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President of Russia Dmitry Medvedev: Colleagues,

Yesterday, some of us here, including chief executives of major Russian companies and Government members, discussed general issues of technological re-equipment and modernisation of our economy [at a meeting of the Presidential Commission for Modernisation and Technological Development of Russia’s Economy]. Today, we meet to address one of the most important sectors of our economy, the fuel and energy industry, so we will talk about how to develop it.

Let me note that in December of last year at a meeting in Moscow we already discussed the ways to shape a new legal framework for international cooperation in energy and agreed that we would have a separate meeting to assess the industry’s performance in 2009.

And so, I would first like to say a few words on this topic.

2009 was a difficult year for energy companies, and for the nation as a whole. The production of primary energy sources decreased by five percent. While oil extraction indices were somewhat positive, though just barely, we saw significant drops in gas, coal, and electricity outputs. You are all familiar with the figures. For the most part, this decline was due to such objective causes as a reduction in national industrial manufacturing, lower coal prices, and fairly warm weather conditions at the beginning of the heating season.

Fuel and energy sector accounts for almost a third of Russia’s GDP and around 40 percent of all budget’s tax and customs revenue. Although our key goal for the upcoming years is to modernise our economy and make it less dependent on exports of raw materials, we nevertheless consider developing the fuel and energy industry to be our greatest priority. The overall country’s economic wellbeing depends on the sector’s stable performance and continued development. In any event, this will be true for some time to come, despite all of our efforts to stimulate growth in other industries and to develop other sectors. It is imperative to use the entire range of possibilities available, from state support and liberalising regulations in individual areas, on the one hand, to toughening supervision in areas where it is now required, on the other.

I would like to specifically focus on key tasks demanding our particular attention.

First of all, we must develop and launch a long-term market for electricity capacities and create the right conditions for investment in new generating capacity. Among other issues, I am referring to introducing on a national scale a new tariff regulation method in electric power distributing since 2011. I expect the Cabinet will shortly have a meeting on the subject to make all the decisions required, and I therefore will not focus too much on this issue now, since our colleagues plan a separate, special discussion on the matter.

Second, modernisation of existing oil refineries, and construction of new ones must be accelerated. We must produce competitive, high-quality petroleum products that meet world standards. This is a priority for all our major energy companies. Incidentally, I already gave specific instructions to Deputy Prime Minister Igor Sechin in December 2009 and would like him to report today on the corresponding results and to present the plans for proper utilisation of associated gas. This has become a popular topic, widely discussed but hardly approached in practical terms. Nevertheless, we already have promising technologies and hence must ultimately decide what is to be done to implement them in Russia; if necessary, this may include government support measures.

Third, there need to be effective incentives for fuel and energy companies to encourage greater investment and innovation in developing new hydrocarbons deposits and rationally using sub-soil resources. This will require corresponding amendments to tax and customs legislation, as well as improving the entire state regulation system in this area, so I think relevant suggestions should be drafted on export taxes and on preferences for companies operating in difficult [climatic or geographical] conditions at complex deposits. Such suggestions should cover all the aspects to be addressed in the context.

Particular attention should be paid to the coal mining. I have just come here from Kemerovo, our national leader in coal mining. A new project was just launched there – a very interesting project for industrial extraction of methane from coal seams.

At the same time, we have traditional coal mining as well. We need to resolve issues of increasing competitiveness of this type of fuel and ensuring industrial safety at mining companies. By the way, projects such as the one launched today [in Kemerovo] are very effective means for complex resolution of existing problems as they both improve mine safety and produce extra added value through exploitation of such advanced coal fields. Overall, they help to resolve an array of problems, so it’s good the issue is now approached in a proper manner.

At the same time, social and economic problems faced by single-company cities and towns built around mining enterprises must be carefully addressed.

I would also like to discuss another important topic. We need to create a unified system of recording and monitoring transportation of oil products, as well as an integrated itemised list of oil products to be used for customs clearance purposes. Unfortunately, even though oil exports are really essential for us as they generate significant revenues for the government, for the producers, and for their shareholders, there still is no detailed up-to-date regulation in this area. The oil products identification methods currently employed for customs clearance allow for the highly refined oil to be exported as raw materials, petroleum oil, combustible liquid, heating oil, etc.

One of the reasons for the large number of illegal incisions into the pipelines, as well as other ways of stealing hydrocarbons, is the manipulations in oil refining and oil products processing. We must sort that out. I hope our colleagues will cover the problem in their reports and we will ultimately come up with a number of instructions.

I would like to specifically emphasise that today we are not only talking about point-by-point responses, although they are essential as well, and the development of this industry depends on the implementation of concrete projects. Still, ultimately, the decisions we make together will determine whether Russia remains a leading global energy power or is pushed aside in spite of our enormous reserves and our licensed and non-licensed stocks we are so proud of and use so actively. We may indeed find ourselves trailing behind.

I would like to conclude my opening remarks with the issue I brought up at the beginning. We must strive to modernise our overall economy and introduce innovations, not only in the new sectors and the high-tech industries in the literal sense, but in our traditional economy as well, including the fuel and energy industry. Our success will determine the wellbeing of our nation and our people.