Yuri Shafranik, Union of Oil & Gas Producers of Russia
Release Date: 2009-05-04
Usually the role of a Union is to represent the interests of an entire industry. But how does your Union reconcile the interest of oil majors, making most of their money in the downstream of the industry, and those of the independents, who have nearly no access to refining?You ask questions from the perspective of steady business and stable relations, while many spheres in Russia are undergoing dynamic changes, which are the continuation of revolutionary transformations in the economy and politics of the country that started in the 90-s. The Soviet Union collapsed and the pattern of ownership changed. These and other radical changes will continue to have an impact on the politics, business and other spheres of the social and economic life of the country in the next 10-15 years. We have a different perspective on a number of things, including those referring to the role of a Union. In the West, corporate bodies like our Union represent interests of the business itself and lobby certain issues.
Let’s take a short look into its history. We started to form corporate relations in very difficult circumstances. In 1992, when the Soviet Union collapsed, in Russia there was no even a ministry to run the oil and gas sector. We created this Union in Tyumen, when I was the Governor of the region, and my colleagues and I saw our mission not in representing anybody’s interests, but in leading the reforms of the sector within the national priorities. In 1993, I was appointed Minister of Fuel and Energy; I formed the ministry, and the Union continued dealing with reform of the sector.
Evaluating the results from today’s perspective, I can say that many things have been accomplished. Companies like Lukoil, Surgutneftegas and others, who were created as vertically integrated companies, maintained production and refining, retained and further developed inter-industry production relations, gained markets, and set the necessary conditions for their restructuring in the next coming years.
At that time we managed to do things that many other industries are starting to do only now; ship building, aviation, defense industries only now come to the idea of holdings and companies, while we created companies already in 90s.
Since then, 16 years have passed and many things have changed. First of all, the authorities became stronger and more experienced. The functions of the Union have also changed. We still lobby, but our main mission is to give advice and make proposals to the Government. Our proposals, in my opinion, are supported and in one or two years reflected in the decisions made by the Government. That is why our union is so valued and respected. The time when we could highly influence politics is over, as the former President and today’s Prime-Minister says “business is for business and politics is for politics.”
Now, regarding your question about representing interests of both small companies and the majors… In 1996 after the beginning of the reforms, when we were creating big companies we gave impulse to the development of smaller companies as well. We made it through a number of laws and regulations, and at that time actually 16% of the whole production volumes belonged to small and medium companies. Today, that percentage hardly reaches 2%! Small business today is burdened with tax. We realize this problem and our mission is to analyze the issue, try and persuade the Government and the State Duma that it is very important and that resolving it is in the national interest. And may be then we will approach the western classic lobbying system.
So what are the main differences in your opinion between Russian oil and gas companies and western ones, beyond giving back much more to their countries in terms of tax and, in the eyes of an outsider, being less transparent when it comes to their shareholder structure?
We are still in the process of developing. When creating the companies, I firmly believed – and my ideas were accepted by the Government as well – in the idea of creating the companies on the basis of the state property. And that’s how the companies were created. But we should not have given the companies to single persons. I was strongly against it. The Government should have sold the companies publicly, with no rush, step by step, making big money. But it all went in a different direction. I think the Government shall now make more efforts to make the companies become public –by means of emissions, attraction of investments, which then shall be put into production. The money raised should not be spent in buying a new company, but should result in investments for development.
The second part of the model that we approved back then had to do with private business. The law about natural reserves adopted in the 90s implied attraction of private capital, and it was then when small and medium companies started their activity and grew in amount. That business, that new capital could concentrate and become the basis for further development. At least, that’s how it was initially conceived. In the past few years when the economy was super good, both securities and for oil, the Government didn’t manage to attract funds. The issue of shares was directed not to the development but to the purchase of new assets. I call it “the period of lost possibilities”. Now the environment is very bad so now we have to wait for a new rise.
Now, regarding what’s better, public or private? Both are good. We have outstanding leaders of the companies, but they are all different personalities. Big companies truly need systematic management. I think at some point we will come to that.
With the State getting most of the revenues from the price of oil, facing a decline in demand price, do you think there is any chance that this crisis will prompt the Government to change the taxation regime, and is the taxation regime a real problem for the industry?
It is the problem. The Government does try and make reforms in taxation regime, as well as tax breaks for new fields. They take measures but they are not sufficient because the tax system needs radical changes and that is a dangerous thing.
So is it possible to have those radical changes in Russia now?
Radical changes happen either when the situation is good and there’s a lot of money, or when there’s a crisis when radical decisions and actions must be taken. Our situation is not so critical yet and we hope for evolutional process and serious changes for the sake of business.
Will the year to come be static for the oil business?
Oil companies all over the world produce not just commodities but very special commodities. Not all understand that this special commodity may lead to the formation of financial bubbles. In the case of other commodities, demand and supply are the main drivers, but not in the case of oil. For 8 years, production was growing in the world, while consumption was slowing down and the price was getting higher. Evaluation of the current situation gives us reason to state that the world’s oil industry will survive. And our companies will survive too. They have good potentialities and the funds. They will surely cut down some programs. But the more they cut down, the worse the effect it will have on us in 2-3 years. The world’s oil industry is being underfinanced today. The deeper the process go, the more lack of oil there will be in the future. And then the price will jump up.
In November 2008, the Union of Oil and Gas Producers recommended the Government to fix the 2009 investment program at the level of 2008. We suggested not to produce more but to invest more to the development of the companies, which would lay the foundation for the future. That would lead to a lesser decline in other sectors, to which oil companies serve. And the Government heard us. Prime-Minister Putin said so in Kirishy.
So you can see the influence of the Union. We considered the situation and the Government heard us and supported our views. The Government is already putting pressure on the oil companies so they won’t reduce their investments. State company Rosneft has already announced that. The others will follow suit. And it’s very good because in November- December every one was talking about 30-40% investment cuts!
One of the things discussed is the potential of cooperation between OPEC and Russia, that’s the topic often brought to the table. Are the other companies ready for this kind of thing, or again it’s just an idea, and what is your opinion as a member of the Russia -Saudi Chamber?
This union came into being when Russia extremely needed reformed relationships with the Arab world. Relations with the Minister of the Oil Industry of Saudi Arabia, Ali Ibrahim un-Nueymi, whom I appreciate a lot, resulted in the foundation of an Inter-Governmental Commission. Then the former Prince and today’s Regent of Saudi Arabia visited Russia, which further led to the development of tight relations between Russia and Saudi Arabia.
I have always believed that Russia, being an oil and gas producing country, should cooperate with OPEC and its member countries, which all have very good ministers with good analytics. But I have never supported joining the Organization. I would like to note that the West still uses the policy of “energy plots”, and so they tend to suspect Russia and OPEC of the same thing.
It’s probably because of such biased approach, that no one payed attention to how in May 2008 both I and Chakib Khelil officially announced that some 40% of the price of oil was unreal, a ‘phony’ financial capital. I predicted the decline 2 years ago, based on the calculations made by the Energy Strategy Institute, where I’m the Chairman of the Board of Directors. It didn’t seem to be a secret. However, in July 8 leading countries met in Japan and adopted a memorandum about an increase of production. The heads of those countries, relying on poor analytics, tried to persuade the whole world that there was a supply-demand problem. And in few months it emerged that no one needed that production and that there’s more oil than may be needed! Another “revelation” emerged, that oil is a super –commodity, a shelter for the financial capital. When there’s instability in the world, a ton of oil is always stable.
Obviously with the level of production today Russia needs to find two Gulfs of Mexico per year to renew its reserves. There’s a financial crisis and access to credit is extremely difficult. Who is going to invest? Who should invest?
The issue is very serious and important. I’ll approach your question from another angle. I think that high prices for oil have really relaxed many structures in Russia who had to take measures to improve the investment climate in Russia. Regardless of the balance between foreign and Russian capital, the investment climate is far from optimal here. I have business in 7 countries and I can not say that the investment climate is good in Russia. So I think our suggestions about improvement of the climate will be supported by the Government. We extremely need direct investments: in production, in refinery, in chemicals and in associated industries like machine-building, for example. The mission of improving investment climate also implies fighting corruption and bureaucracy and working over license procedures. Everyone should understand that the invested money should be cherished, appreciated and used properly. Investments may come from China, India, US, any country with money. The world needs oil and gas and Russia has it all, so we have to work hard on improving the climate and to protect direct investments.
But that mantra ‘making investment climate better’ is repeated over and over again, and yet it seems it’s always one step forward, two steps back...
In any country there’s a necessity to improve the investment climate. The difference is that in many other countries the situation is more stable and in Russia many things arestill being created. While I was the Governor of Tyumen, I would be asked by potential investors what was needed to be able to work in Russia. I said two things: first and foremost is to have a project and to believe in it, and second is to find a Russian person to lead the project together. Aside from that, the culture of law implementation in Russia is at a much lower level than in other countries. For a good law system to be formed in Russia, it will take yet another 10-15 years. There is a good Russian proverb: “Communism is a good idea but no one promised to feed you on your way to it”. There are still lots of things to be done to improve the law system.
For Russia what is crucial now is not the survival of oil companies, which will survive, but of services companies. All kind of services: drilling services, geological, well services etc. Just the drilling service itself is estimated at 20 billion USD. However they are under stress now. It is necessary to create domestic service groups, make them grow stronger, und under no circumstances shall we give them away under direct influence of foreign investments. Otherwise Russia will turn into an “assembly shop”. So the mission should be on the one hand to preserve the Russian service market, and on the other to attract western funds and technologies – to share the market but not to give it away. I presume we can manage that.
Thank you Mr. Shafranik for talking to us.
| Company: | Union of Oil & Gas Producers of Russia |
| Position: | Chairman of the Board |
| Country: | Russian Federation |