OREANDA-NEWS. July 16, 2010. In four years the capacity of the existing Caspian Pipeline Consortium (CPC) system should more than double. The way toward this decision was long, mostly due to the difficulties in funding the pipe expansion. In his interview ALEXANDER TARAKANOV, who became the Company’s Head in this May, told her about the Project economics, Shareholders and construction magnitude, reported the press-centre of CPC.

DISCIPLINE AND ECONOMY
— Transneft has recently announced its intent to increase its share in CPC. Rosneft discusses acquisition of about 5.6% of LUKOIL’s shares in the Project. What has caused this tendency?
— This question should be addressed to the Company’s Shareholders. CPC is a commercial company and this kind of changes should not come as a surprise.

— And is there a chance of new owners coming?
— There are Shareholders in CPC whose fields are located in Kazakhstan and Russia. Therefore, there interests are clear: they need a crude oil transportation system. If any company wants to reinforce its positions in the Project or obtain a share in it, it means that it should have development prospects and additional crude oil volumes. There is no point speaking now about any significant change in the Shareholders’ structure.

— What will be the final amount to fund the pipe Expansion Project? Which funds are to be used for financing?
— At the moment the Expansion Project implementation cost amounts to USD4.6 B. This amount will, however, be finalized on the base of the tenders for construction and installation work. Project financing plan has been approved, with CPC own funds generated as its profit from the base business and the Shareholders’ debt deferral being the main financing source.

— Is a possibility of a bank credit being considered?
— In the event of the funds shortage third party borrowings will be used. Though, according to our estimates, our own funds will, most probably, suffice.

— What were CPC last year tariff revenues and profit?
— The Company now operates quite efficiently. In 2009 CPC tariff revenue exceeded USD1.1 B, consolidated operation profit (under IFRS) exceeded USD600 M. The necessity of the Shareholders’ debt servicing still has a significant impact on CPC financial metrics, therefore, the consolidated new profit amounts to about USD250 M.

— What financial results to you expect after the pipeline expansion?
— We expect the revenue to increase up to about USD2.5 B per year, which will materially improve the Company’s financial metrics and allow for sooner debt repayment.

— How much is the CPC current debt to the Shareholders? Based on the last year results the Company decided not to pay dividends. How soon can the repayment be resumed?
— By the beginning of the funds accumulation — January 2009 — CPC debt to the Shareholders amounted to USD4.6 B. By the beginning of this year this figure has increased up to USD4.9 B, out of which the debt to Russia is less than USD700 M. We expect that by the completion of construction the debt will have increased up to the maximal value of USD6.6 B in 2014, and then it will start to decrease and will have been repaid in full in 2018, thereupon the Company will start accruing dividends. Besides, in accordance with the provisions of the Memorandum of Understanding the previous debt repayment procedure which assumed repayment priority was changed. Now the debt will be repaid to all Shareholders on the pari passu principle, so the commitments to Russia will have been fulfilled by the same date.

— What is the Project payback time?
— We assume that the CPC Expansion costs will have been paid back five years after the Project completion.

— What amount of capital investments is budgeted for the Expansion Project for this year?
— About USD450 M. This amount includes the funds to complete the detailed design, advance payments under the contracts for long-lead equipment items, payment for the Management companies’ expenses. In late this year the Shareholders are expected to approve a long-term (four-year) Expansion Project budget. It will include expenditures for construction which is scheduled to commence in Quarter one of the next yearа.

PIPE will not become empty
— When will the CPC Expansion Project TEO be ready?
— The TEO is already ready and in late last year it successfully underwent the state expert review. Also, a positive project environmental expert report was received. The process is currently underway to complete legalization of the right-of-ways and preparation of working documentation.

— What will be the construction schedule?
— The intent is to do a phased construction. The first phase of implementation will include the CPC existing facility upgrade and replacement of 88 km of the pipeline, allowing for having an increased capacity of the system from the current designed 28 M tons to 35 M tons in 2012 (now the Company actually pumps more than 34 M tons of crude oil per year by injecting a drag reducing agent, DRA). Second phase — capacity increase up to 48 M tons through construction of five new pump stations and three 100 cu. m tanks at the Marine Terminal — will be implemented in 2013. Third phase — construction of the other five pump stations, three 100 cu. m tanks and SPM at the Marine Terminal, bringing the capacity to the designed 67 M tons (76 M tons with DRA) — is intended to be completed in 2014.

— The crude oil from which oil fields will become the resource base to fill the pipeline after the Expansion?
— It should be pointed out that at the moment the production growth in Kazakhstan outruns the development of the export pipeline capacities in the Region that is why the urgency of CPC capacity increase is beyond any doubts. The expanded system of the Tengiz-Novorossiysk pipeline will receive, primarily, the crude oil from the fields already on the list of nominated fields of CPC Shippers, for example, Tengiz and Karachaganak. As is known, the production from Tengiz has significantly grown and there are plans for its further build-up. Also, crude oil from new Caspian fields is expected to come — Kashagan in Kazakhstan, Filanovsky in Russia. Actually, the Expansion Project parameters were developed on the basis of long-term nominations for crude oil deliveries submitted by all CPC Shippers. The reality of these plans is supported by the fact that the volumes of the crude oil to be delivered will be guaranteed by a “ship-or-pay” agreement. It will be executed with each crude oil shipper and will stay in effect until the Expansion Project costs will have been repaid. So, there should be no problems with loading the pipeline.

— Are there already executed contracts for the Expansion Project and which other contracts are in store?
— A construction management system was approved to implement the Project. CPC itself will provide general management and control of all activities. However, for more optimal and efficient Project implementation the Shareholders’ Management Companies have been engaged which, as instructed by CPC, will assume technical functions to interface with contractors. Transneft, KazMunaiGaz and Chevron affiliates act as Management Companies. Thus, Transneft and KazMunaiGaz companies will be responsible for construction of facilities in Russia and Kazakhstan, respectively, while Chevron will be engaged in the offshore facilities and the SCADA control system modernization. Tanks at the Marine Terminal will be constructed jointly by Transneft and Chevron. In addition to that, the Management Companies will conduct tenders for construction and installation work before the end of this year, while it is CPC who is engaged in the purchase of long-lead major equipment items. Already last year the tender were conducted for the total value of about USD550 M, the activities to execute contracts with winners are close to an end.

BURGAS — ALEXANDRUPOLIS
— CPC pipeline crosses the territories of a number of Regions in the Republic of Kazakhstan and Russia. Do you anticipate any difficulties in the course of the Expansion at a local level?
— We have time-proved constructive relations with the authorities of all Regions crossed by the pipeline route. Both they and we understand that CPC continuous operation is a benefit to both us, and the Regions, and the State, in general. Sometimes, though, situations arise when the parochial interests blur the State interests. I will remind you, however, that CPC is the Company with the interests of the Governmental Shareholders of Russia and Kazakhstan, as well as the largest oil and gas companies of the world, that is why we always align our business in strict compliance with the legislation and we manage to resolve those problems.

— CPC Expansion was coupled with the construction of the Burgas-Alexandrupolis crude pipeline. May the uncertain fate of this project have some impact on the Caspian Pipeline Consortium’s plans?
— I can say that cancellation of the CPC Expansion Project is unlikely and a delay in Burgas-Alexandrupolis Project will have no impact on its implementation. One of the long-standing stereotypes in respect of CPC consists in that decisions on the Expansion Project are made for some political reasons. Apparently, this is caused by the geopolitical role played by the Company in transportation of the Caspian oil. But right now the economic factors are the main Expansion drivers. Expansion implementation enters its active phase, and if there are any delays they will be caused by purely technical issues, only. But for my part I would like to state that we will use our best efforts to have CPC Expansion implemented successfully and by the target date.

— Nevertheless, do you think that the Burgas-Alexandrupolis Project which you directed before coming to CPC will be implemented?
— My personal opinion is, yes. The entire front-end-engineering documentation is ready in full. In August-September the EIA (Environmental Impact Assessment — RBC daily) documents will be submitted to relevant authorities in Greece and Bulgaria. If all political talks currently carried on are dismissed, the process goes within the rules and standards existing in Europe. Besides, CPC and Burgas-Alexandrupolis are two different projects. It is another matter that an additional oil inflow in the Black Sea should exist for Burgas-Alexandrupolis. Therefore, if CPC Expansion is a fact, then the Russian-Bulgarian-Greek pipe implementation becomes more probable. This is the scenario which was planned originally.

— What is the progress of the project to construct a port on the base of the Yuzhnaya Ozereevka Terminal near Novorossiysk which will lift more than 100 M tons of oil per year?
— This is just an idea, and, as far as I know, it is not being discussed with CPC Shareholders.