OREANDA-NEWS. February 17, 2010. An independent natural gas producer ITERA Group unlike its competitor NOVATEK could not finish the year 2009 better than the entire market and cut their gas sales. However, the chairman and co-owner of ITERA Igor Makarov assured the ”Kommersant” that the group's profitability had improved, and the majority of projects including Turkmenian are still going.

— How has ITERA finished the crisis year 2009?

— In 2009 ITERA Oil and Gas Company sold 18.3 billion cubic meters of natural gas, which is 15.3% less than that in 2008. Gas sales revenue reduced by 16%, although the operating profitability turned out to stay at 15%, while the net profit even grew from 9 to 12% due to smaller amounts of gas purchased from third party producers and larger portion of own gas. The company's net profit as at the end of the year is about 4 billion rubles which is somewhat better than that achieved in 2008.

Last year, as opposed to 2008, the company had no negative differences in currency loans. We are grateful to Sberbank, VEB, VTB, Novikombank, Gazprombank, St. Petersburg Bank and Bank of Moscow for understanding that everyone would better support other each other during hard times of the crisis. We restructured short-term and unfavorable loans with high interest rates. We extended the debenture issue. I am very grateful to the partners who have not feared the crisis and believed in us. Yes, the company's profit reduced, however we not only survived but also incremented our resource base without getting deeper in debt. This year we continue financing our investment programs, though not with previous volumes and pace. If we take a look outside the gas business and overview the whole group and construction business in particular, we can see “Minsk-City in Belarus and other construction projects in other regions progressing although with some delay.
 
— ITERA International Group of Companies continues consolidation of core-business and disposal of non-core business assets. What was sold in 2009 and what do you plan to dispose of this year?

— Indeed, during the last five years our business changed directions from one to another, and as the group consists of more than 150 companies in 20 countries of the world, some projects were more successful, some less. We have planned to restructure our assets long time ago. But until recently we did not know how the situation in the gas market will evolve and many processes were impeded because of this. Now, then we've almost dotted all the i's, I can say, we are going to develop as an established gas company, if nothing revolutionary happens. We still are getting prepared for IPO and for strategic partnerships. This will enable us to progress further.
In 2008-2009 we sold half of our small oil fields and allocated the proceeds to gas business. Yet there are a few oil fields left in Orenburg and a transshipment terminal in Samara, which we are selling.  Similarly, we sold Moldkarton to local Moldavian business with foreign capital. Our development strategy shows that this sort of business should be run by specialized operators.  We are also getting prepared to dispose of our Malkinskiy quarry (Stavropol) which produces non-metallic materials, sand, crushed stone. We do not need it, although this business proved to be profitable even during the crisis. We put for sale our Vyiski woodworking facility in Sverdlovsk region.

We sold ITERA-PET In Mogilev, Belarus. It was built for our needs to produce plastic utensils. We invested EUR15 million, and all of a sudden it becomes a competitor Mogilev Khimvolokno. They tracked our production and supplied us with feedstock at prices disabling us to return investment. Then we came with a proposal to Belorussian government saying there was a conflict of interests and if the state was determined to maintain Khimvolokno under control they should take away our asset. The President Alexander Lukashenko supported the idea and the government acquired our plant. Thus, we brought benefit to Belorussia, my second motherland.

— What are the plans for this year?
Globally we are not starting anything new. The Board of directors made a decision to keep on selling non-core assets so that by the end of the year we could distinguish between gas and non-gas business and henceforth avoid cross financing. Gas money will work exclusively in gas business. We intend to start developing Khadyriakhinskoe and Zapodn0-Zapolyarnoe gas-condensate fields held by Sibneftegaz, and to continue construction of Bratskoye. We are about to involve a specialized co-investor in Apsatskoe coal project in Transbaikal district, and in acquisition of new fields as well.

I think we will get back to generating projects in 2010 in Nizhniy Novgorod and Sverdlovsk region. Our subsidiary Upper-Volga Generating Company intends to build a 900 MW steam-gas power plant in Kstovskiy area, Nizhniy-Novgorod district. ENEKO and Regiongaz-Invest will continue upgrading old and building new small-scale power generation facilities in Sverdlovsk region. Together with the local administration and VEB we plan to reconstruct and to build 233 boiler houses, 14 mini heat and power plants. Our intention is to allocate 4.8 billion rubles for this.

— Itera is one of a few Russian companies actively operating in Turkmenistan. Last year amid the economic crisis the Moscow-Ashkhabad gas relations have aggravated. What is going on with your projects in that country?
— Last year, despite the fact that it was a crisis year, in my assessment was quite successful for the company. The President of Turkmenistan Gurbanguly Berdymukhamedov approved the majority of our proposals.  He supervises some of projects personally, which I appreciate very much, as the Presidential support is every important for the company in any country. We opened a new office of ITERA in Ashkhabad in 2009 and are ready to offer office space to our partners working in Turkmenistan. For example, it will accommodate an operator of Block 21. We constructed a sport complex in Turkmenabat with a 10 thousand seats stadium, a 50 beds hotel, a tennis pads and football fields. We are currently building two hippodromes, a hotel in Avaza tourist center on the Caspian Sea shore. Our subsidiary MRK-Engineering is about to complete in June a 198 km main gas pipeline from Central Karakum to Yilanly compressor station which will connect 24 gas fields in Turkmenistan with the Central Asia – Center gas trunk line.

— In autumn ITERA acquired the right to develop Caspian shelf in Turkmenistan and gave away its control in the project to Zarubezhneft. How has the transaction progressed?
— On January 29 we received an exploration license, i.e. the PSA agreement for Block 21 between ITERA and Hydrocarbon Resources Control authority with the President of Turkmenistan has come into effect. The transaction with Zarubezhneft is in the process of legal finalization.

— Why Zarubezhneft?
— Because all nine fields that our company developed are located onshore, and we never worked offshore. It took us no time to decide who to take as a partner. They are a state company who manifested reasonable flexibility in Zarit project negotiations on Blocks 29, 30 and 31 in the Caspian Sea, and thy were comfortable to work with.  Taking into account their vast experience of offshore drilling in complex fields in Vietnam we thought they would bring their know-how in our project as well. Besides, Zarubezhneft committed to raise financing for development of Block 21.

— What is the amount of financing required?
— Well, first we should do seismic, drill three wells, analyze exploration findings, and only after that we can talk about the size of financing required for production and treatment of hydrocarbons. According to preliminary estimates the recoverable reserves in Block 21 amount to about 200 mln tons of oil and 90 billion cubic meters of gas. If the reserves estimates are realistic, then in addition to gas sale subject to an agreement with the government of Turkmenistan we will build a nitrogen fertilizer plant with an annual capacity of 650 thousand tons of carbamide. Crude oil can be exported or supplied to the Turkmenbashi oil refinery. It is more advantageous to sell finished product rather than raw materials.

— How is Sibneftegaz evolving? There was a serious limitation for gas supply from Beregovoe and Pyreinoe fields last year. Are those limits removed now and what are the prospects of future development at the fields?

— In fact, Beregovoe operated at a fraction of its load, and production did not exceed 3.3 billion cubic meter of gas. For this year we achieved an agreement with Gazprom to pump 10.3 billion cu. m of gas into their pipeline, including 1.2 bcm coming from Pyreinoe. Our intention is to continue seismic survey in Beregovoe and Pyreinoe in order to tackle deeper occurring deposits in a long-term perspective.

An equally important news is that we managed to buy out Acron's stake in Sibneftegas last year. It took four years of complicated negotiations, where everyone was talking and convincing each other, but there was no progress. Acron did not interfere with block the work, yet it made no investment in the resource base. It was difficult to reach an agreement. Finally, to everybody's satisfaction, the transaction was completed: we paid Acron €92 million for 21% interest in Sibneftegas. So now we have no problems with Beregovoe. We have restored our relations with Gazprom as well as with the controlling shareholder — Gazprombank. I sincerely thank Andrey Akimov, (President of Gazprombank) and his team for their assistance in raising funds, and as the result there are only two shareholders working in the project.

— What does it mean that relations with Gazprom were restored?
— We understood Gazprom, and Gazprom took our wishes into account, and now we have good normal relations in the framework of the signed cooperation agreement. Our joint ventures Purgaz and Sibneftegaz should produce about 26 BCM of gas this year and we shall jointly sell it.  We have commissioned Bratskoe gas field in Irkutsk Region and we transfer produced gas to Gazprom to supply Bratsk users. We cooperate in Latvia and Estonia. In wintertime Inchukalnskoye gas storage in Latvia supplies gas to customers in Leningrad, Pskov and Novgorod Regions. Jointly with Gazprom our company took part in construction of the gas pipeline to South Ossetia.

— The main profit of Itera comes from gas sales in Sverdlovsk Region. How are you getting on with the new governor Alexander Misharin?
— On December 31, 2009 our five-year PSA with NOVATEK has expired on gas fields that we started developing together. To a great extent we have shifted to the feedstock from Purgaz and Sibneftegaz. This gas is primarily designated for Sverdlovsk Region. Our relations with Alexander Misharin are evolving well. The government of Sverdlovsk Region owns 30% shares of Uralsevergaz with the controlling interest held by ITERA. So why should we have bad relations? After all, it is their company as well. Over a period of 12 years Uralsevergaz has been supplying fuel for over 1.7 thousand enterprises of the region including profitable companies and not so much; mostly companies and organizations of housing and public utilities infrastructure and the social sphere owing us about US150 million. New gas suppliers appeared in the region though I would not dramatize the situation. We maintained the distribution market. This year we are expecting to sell 15-16 BCM. In 2009 we have sold 15.4 BCM.

— Do you think the crisis has reached its bottom? And how soon Russia will get back to the energy consumption level of 2007?
— What we feel in Sverdlovsk Region and what our construction projects show is that we most likely reached the bottom. If in the first quarter of 2009 the energy demand reduction varied from 13 to 40% in different months, then by the year end the energy consumption level has grown up. And it keeps growing, which means the economy has started reviving.

— Since January 1, 2010 the government has raised gas tariffs for industrial consumers by 15%. Will it have any effect on profit margin of your company?
— If gas transportation tariffs had not been raised simultaneously then I would definitely have answered: "yes". But Russian domestic gas transportation tariffs for 2010 have also been raised by 15% on the average. In our case, the costs we pay to transport our gas from Gubkinskoe field to Sverdlovsk region have grown up by 27.6% compared to 2009. My opinion is that such raise in gas tariffs would cause even more payment delays from communal services companies. These delays would, in turn, put additional financial burden on Itera. To sustain this burden we would have to borrow more money which would increase our expenses and cut down our margin.

— Does Itera enjoy any tax privileges when developing new fields in Siberia?
— No we don't. We plan to develop our new fields in Yamal and the Eastern Siberia under commonly applied regulations.

— Has Itera paid any bonuses to its managers for 2009?
— Yes, we have paid some bonuses and incentive premiums for the first half and for the year of 2009 to those employees who made their contributions to sustainable development of our business. We are a private company, you know.

— In spring of 2009 you were saying that the Indian Sun Group might cease being Itera's shareholder. Has it actually happened?
— I'm still the major shareholder. And Sun, with the other shareholders' consent, undertook to attract a strategic partner for 18% share in Itera reserving 8% share for itself. However, the world financial crisis hampered this process. It is now suspended. There is no rush actually; we have a work to do. So we can wait.

— Are you planning to return to the gas business of Ukraine when the country's new president is elected?
— Well, we actually did not withdraw from Ukraine. We keep on selling some amounts of gas on their domestic market through our Itera-Ukraine outlet. We also run some LPG filling stations there, but it's not a big business, of course. I don't know what's going to happen with our business in Ukraine this year: gas sales in that country are controlled by Gazprom which is the policy of our government.

— What is the situation with you urban development projects?
— We have established a new subsidiary – Itera Investment and Construction and Development Group. This new subsidiary is headed by Dragomir Karich who has a vast experience in construction. How this business will develop depends on the market as a whole. Mr. Karich has presented us a ten-year development program for his company, and this program is now being implemented. At the same time we invited to our company the former vice prime minister of Armenia Mr. Gagik Martirosyan who is now my deputy for construction and power generation business. He is fully in charge of Itera's construction activities.

Dragomir Karich has brought to our company a team of professionals who are now striving to put in order things disturbed by the crisis. I believe we have formed a good construction crew. And I'm very proud that we were able to keep afloat many of our construction projects such as the hippodromes and other facilities in Turkmenistan, Minsk-City and the business center in Belarus.

Unfortunately, implementation of our Moscow projects is now hindered by litigations against our former partner. According to audit findings, that partner was not fair enough in performing its obligations, and many projects acquired for Itera's money turned out to be taken away from the Itera group and registered in favor of some outside entities. This situation seriously affected our business last year. Even these days a number of headline-making cases in this regard are being heard at courts, so let us get back to this subject in a month or two. Anyhow, some of our assets have already been returned, some are in progress of return. On many sites where the construction work had been suspended activities will recommence as soon as the weather gets warmer.

— Have you attracted any co-investors in the Minsk-City project? Are you planning to cooperate with any big Russian companies?
— There were some big investors willing to participate in the Minsk-City project. However, the world financial crisis undermined their plans: the 'want' and the 'can' failed to meet. We expect this year most of those investors would come back: offers are already being received, discussions are being held.

The Belarus government deems this project to be very difficult. My vision is that this project is not so difficult as it seems: the project cost of USD 6-7 billion will have to be paid not in one year but in ten-fifteen years and not by one company but by a pool of investors. Is it so unrealistic? The project layout is already prepared, the power supply is ensured, other utilities are hooked up, all regulatory issues are agreed upon, the business plan is clean and clear, we know where we build the hotel, the school and the hospital. So I can't see any unsolvable problems here.

In the near future construction of the first residential block will begin. Parties willing to participate in the Minsk-City project are already there. We are negotiating with VTB and VEB banks and other entities who established their subsidiaries in Belarus. SU-155 and other Russian companies would also like to catch the train. We discuss this project with a Canadian construction company. Some of European and U.S. companies whom we are dealing with in our Minks project used to be involved in erecting many buildings in Dubai which gave them experience in modern skyscraper construction. The President of Belarus, I think, would appreciate the new urban-building ideas and technologies this unique project is based on, and we will openly demonstrate the project's potential in public. We plan to launch IPO of Minsk-City company that owns a land lot where three million square meters of residential and commercial real estate will be built. This year will show what we can.