OREANDA-NEWS. November 19, 2010. Vladimir Makeyev, Chairman of the Management Board, General Director of ITERA Oil and Gas Company, LLC. There are one and a half months to go until the 2010 year-end. The general trend for ITERA gas business development is obvious, though: transition from the slowdown caused by the world financial crisis to progressive advance became a fact of life and secured a footing, reported the press-centre of ITERA.

 Figures testify to a progress achieved. 13 650 million cu m of natural gas were supplied to consumers within nine months of 2010. This is less than that in the similar period before the crisis, but 6.5% more than that in the 1st -3d quarters of 2009. A quarter by quarter comparison confirms that the positive trend reinforces steadily: while the surplus of the volume of gas supplied in the 1st quarter of 2010 over that of 2009 was about 1.5 %, that of the 3d quarter was 23%.

The above figures are far from being a cause for delight. Those figures allow for a share of optimistic expectations, though, not just about plans, but also about implementation of those plans.

Explicit strategy
The ITERA’s strategy is now explicitly defined: gas is our core business for the foreseeable future. This includes gas production, gas marketing and gas processing. Non-core assets (we have quite a lot of them) are going to be sold. Sales revenue shall be invested in repayment of loans and in gas related projects.

The principal objective is to expand the resource base of the core business. ITERA shall participate in auctions and tenders on license areas to be held by Rosnedra (the Russian Subsurface Resources), primarily in the Yamalo-Nenets Autonomous District where our major fields are located. We shall also consider our possible participation in auctions in Western Siberia. We have a license on Bratskoye field in the Irkutsk Region. In fact, we have completed development of this field.

We shall use it jointly with Gazprom to ensure gas provision for the Bratsk Region. We shall operate on the so called “secondary market” to purchase assets. Moreover, ITERA offered Gazprom a Program to Development Small and Medium-size Fields (of up to 50 billion cu m), on which fields Gazprom owned licenses. At that, establishing a JV with Gazprom’s controlling interest in it, would be an optimal solution, in our view. Our JV Purgaz could serve a foundation. This company has all possibilities, both technical, and financial, to put new fields into operation quickly.

Prospects for expanding production base are related to development of our operational producing enterprises in YANAO. Most investments will be made in Sibneftegaz (Siberian Oil and Gas) in 2010. We need to continue development and exploitation of Beregovoye and Pyreinoye fields, and prepare Khadyrjakhinskoye field for commissioning. Investment for these purposes shall account for about Rub. 2 billion.

ITERA plans to continue geological exploration in Kalmykia in the years to come. We had prospecting licenses on 11 areas for a term of five years there. Expenses on geological exploration accounted for about USD100 million. We have made a decision about the prime areas. We are now in the process of establishing a joint venture with a Russian partner to continue geological exploration. It cannot be ruled out that Western companies and their deep-hole drilling will be retained.

ITERA is going to develop gas advanced processing projects and gas-chemical processing projects more aggressively. Commencement of construction of a gas-chemical processing complex to produce 600 thousand tons of methanol a year in Nizhni Tagil is planned for 2011. The complex is valued at about Euro 300 million. It would be good to do more in that sense, but our possibilities are not unlimited.

Foreign Projects
If we talk about foreign projects, our accent is made on Turkmenistan. ITERA is so far the only Russian company that had received a license to develop a block in the Caspian Sea off-shore area. This is our principal project. Ultimate development and exploitation of the 21st block require the investment of about USD 6 billion within quite an extended period of time, so we are not scared by the figure. Moreover, certain large Russian companies, such as Zarubezhneft (Overseas Oil) and Rosneft (Russian Oil) may become our partners. Prospects are fair. According to preliminary assessment the reserves are 218 million tons of oil and over 92 billion cu m of affiliated gas. Moreover, there is a possibility of additional resources of 100 billion cu m of free gas.

ITERA is also involved in a few large projects related to development of gas infrastructure in Turkmenistan. In particular, MRK-Inzhiniring (MRK-Engineering), our affiliated entity, had completed construction of a 200-kilometer-long gas pipeline in the Central Kara Kum desert.

Implementation of all those and other numerous plans directly depends on the revenue from the core business that is supply of natural gas to consumers. Over 90% the supply is intended for the Sverdlovsk Region. We set a high value on the confidence to ITERA to act as a major (and until recently, the only) supplier of natural gas to this industrial center, one among the largest in Russia. Our Company has been supplying natural gas without breakdowns and limitations to all categories of consumers in the region for 12 years. It is our principal business activity area there today. So, the problems that arise there are especially sensitive to ITERA. Those are the payments by consumers for the gas we supply. That is, to put it a precise way, non-payments for a considerable volume of gas we supply.

Modernization is needed
The indebtedness by consumers in the Sverdlovsk Region in the 2009/10 heating season for gas supplied by ITERA has doubled to Rub. 4.3 billion, out of which amount Rub. 3.2 billion was the indebtedness on the part of the enterprises of the housing and utilities infrastructure. The total amount of indebtedness was equal to the value of the gas we supplied to the Region within two months. The indebtedness slightly decreased by late summer down to Rub. 3 billion, including Rub. 2 billion due from enterprises of the housing and utilities infrastructure and in fact turned short at that critically high level.

As soon as the heating season commenced, we had to begin supplying gas in full measure to all consumers of the housing and utilities infrastructure, including to skates. The total aggregate indebtedness by consumers (the value of gas supplied this October not included) as on this October 31 equaled Rub. 2 billion 680 million, out of which Rub. 1 billion 850 million was the indebtedness by enterprises of the housing and utilities infrastructure. It is obvious that non-payments make an additional financial cost loading on the supplier. We have to raise loans to purchase and transport gas to meet the needs of the Sverdlovsk Region. This adds loan servicing costs to the funds we did not receive for natural gas supplied.

This is not the only problem. Non-payments for commodity supplied and, as a matter-of-fact, coercion of the seller to continue supplying gas even to skates grossly distorts the essence of the market relationship by shirking upon the supplier costs related to wear and tear of the housing and utilities infrastructure, insufficiency of the state and municipal management and the regulatory framework.

This problem exists not only in the Sverdlovsk Region. It is typical of all regions of Russia. A necessity to modernize the entire housing and utilities infrastructure is there. A Federal program for that matter is being developed. It shall be implemented soon.

No doubt, we take all possible measures to reduce the indebtedness by consumers. Beyond the framework of the heating season, we introduce limitations for volume of gas to be supplied, restructure debts, and coordinate payment schedules. The Administration of the Region is actively involved in solving the indebtedness problem. Alexander Misharin, Governor of the Region, and Anatoly Gredin, Chairman of the Government, always have issues related to payments for gas in their view. Leaders of the Region understand that gas is the commodity of value that needs to be paid for. They raise finick to heads of municipalities for payments by municipal enterprises of the housing and utilities infrastructure, for general order in this area.

Solution exists
To solve the problem of non-payments strategically, it is necessary to reconstruct thoroughly both the material base of the housing and utilities infrastructure, and the financial and management schemes that produce the problem.

First, it is necessary to implement serious re-equipment of the heat economy, including boiler equipment, heat and gas supply network. Outdated equipment needs to be replaced with high efficiency modern equipment, because loss of the heat-exchange fluid is huge along the entire processing chain. Losses of heat at the heat supply systems alone may reach 60%. This makes it difficult to discuss collectability of payments from the population that has to overpay heat and gas for that matter.

Second, thorough control over payments for energy supply at a municipal level should be installed. It is not a rare case, where the money paid by consumers of heat and gas do not reach the suppliers, but rather get spent for other purposes.

Third, private business should be involved in modernizing the housing and utilities infrastructure, because private business can help and is interested to do so. At that, it is necessary to provide for economic conditions for private business to get involved. A payback period of ten to fifteen years is quite acceptable for private business, but not 30, 40 or 100 years that make it useless for any private entity to enter the business. Tariffs may be reduced and they have to be reduced, but thanks to energy saving only.

It is clear that implementation of the entire set of the indicated measures (that is just a share of what has to be done) is going to take years or decades. Meanwhile, mechanisms to counteract the absurdity of the "market" relationship based on non-payments for commodity supplied and the lack of possibility to interrupt the supply to non-payers are needed today.

It is only the state that can create such mechanisms. One of the possible schemes is the use for those purposes of a part of funds that come to the federal budget additionally in result of increased tax on natural gas produced. These funds could be included into transfers to the regions and serve a state guarantee of payments for heat and gas supplied to the population. In this case, the suppliers would be guaranteed against the excess percentage of indebtedness, while the state bodies of the constituent territories of the Federation could act in the capacity of creditors of municipalities. This is just one among the possible schemes. There is no doubt though it is the state that should address the issue of normalizing situation with payments by consumers for the commodity named "natural gas".

I am sure this is going to come true sooner or later. This will considerably facilitate the progressive advance of the Russian gas industry and ITERA, as its small but important component.