General Director of “Zarubezhneft” Nikolay Tokarev was probably the most biased viewer of the dialogue between the President of Russia and the President of Vietnam in the middle of May. The major asset of the enterprise, whose brand has been famous for almost 40 years, - is its highly producing wells on the continental shelf of Vietnam. But “Zarubezhneft” does not limit itself to them: the company is trying to win back its place in other countries and try itself in the home oil production market. Mr. Tokarev acknowledges his familiarity with Vladimir Putin but denies using this acquaintance it for forming a state-owned petroleum holding or acquiring “YUKOS” assets in case the company goes bankrupt.

Is it true that the oil producing joint venture “Vietsovpetro”, established on a parity basis with “Petrovietnam”, is among the most economically effective companies of the world?

For the last four years “Vietsovpetro” annual production has been at the level of 13 MMT. This amount is produced from just a little over one hundred wells, i.e. flow rates are very high, over 1000 MT per day, and the cost price is comparable to the one in Saudi Arabia – a little over 2USD per barrel.

Is such high effectiveness ensured by the unique characteristics of the field or the low cost of labor force?

Well, naturally, one can count such oil fields in the world by the fingers of the hand. Though we have been working at these wells for over 20 years, there are no signs of the flow rate decreasing.

Which Vietnamese offshore blocks are the most prospective for “Zarubezhneft”?

In tough competition we beat Shell, Occidental Petroleum and other companies in a bid and now exploring Block 09-3. By June 1 we shall receive information on the commercial reserves there. Everything says that it is a prospective block and the reserves can be considerable. Besides, “Vietsovpetro” is doing exploration works on Block 04-3. Our subsidiary with “Gazprom” is drilling at Block 112 – it is to the north from “Vietsovpetro” area and here we mostly count on gas production.

What are the annual investments of “Zarubezhneft” enterprises?

“Vietsovpetro” is using financial resources after paying the taxes into the national budget of Vietnam and payments to the Russian and the Vietnamese Parties to the joint venture. “Zarubezhneft” receives 5% of the profit share of the Russian Party in “Vietsovpetro”, after deducting all taxes Russia gets about 15% of the ventures’ profits (in 2003 this figure amounted to about 600 MM USD). For the last 4 years the state budget of the Russian Federation has received over 2 bln. USD.

As you understand, it is hard to invest on a serious scale from our 5%. However, we receive a lot of cooperation proposals. We have been known in the markets for 37 years. But we are limited by the legal format of a unitary enterprise. But we have diversified the business and sign services contacts now: we perform turn-key projects at oil fields. We render such services not only in Vietnam, but in India as well.

We are preparing a project for developing three blocks on the Turkmen shelf of the Caspian Sea. “Zarubezhneft” received this offer came from Turkmen President Saparmurat Niyazov two years ago. We established a joint subsidiary with “Rosneft” and “Itera” under the name of “ZarIT”. It is aimed at exploration and oil production, though doesn’t not exclude works at gas fields. The project is already prepared in detail, and, judging by the preliminary exploration data, there are resources there for commercial development. But unfortunately these blocks are located at the former Soviet – Iranian border, though the status of the Caspian Sea has been determined only between Russia, Kazakhstan and Azerbaijan. Iran takes a different approach towards the division. Therefore it will be practically difficult to start real works at these blocks before Turkmenistan and Iran solve the ownership problem. Iranian partners have also said lately that they are interested in solving this issue.

What is the proportion between the income from “Zarubezhneft” services and its own production?

Four years ago “Zarubezhneft” supplied materials and equipment to “Vietsovpetro” worth 800,000 USD. It was a drop in the bucket as the joint venture purchased equipment worth 300 MM USD. Naturally, we weren’t satisfied with such situation. Today “Zarubezhneft” performs supplies for “Vietsovpetro” worth over 60 MM USD. But it is not the limit yet. We are taking active part in supplying materials and equipment to Iraq. This year alone we will implement supplies contracts worth 70 MM USD within the framework of the UN “Oil for Food” program.

Which Western companies do you have to compete in Iraq, which difficulties do you encounter?

Many international companies would like to work at the oilfields, that were offered to us before by our Iraqi partners. Ben-Umar field, for example.

Have you won the bid?

Several years ago Iraqi Ministry of Oil offered to us to start the development of the Ben-Umar field. The bid was not opened because “Zarubezhneft” worked at this oilfield back in the 1970-s. We agreed of course and practically completed the contract draft, but we didn’t have the right to sign it as the international sanction regime against Iraq was still in effect. The war started a year ago, and the situation isn’t changing for the better yet. The project is still frozen, though American companies showed big interest in our experience. They all offer wide cooperation up to investments in exchange for the potential, gained by “Zarubezhneft” in Iraq. The issue is still opened due to the instability and the lack of the necessary political decisions with the UN involvement. We can only comfort ourselves by saying that, unfortunately all our predictions regarding the events in Iraq, have fully proved to be true. A year and a half ago “Zarubezhneft” unambiguously stated that the price would be and remain very high, that the situation will go down to the Palestinian model with the use of gorillas’ actions. One cannot count on easing the situation fast in Iraq under such circumstances.

What are the chances of “Zarubezhneft”, “LUKOIL” and “Mashinoimport” to go back to Iraq for West Kurna-2 and other objects?

Currently the contract for the second stage of West Kurna is the only contract, signed earlier, that remain absolutely legal. Sometimes they say that it was allegedly terminated by the Iraqi party because Hussein’s regime meant to punish “LUKOIL”. It is not true. Back then “LUKOIL” received only a letter from the Iraqi Deputy Minister of Oil, which was informing about the decision to terminate the contract. But initially the contract was approved by the Government and passed by the Iraqi Parliament. Therefore the termination procedure should be mirror-like. This never happened. Nobody saw any official documents, proving that the contract was terminated. I hope that the legal capabilities of “LUKOIL”, “Zarubezhneft” and “Mashinoimport” will be enough to prove that our rights for West Kurna are still effect. A different issue is how to implement the contact under current circumstances. Now the situation does not allow it.

But the full authority will be transferred to the national government of Iraq on June 30…

I would like to avoid pedaling the legal government topic right now. The events in Iraq change so dynamically, critically and not for the better, that anything can happen before the scheduled date. Maybe, the Americans will push off the authority transfer in Iraq. In any case, the purposes they came to Iraq with and the slogans they declare today are not the same. Americans came to Iraq to get the mineral resources, and they are unlikely interested in leaving everything, without achieving their aims.

The government assigned you an authorised company for the implementation of oil and gas projects under the terms of production sharing agreements. But now this procedure was found ineffective for the country and is not used anywhere beside Sakhalin and Kharyagin projects. So, the need for “Zarubezhneft” as for a expert company has vanished, hasn’t it?

You see, production sharing agreement is like a sharp knife. You can slice bread with it or cut the veins. Look, how effective this regime is working in Vietnam. Using production sharing agreements the country established its oil and gas industry and raised its economy. The Norwegians were also successful in using production sharing agreements. There are many other examples. But we always go from one extreme to another. Naturally, no one can like the production sharing agreement terms, written in the first Sakhalin projects. There are many provisions there that are unfair for Russia, many different authorities have to interfere to balance the contracts with the foreign investors. But it is wrong to say groundlessly that production sharing agreements are unprofitable for Russia and they should be eliminated. They can be useful in developing Eastern Siberia regions, which have reserves but no infrastructure. There is Barents Sea continental shelf, that needs serious investments, of which we don’t have enough.

The main critics of the PSA regime didn’t raise a finger to increase the reserves. They were increasing the production volumes, putting away licenses for new oil fields, like in to a money box, without doing anything there. Because their aim was completely different.

Obviously you are hinting at “YUKOS”…

Isn’t it a common knowledge, what companies were against production sharing agreements, having reserves that were enough for decades? It was publicly stated that “YUKOS” reserves are enough for 40 years. A large company in America has reserves for 8 – maximum 10 years. This provides strong development dynamics of the company and doesn’t hurt the state interests. “YUKOS” is not the only company like this here. One can name companies as well that have decade-size reserves whose fields are not in operation. And when they say that Russia doesn’t need production sharing agreements, I am asking who will go to invest in Eastern Siberia, who will develop engineering, roads, energy generation. There are those who want to come to invest. Japan, India and China are practically searching throughout all oil bearing regions, hoping to acquire some fields to cover their own energy deficit.

With such spare capital and oil shortage they would agree to work under a standard tax regime. Why do we need production sharing agreements?

Yes, there are already owners of Shtokmanskoe and Prirazlomnoe fields, the process has started off there. But there are other large fields: the same Eastern Siberia, which is difficult in the geologic aspect. Or the northern seas’ continental shelf with huge reserves but severe ice situation and a thousand of different other “buts”. And when Russian companies come there, where will they get the financing for billions of dollars, I wonder. And the foreign investors have already lined up…

Great, then we hold a bid on standard taxation terms and if no investor agrees, then you can transfer the field to the production sharing agreement regime.

It is all logical, but nobody does this. Maybe we should use the current pause to go back to the issue of production sharing agreements. In order to help the public face it again and see where we were right and wrong. Adjusting the government’s opinion on Sakhalin projects set a certain tone for discussion and it should be completed.

Who initiated the President’s Decree on transforming “Zarubezhneft” into a joint stock company?

The circumstances did. We are a federal state-owned unitary enterprise, the country has oriented itself for eliminating them. Probably, in order to stimulate this process, the Ministry of the State Assets was pushing through the State Duma legal acts, limiting the authorities and possibilities of the unitary enterprises. This completely deprived us of any rights towards the owner. In order to solve any economic issue, say, getting a loan, we had to get the approval of the Ministry of Energy, which is our operational manager, two supervising deputy ministers from the Ministry of State Assets and work with the Ministry of Finance. All these took lots of time and effort, not allowing to solve problems quickly and efficiently. Such old-style model of interaction with the state authorities brought us to the idea that we should switch into a different legal field. At the same time the Ministry of Energy offered to include us into the privatization program for unitary enterprises in 2003. We agreed under the condition that “Zarubezhneft” will have a 100-percent state own share holding without the right of sale in the future. We received such guarantees and prepared all the documents, necessary for the transformation into a joint stock company. We did out best to defend ourselves from the changes of life, mitigate risks, because in accordance with the traditional Russian scheme some people appeared who wanted to win over “Zarubezhneft” and pull it from the state control. The schemes are easy: joint-stock but insolvent enterprise is put up for an auction and bought for 6 kopecks.

Where have the debts to be claimed in court arisen from?

We were preparing the decision on the transformation into a joint stock company, and at the same time the interested structures were fabricating materials, which were later forwarded to the tax police. Afterwards there were attempts to involve the Internal Ministry into this work too. We were under the inspection of seven different authorities at the same time. The coincidence of these inspections in time and the direction of the questions could not be accidental. We believe, all these attempts were aimed at proving the failure of “Zarubezhneft” management and the necessity to give it into the private hands.

Who are these plotters?

I wouldn’t like to personalize them. I’ll just say that these are the most famous in Russia specialists on mergers and acquisitions, that stop at nothing and who have a whole bunch of business lines, that seem not to be compatible with each other.

When will the transformation be over?

We expect finishing before the end of the year. There are many questions there, that under the Law on joint stock companies require a certain number of days for each procedure. The terms were also extended by the government reorganization. The authorities concentrate on their problems more than on ours.

What is the main purpose of the transformation: to remain a 100-percent joint stock company in the state ownership or to be out for privatization in the future?

We envisaged everything in order to eliminate the future privatization. “Zarubezhneft” is enlisted among the enterprises, that have a strategic importance for providing the economic security…

And privatization of which is possible only in accordance with the President’s decree?

Yes. We can be put out for the auction only under the President’s decision. It is provided by the Decree and the Governmental decision. It is a solid guarantee that “Zarubezhneft” will remain in the state ownership in the foreseeable future.

So, everything that you will gave in the result of the transformation into a joint stock company – is a capability to obtain loans without the approval from the Government.

The Law on joint stock companies is much more liberal than the Law on federal unitary enterprises. The company will have more freedom in planning its production, preparing financial plans, obtaining investment funds and disposing of profits. There will be no forcing any more. Besides, the board of directors of a joint stock company obtains further insight into the issues of the enterprise’s development, compared to the interbranch balance committee, where everything in like on an assembly line. There is only short time dedicated to listening to the major figures and raise a hand. I believe that the status of a joint stock company, even a state-owned one, will allow us to be more flexible and efficient in implementing our plans. Especially because now they also deal with the production in Russia.

Which specific projects do you mean?

We have never worked in Russia before, so the problems of the Russian companies are known to us only indirectly – through the mass media or the information that we received within the oil sector. Everything that we started with “Severnaya Neft” or other projects dies off pretty quickly. So we need a small training ground, where we could learn how the Russian business works. We are starting from a small project in Komi. We are acquiring an oil company there named “Dinyelneft” with a number of adjacent oil fields. The production volumes are not large yet, 100,000 MT per year. The total reserves are up to 15 MMT. But we are not going to limit ourselves to “Dinyelneft” only.

Some say that in case “YUKOS” goes bankrupt, all the assets will not go to “Gazprom”, “Surgutneftegas” or “Rosneft”, but to “Zarubezhneft”.

These are intrigues only. I don’t’ see any sense in bankrupting “YUKOS”. It is a serious and strong company today with the production volume of over 80 MMT. Doing something to it, transferring its assets somewhere with a vague prospective may cause severe damage to the industry and the economy as a whole. If we imagine, that “YUKOS” is going to merge with a state-owned company, the issue arises about “YUKOS” foreign share holders. A lot of financial and technical problems appear. Not to mention the suspended alliance with “Sibneft”. You can say all you want, but these are purely exotic ideas.

Besides, as far as I know, the Tax Services’ claims are worth about 3 bln. USD. If the verdict in against “YUKOS”, I think, it will be able to pay off the money. It is will have to strain, of course, and bear certain costs. But they will be able to do it and close this issue.

You are the largest creditor of the “Imperial” bank, whose license has been recalled lately. What do you want to gain from the bankruptcy procedure, considering that “Imperial” doesn’t own practically any assets?

“Imperial” – is our cross, we have been bearing for many years. “Zarubezhneft” had extensive plans for this bank. Back then all the money “Zarubezhneft” was receiving from “Vietsovpetro” was accumulating in “Imperial” accounts. And as a result almost 100 MM USD vanished. We managed to get some of it back, but the most part of the money disappeared. All in all more than 30 court sessions were held, a criminal case was started against certain misuses. I can’t agree with you that the bank is empty. It has fixed assets – buildings that cost a lot in the market. One could get around 40 – 60 MM USD for them. As the largest creditor we take part in the committee of bankruptcy, introduced in “Imperial”. Of course, it is very difficult to deal with this bank, but we don’t have a choice.

About the Company

The State Enterprise “Russian Foreign Economic Association “Zarubezhneft” was established in 1967 as an All-Union Association attached to the Ministry of the Petroleum Industry of the USSR. The Company participated the construction of large petroleum establishments in Algeria, Vietnam, India, Iraq, Yemen, Libya, Syria, Cuba and other countries. “Zarubezhneft” is the Russian operator of the JV “Vietsovpetro” which in 2003 produced 13 MMT of oil on the continental shelf of the South China Sea. The Company also takes part in the implementation of the UN “Oil for Food” Program for Iraq and develops projects in India, Iran and Syria. In 2003 “Zarubezhneft” receipts increased by 450% compared to the previous year and amounted to 7,566 bln. RUR, and the net revenue increased by 12,8% up to 647,7 MM RUR.

Biography

Nikolay Tokarev was born in 1950. In 1973 he graduated from Karaganda Polytechnic Institute majoring in “electrification and automatisation of mining works”. He held positions, including managerial, in exploration expeditions of the mining industry, later – in the Administrative Department of the President of the Russian Federation. Since September 2000 took up the post of Director General of the state enterprise “Russian Foreign Economic Association “Zarubezhneft”.