have developed a roadmap for a similar programme in the gas sector.

Vladimir Putin: There is still a lot of work to do in all areas, including electricity and gas.

Alexander Novak: Yes, I agree. This is just the start. On electricity, working together with the Agency for Strategic Initiatives, we have already carried out a lot of measures.

In this work, we will need to spread the positive experience gained in Moscow, St Petersburg, Moscow Region and other regions. We are engaged in this right now. This is one of the objectives we have set.

In the gas sector, we are still only at the start of the road and we will need to carry out these tasks. There have been many requests in this area and we must now set about carrying out this work.

Vladimir Putin: We see good and positive development in practically all areas. We must continue paying attention to all of the areas you mentioned.

Of course, we need to work towards not just extensive but also intensive development of the sector. We need to modernise it, introduce modern equipment and management methods. I see that the results are good so far and I hope that the second half of the year will be better, not worse.

We must remember that the winter and the frosts are ahead, of course, and must ensure we are fully prepared for this season.

Alexander Novak: We are preparing for the winter and will brief you on this work in autumn.


July 25, 2016, The Kremlin, Moscow