OREANDA-NEWS. April 23, 2009. Igor Makarov, Head of ITERA Oil and Gas Company, comments on natural gas demand, new projects and real estate, reported the press-centre of ITERA.

Reduced demand resulted in a material decline of natural gas production by Gazprom.  Based on data by the Central Dispatch Control of Fuel and Energy Complex, this has hardly affected independent producers, so far.

The situation is not that optimistic at least with one of them. Production had gone down 25-80% at ITERA and Gazprom joint fields. Igor Makarov, Head of the Board of Directors and Co-owner of the Company hopes the decline was a fault of a technical nature.  He expects the natural gas price correction every week, and continues real estate construction in Turkmenistan.

— ITERA finished with profit the year of 2008. What is the Company doing to get profit under conditions of financial crisis in 2009?

— It is true we have been a success last year. Despite reduced profitability in the fourth quarter, the net profit of ITERA Oil and Gas Company, LLC, for 2008 was Rub 3.7 billion, while gas and oil sales proceeds exceeded Rub 40 billion. The Company had supplied 21.6 billion cu m of natural gas to consumers. It was 6% more than that in 2007.

We have got five business scenarios for 2009. They vary from an optimistic scenario down to a pessimistic one. This is because the market may behave different ways during the year. As you know, we sell 85% of all gas to the Sverdlovsk Region where military-industrial complexes, aluminium and copper plants, and electricity generating companies are located. We are heavily dependent on those consumers. Should they continue reducing gas consumption, we won’t have a chance to expect the optimistic scenario to come true. Moreover, pricing is of a basic importance. Last year, the government planned an indicative growth of the Federal Tariff Service’s tariffs of up to 30% for the current year. It was this forecast, that we based our single business-plan scenario on. Yet, early this year, just after January, they said that either a maximum of five percent tariffs rise was possible, or the prices could be frozen at a previous level.

So, we are waiting for new narratives every week and every month for us to correct the current business-plan. Consumers are pushing us all the time. They demand that we should sell the raw material cheaper, even below the production cost. We respond, though: "You did not share your profit with us when your business was all right. We continued operating according to the Federal Energy Commission’s requirements at that time. The Commission is setting tariffs for us today. Should we go below those tariffs, the Internal Revenue Service would decide we have to make an additional payment ". This is why we spent the whole winter to prove we were right. As a result, we closed the first quarter in line with an average scenario: it was neither maximum, nor minimum.

— The total indebtedness by natural gas consumers in the Sverdlovsk Region in February equaled the monthly turnover of Uralsevergaz, your major gas trader. Were there changes for the better in March?

— It was a bit better in March: the indebtedness went down. This is why  the first quarter was not bad, to my surprise. Very bad times are coming, though. Winter is not quite a problem. Summer is the most difficult period, of course. You know from reports by Mezhregiongaz and Gazprom Export that consumption of natural gas reduced considerably in Europe and in the national market yet in winter. This directly affected production. Purgaz, our joint enterprise with Gazprom (the major producing company of ITERA — "Ъ") had to reduce production by 25%.

Things with the Beregovoy field, our joint project with Gazprombank and Akron, are even worse. Production was reduced there by 80% since April 1. The situation is far from being simple. I hope this is a temporary solution or a kind of a fault of a technical nature. We are currently negotiating with Gazprom leaders a possibility to raise the volume of gas to be pumped from this field into the gas transportation system.  We also hope that limitations regarding OJSC Sibneftegaz would be similar to those for other gas producing companies: at a level of 25-30%.

— What about your Company’s indebtedness to creditors?

— I cannot say this indebtedness is too big, but it is there. Our Company’s loan liabilities were Rub 5.8 billion as of December 31, 2008.

— ITERA had announced selling some of its assets abroad. What are other projects you expect to quit with?

— It is true we ceased as Armrosgazprom’s shareholders, and sold our shareholdings with projects in Canada and Cameroon. Those projects were not of priority importance for us. We primarily sell non-core assets in Russia and the CIS. These assets had been assembled in an ITERA holding, a separate company. It included the Malkinski quarry that produced 2.6 million tons of chippings and gravel for railroads and industry of construction materials in the South of Russia. We want to sell it. The same is true with a cardboard factory in Moldova, and anything related to oil assets.

We would probably never become an oil company. We tried to do it at a time when there were not enough areas of common interest with Gazprom, so we were buying small oilfields and constructing an oil transshipment terminal in Samara. So, we are trying to sell all this now to invest the realized amount into the gas industry. We shall concentrate only on what we consider our core business areas, that is gas and electricity related areas. We shall also retain projects we put together  within ITERA Invest-Stroi, a separate company. It is a developer and construction company. It is involved in construction of apartment houses and office buildings in Moscow, the Moscow Region, Turkmenistan and Byelorussia.

— Authorities of Byelorussia did not allocate a land-plot, where an aircraft repair plant in the center of Minsk is located, for Minsk-City to be constructed. Would you postpone this project until the crisis ends or continue implementing it?

— We are doing everything we can under these conditions: we have completed construction of the first floor of our office building in Maxim Tank Street in the center of Minsk. As regards other areas, we are waiting for support and approvals on the part of the Byelorussian authorities. We expect that a Decree by the President of Byelorussia may be signed in the nearest future.
The developer and construction business in Turkmenistan are easier to forecast. A sports complex worth US20 million was commissioned in Turkemabad last weekend. It included a stadium for 10 thousand spectators and a hotel for 50 persons. Our affiliate company acted as a contractor for it. This facility had been constructed within a record nine months. Our plan for that country includes a hotel and a number of other facilities.

— What are you going to develop in the gas related area?

— We are trying to produce gas near the gas pipeline. We have two good starting points. These are Gubkinskoye and Beregovoye fields with a production potential of 25 billion cu m of gas a year. We own licenses to develop Pyreinoye field, Zapadno-Zapolyarnoye field and Khadyryanskoye field not far away from Beregovoye field. We have completed construction of the Pyreynoye field and are ready to open it. The plan is to commission it on April 23. This field alone will allow raising production by 2 billion cu m of gas a year. We are also doing geologic exploration of smaller fields located around the Beregovoye field.

— What is going on with the Bratski field in the Irkutsk Region?

— We shall sell or swop it with Gazprom or other companies. This field is quite good, but there is too much helium in it, plus there are gas disposal problems. The world financial and economic crisis prevented us from implementing our plans to construct a methanol production complex, a gas liquefaction plant or a GTL plant in the Irkutsk Region (processing of gas into high quality synthetic motor oils, including gasoline and other chemical products.— "Ъ"). If oil price, which the natural gas price is bound to, wouldn’t go beyond \\$75 per barrel, production of GTL in this region is going to be, generally speaking, economically feasible. Should oil price be at a level of US 40-50 or even US 55-60 per barrel, it won’t be economically sound. To make the GTL production profitable, one should have a field three times the size of the Bratski field.

— What about your relationship with authorities in Turkmenistan regarding gas projects, your core business area?

— We have signed a contract with Turkmengaz to develop a few smaller fields in the Central Kara Kum desert and to construct a 200 kilometer-long pipeline to transport up to 3.5 billion cu m of natural gas to SATs-4 (a pipeline  system Central Asia—Center that is used to supply Turkmen gas to Russia.— "Ъ"). The pipeline will connect the Central Kara Kum desert with the border of Uzbekistan at Iylanly gas compressor station. The first stage of the project is assessed at US153 million. The plan is to commence implementing the work package on making the route ready beginning on May 15. Completion of work is planned for the next April 5. All-in-all, the project is both time-consuming, and troublesome. It may result in up to 10 billion cu m of gas ready for export, though.

There are also certain projects on the Caspian Sea shelf. We come across of a delay there. We cannot commence the Zarit project, unless a pentalateral inter-state agreement on division of the Caspian Sea bottom is reached. It is so, because block 31 (we have blocks 29, 30, and 31) is located exactly at the territory disputed by Turkmenistan and Iran. We are completing talks regarding block 21 and block 22, and hope to reach agreement with the President of Turkmenistan who has tentatively agreed with the development of those blocks by our Company.
We shall invite Zarubezhneft as a partner to join us there, because they have a marine production platform and the production experience in the sea shelf of Vietnam, ITERA lacks.

— Last week, Turkmengas announced an international tender to construct Vostok-Zapad (East-West) gas pipeline from Ilotanskoye field to the Caspian Sea. This pipeline will be able to supply gas to both the Caspian gas pipeline and the Trans-Caspian gas pipeline. Would ITERA apply for the tender?

— It is true that the international tender on this project is set on June 27, 2009. Until then, we will prepare the commercial offer based on engineering specifications by Turkmengaz and file them to be able to participate in this project. ITERA shall apply jointly with Krasnodarstroitransgaz (Krasnodar Gas Transportation Construction).

Generally speaking, the Company has serious plans for the current difficult year. I hope we will be a success with most of them.