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Excerpts from Address to a Nationwide Conference on the Development of the Fuel and Energy Sector

March 3, 2000, Surgut

Vladimir Putin: Good afternoon.

In recent years the fuel and energy complex has been a factor of stability in the Russian economy. In the coming decade it should become a factor of growth.

Today, the energy sector contributes up to 30% of the consolidated budget revenues, nearly 45% of currency earnings and about 30% of the country’s industrial output.

The results of 1999 are as follows: overall growth in the fuel and energy sector has been 8%. The highest rate of growth has been achieved in the coal industry, where it has been over 7%. Oil production has grown by 0.5%, which is a marginal increase. Oil refining has increased by 10% and power consumption by more than 2%. Investments in the fuel and energy sector have increased by more than 15%.

We have managed to defuse social tensions within the industry. Disputes with coalmen have largely been settled. Wage arrears in the entire fuel and energy sector have dropped by nearly 17%.

However, the safety margin built up by investments in the previous decades has been practically exhausted. The basic production assets are outdated and run down. All this threatens power supply and national budget revenues.

There is yet another side to the issue. A distinctive feature of the sector is its dependence on world oil prices. For a country it always carries a potential threat of financial and social upheavals, like those we experienced in 1998.

I don’t want to remind you of the consequences a drop of prices entails, but we should always be prepared for them. We assume that there will be no major slump, but at the same time we have to be assured of the country’s energy security, which ultimately means social stability.

It is necessary to work towards a more rational structure of foreign trade, to diminish the export of raw materials while increasing the export of petroleum products, petroleum chemistry, power and the products of other industries.

We already feel the signs of an industrial recovery. But in some regions production growth is hampered by the lack of solvent demand for energy, and indeed, of energy itself. Major companies in some sectors have even been laying off workers. Initially they recruit personnel and build up the pace of work and then, because of power or heat supply shortages, curtail production and cut jobs.

It is in the interests of the state – long-term, strategic interests – to increase supply of energy to the domestic market. That, of course, requires that certain conditions be met, such as a reduction of debt defaults and increased output in the processing industries.

One strategic conclusion is that the state should initiate robust measures to protect domestic fuel and energy enterprises in the international arena. Any restrictions introduced against our companies and goods should be scrutinised and challenged, and better still, prevented.

I don’t think enough effort has gone into this up until now. In the new conditions it is an imperative. There needs to be diplomatic support in getting foreign partners to pay off their debts and cut transit and other tariffs. Directives to the effect will be sent to all the Russian embassies and trade missions.

You know as well as I do how aggressively other states defend their producers in the international markets. The leaders of foreign states – our partners – are not shy of openly raising such issues at the highest level. They do not only wait for these issues to be resolved but sometimes aggressively press for it. In that sense, we have huge reserves. For example, the overall debt of the CIS countries for energy supplies is estimated at about 70 billion roubles.

Our interests lie in the development of Sakhalin and opening up of the Kara Sea, in building new ports on the Baltic and the Black seas, modernising existing and laying new pipelines, and consolidating a common energy market of Russia, Ukraine, Belarus, Kazakhstan and Turkmenistan, as well as in building energy, gas and oil bridges to China, and in active cooperation with Azerbaijan and Turkey.

We should sell our energy to the largest possible number of countries and look for new partners. We should build our work proceeding from the geostrategic interests of the Russian Federation.

Today, the production of hydrocarbon fuels does not match its consumption inside the country. The so-called “gas pause”, that is, the period when gas extraction grew five-fold and its share in the country’s fuel mix by only three times, is practically drawing to a close.

So, the next conclusion is that the structure of the fuel and energy mix should be urgently changed. The new vision of the problem should seek to optimise the price correlation of different interchangeable energy resources – coal, gas, fuel oil.

Development of a national energy strategy for a period up to 2005–2015 is a truly important issue. Its aim should be to ensure the country’s energy security and lay the groundwork for continued economic growth.

In order to enter the world economic system we need an industry that uses energy effectively. As it is, in the past decade the energy consumption per unit of GDP increased by 21% instead of falling.

Obviously, a dramatic decrease of the energy-intensive character of the economy will boost production and encourage the introduction of high technologies.

Improving the mechanism of export duties is a serious issue both for the state and for the industry. It is the duty of the Government to make it transparent and clear. This leads to an important conclusion: we need guarantees against arbitrary change of duties, against arbitrary decisions on these matters by individual officials, and any change of export duties must be tied in with the dynamics of world energy prices.

I am not sure that all of you are aware of it, but the Government is trying to develop such a mechanism.

This new approach will enable companies to do effective investment planning and to attract investors.

Tax policy needs adjustments. Its prime aim should be not only to replenish the budget but also to increase investments. We are fully aware of that.

In general, I won’t go into details, but of course the main thrust of our work will be to ease the tax burden in the economy as a whole, and also in the fuel and energy sector.

At the same time we need to take a long hard look at the tax system. Not only the Government but also what used to be called “broad masses of working people”, ordinary citizens, often feel like asking a legitimate question: how much of the $1.5 billion flowing out of the country every month is money from the fuel and energy sector? After all, the subsoil resources belong to the state. It is no secret that oil companies use offshores, both foreign and our own.

Some questions may be asked about the so-called “large-scale Russian investments abroad”, especially since Russia itself is starved of investments. I must say that we are not against civilised offshoring, although, to be honest, I do not want even to discuss the issue here today. I think we should discuss ways to improve the tax system.

The main direction of our efforts is to create a stable investment-friendly environment in Russia. The situation with explored resources needs to be addressed urgently. As a result of the dramatic slowdown of geological prospecting in the last eight years, the proven resources dropped by more than 9.5%, and in Western Siberia by more than 16%. The increase of reserves cannot even make up for current extraction of energy resources.

In fact, we are living off the resources previously explored. You understand better than I do that this is a dangerous situation. The rest of the civilised world acts in the opposite way: exploration outstrips the rate of current extraction. So, it is necessary to introduce amendments to the laws on the use of subsoil resources. Companies need incentives to conduct geological prospecting at their own cost. Small companies should have an incentive to develop fields whose resources have not been fully tapped.

The depth of processing in the oil refining industry is a major problem. In Russia it is 67% on average. You know that in the US it is 90%, the same as the world average. Obviously, our indicators must be improved. But the improvement should be closely connected with efforts to reduce the consumption of fuel oil in the power industry. Deeper processing should not provoke a new crisis in providing the economy and households with heating and electricity. This is to be borne in mind by the Ministry of Fuel and Energy and the Ministry of the Economy.

The next issue is payment discipline both in the country at large and in the fuel and energy complex. It has to be admitted that the Government has itself to blame for non-payments for energy resources. The situation cannot be tolerated, and we are already taking many steps to rectify it. For example, we have introduced consumption limits. We are aware that this is not enough. These are administrative measures.

The task of the state is to have all the public sector consumers pay off their debts to energy suppliers. These measures should form part of a comprehensive fuel and energy sector development strategy. However, there are many questions to oil companies as well. I think the Government should take a tougher stand with regard to the parent companies over the debts of their subsidiaries.

Now a few words about the problem of energy supply. It is necessary to step up work on energy efficiency. It is all the more important because the adoption of energy saving technologies and more efficient use of energy will make it possible to raise tariffs and the incomes of the fuel and energy industry as a whole.

With tariffs as low as they are today, neither companies nor households have any incentive to save energy. In fact, investment in energy saving is becoming unprofitable. As for households, I think more progressive forms of economic incentives should be introduced. We know what these forms are.

I would like to indicate the Government’s position with regard to natural monopolies. We understand that these companies contribute a lot to supplying the nation with energy. So we will do all we can to help them. But it is equally important to control their work. I am sure that structural changes should not take place unless the consequences of such a step for the country as a whole are clearly understood. We will proceed with care on these issues.

The Government will also encourage competition and the introduction of new product lines by all the companies. And it is an absolute must to achieve transparency of the business and financial activities of all the companies in the sector. The Government controls access to subsoil resources and the system of fuel and energy transportation, and it is our duty to strictly monitor compliance with the terms of license agreements. Violators should be stripped of the right to use subsoil resources. We will shortly be conducting an inventory of this sphere and will make appropriate decisions.

I anticipate the reaction to my statement, but we can no longer afford to act otherwise. Trade in licenses should also be stopped.

Yet, our strategic goals coincide with those of the companies working in this sphere. They are the development of the country’s economy and turning the fuel and energy sector into a factor of growth. Tactical objectives should be discussed and agreed with an eye to that perspective. Clearly, the problems I have enumerated cannot be tackled separately from one another. Partial or half-hearted measures merely worsen the situation and engender a new crisis. I would like to repeat that all the decisions should be taken strictly in the framework of the common energy strategy, whose main goal is to ensure the country’s energy security, enhance its economy and make it more competitive overall.

Thank you.

March 3, 2000, Surgut