OREANDA-NEWS. July 22, 2011. A formal CPC Expansion Ground-Breaking Ceremony was held in Atyrau. On the eve of that landmark event Nikolay Platonov, CPC General Director, gave an interview to the information and analytical magazine “Energy of the South", reported the press-centre of CPC.

— Nikolay Valeryevich, it’s been half a year since the date of the Final Investment Decision on CPC Mechanical Capacity Expansion up to 67 MTA. How is the project progressing today?

— You're right, it’s been more than half a year since our shareholders finally sanctioned the Expansion Project. That sanctioning was preceded by long negotiations. It so happened that almost the entire decade following the commissioning of the pipeline was spent in continuous discussions about its future, as the possibility of capacity expansion had been envisaged in the original agreement.

During these six months I believe we have achieved rather significant results: first of all, it was necessary to understand how we would implement the decision the shareholders made on December 15 last year. And now we already have contracts signed with contractors for all phases of the project. As you are aware it includes three phases. The uniqueness of the project is that the capacity increase will occur without shutting down the pipeline.

The completion of each phase will result in creating incremental capacity. Firstly, we intend to upgrade the existing pump stations, build a third SPM, three oil storage tanks 100 kt each at the Marine Terminal in Yuzhnaya Ozereevka near Novorossiysk, and replace a small 88 km section of pipe in Kazakhstan.

As a result of the first phase, we intend to achieve a throughput of 35 MTA. Last year we had the same numbers, but using DRA. Now the same amount of oil will be transported without the use of DRA.

The second phase envisages the construction of five new pump stations, and, accordingly, we should achieve a throughput of 48 MTA, and the third, and final, phase will include building five pump stations and three 100k cubic meter tanks. The ultimate capacity the shareholders expect to receive is 67 MTA. With the use of DRA you can bring CPC’s capacity up to 76 MTA.

The figures are quite ambitious, and it is a very ambitious project. I hope that we will be able to complete it.

—Could you say a few words about the event in Atyrau on 1 July?

— It was a formal ceremony to mark the start of construction activities under the CPC Expansion Project. We are now at a stage where we have actually completed organizational arrangements, mobilized contractors to facilities be upgraded and built, scheduled the start of large-scale construction activities, some of which are however already in progress on some sites. Our Kazakh friends proposed to hold the ceremony on their territory, as Kazakhstan is the main resource base of the oil pipeline, it can be said that the Kazakh oilfields “feed” our pipe. We accepted that proposal with great pleasure.

— You were appointed General Director of the Caspian Pipeline Consortium at a point where all major differences between the shareholders – around the transportation tariff, the loan interest, the principles of Russia's participation in the Consortium and other issues — had been resolved. Do you expect any other claims from any participants in future?

— It is absolutely correct that by the time I came to lead CPC many issues relating to the launch of this project had indeed already been resolved between the shareholders and that, as I said above, had been preceded by some major efforts, it had not been easy to find a compromise that would satisfy all shareholders. Nevertheless, it was found in the Memorandum of Understanding. The key principles envisaged in it were then recorded last December in the form of a Final Investment Decision which clearly described Expansion parameters.

Therefore I don't expect that we will have any "surprises" which would depart from previously agreed decisions. The CPC shareholders are serious globally-known companies, and also the Governments of the Russian Federation and the Republic of Kazakhstan. I assume that everything that has been achieved through those efforts should and certainly will be implemented.

— Are any changes planned in the project participants’ share distribution, or the emergence of new owners?

— I have already mentioned that the decision-making process around the early expansion was difficult, and one of the reasons for that was that not all the shareholders saw the usefulness of that step. Over the past few years we have witnessed changes in the list of the shareholders, some of them left the Consortium, with their shares acquired by other participants. I do not think that at this time there will be any changes either in terms of the shareholder list or the redistribution of their shares. It seems to me that the situation that exists at the moment satisfies everybody.

— What financial results do you expect from the CPC Expansion?

— Because the pipeline throughput will be more than doubled, we look forward to the doubling of revenues. Currently the revenue stands at about USD 1.1-1.2 bn per annum today, therefore, the post-expansion revenue should reach USD 2.2 billion, perhaps even more.

— And what is the payback period?

— It is difficult to say, but judging by the figures which were discussed by us at the expert level, the payback will be achieved by 2018-2019, again, in the best case, i.e. if we succeed in meeting the commissioning schedule for all facilities that we are going to build.

— Are shareholder debt repayment and project financing issues agreed?

— Yes, we have a clear mechanism that we will absolutely adhere to. I believe that CPC is unique in that we have chosen an interesting form of financing — from our own income from operating the pipeline. In any case, we do not plan to resort to any external borrowing during the first phase.

— And in the future?

— At least, we will be trying to manage with own funds as long as possible.

However, we understand that life, as they say, "is richer that us”, and there might be situations that would require external sources of funding. I will not name an amount at this point, but it is within CPC’s borrowing capacity. We are already seeking financial institutions that could, at a certain stage, finance the project in the most favorable way for CPC. We do not want to put this work off "till later" and we intend to set up relations with a potential creditor in advance.

— The ship or pay principle is considered to be an assurance for Pipe Fill. Oil from which fields will become a resource base for the expanded CPC? What percentage of it will be Russian?

— You quite rightly noticed that the ship or pay principle is the cornerstone of our arrangements. While thinking of the interests of our shareholders that fill the pipe with oil from their different fields, we must not forget the interests of CPC. If under some circumstances there is a situation where the pipe is not completely filled, the ship or pay principle provides the capability to cover the Consortium’s losses. If a shipper fails to inject any oil they nominated, CPC will not lose any money, and the short volumes will be offset with an appropriate payment.

As for the resource base of the project, we are primarily counting on oil which is produced in the Kazakh Tengiz field, and we also hope that we will get an opportunity in the near future to receive oil from the Kashagan Field. Clearly, we are interested in Russian oil fields too, primarily those developed by Lukoil in the Northern Caspian. We hope that Russian companies will also pro-actively fill the pipeline system.

In percentage terms, it is difficult to evaluate now but a large proportion will continue to be Kazakh oil, for production continues to grow there.

- Your predecessor as CPC General Director, Alexander Tarakanov, once said that the Burgas-Alexanroupolis piplein, which at the time was “linked” to the CPC Expansion would still be built. What is your opinion?

— I’ll state my opinion not as CPC General Director, but as a person who was at one time involved in the Burgas-Alexanroupolis project. It is frustrating to realize that the project is currently frozen. Even though no one said that it was canceled. Hopefully it is suspended to be re-started again later.

There was a tremendous amount of work was done on it, especially by the Russian side. Unfortunately, not everything depended on us. As you are aware there was a consortium created which, besides Russia, included Bulgaria and Greece. At this point, one of the parties to the Consortium is all but derailing the implementation of that project.

The project is a very interesting one, primarily, inasmuch as it is aimed at ensuring safe oil movement principles. We all know that the Turkish Straits are overwhelmed and that the transit through the Bosporus and the Dardanelles is unsafe. The Burgas-Alexanroupolis oil pipeline would seriously mitigate potential oil spill and man-made disaster risks.

—Caspian Pipeline Consortium has been operating an oil quality bank since the start of operations, the only one in the Russian Federation. Has it proven its effectiveness?

— We are proud of the fact that CPC has such a tool as an oil quality bank. It is a rather advanced mechanism, even by world standards. Oil coming from the fields that feed into our system is, of course, of different quality but at the outlet it turns into the so-called "CPC blend." And, of course, we must take into account the interests of our shippers and ensure equality between them. Any shippers whose oil quality becomes inferior at the outlet receive a compensation from those whose oil on the contrary improves its properties.

We regularly audit the oil quality bank and so far there has not been any serious complaints about it from either the shareholders or the shippers. This situation allows us to believe that this arrangement meets the expectations.

— It is a known fact that the environmental protection program cost during the Initial Construction Project was 12 percent of the total budget. What environmental safety standards are planned to be maintained during the Expansion?

— That is a very good question, especially if we bear in mind that safety is a key requirement in project implementation. In my view the participation of Western companies in the consortium has significantly enhanced CPC’s environmental and process safety culture. Under the project we certainly intend to adhere to those principles, it is a cornerstone.

What is planned to be done in that respect? First of all, we have adopted one of the most advanced global safety compliance systems for this kind of major facilities in the oil and gas sector. It is named the Incident and Injury Free System. There is a contract in place with a contractor who will introduce our contractors and subcontractors to the best practices in safety compliance during work execution.

Yes, the system is expensive, but human life is more valuable. Here we do not want to economize on safety and health of our staff, our contractors. It should be said that CPC has made some major achievements in Base Business operation: last year we worked 6 million hours without accidents or injuries. We have already worked 5 million workhours this year. I hope that the same level of safety will be maintained in the future, not only as part of the Base Business operations, but also as part of the active construction phase of new facilities.

In general I would like to note that ten years of failfree operation of our pipeline have proved the correctness of the approach selected, and CPC does not plan economizing on environmental aspects, not forgetting, at the same time, the economic attractiveness of the project.

— The more oil, the greater the temptation to steal it. How successful are you in preventing illegal taps?

— The illegal tap problem exists even though its scale has decreased recently. While in 2003 our Security group found 26 illegal taps, last year it was just one, and even that one was thwarted at the actual time it was being made. A group of thieves were caught red-handed and criminal proceedings initiated against them.

It should be noted that the successful fight against theft was preceded by a whole set of measures. First of all, there were some drastic changes in the way our Security operated aimed at the prevention of criminal incursions on the oil pipeline. In addition, we established continual contacts with law enforcement agencies and authorities on the ground: they are our allies in that matter. And above all, we reached a mutual understanding with land users. They were explained that the pipe is under high pressure and any attempt at a tap would lead to some serious negative consequences, primarily for the land users themselves and I must say that all those measures produced results: the number of illegal taps dropped sharply.

— From time to time the local press in pipeline host areas publish articles stating that "CPC has not lived up to expectations”, that the promised “rain of gold” did not materialize, etc. Which benefits will the regions received from the CPC expansion?

— Indeed, such publications do appear in the press from time to time to claim that CPC has not met someone's hopes and expectations. We, of course, carefully monitor those and draw our conclusions. Caspian Pipeline Consortium is a socially-responsible company and, in addition to the implementation of its core functions, we do not forget that we should leave a trail — in the good sense of the word — in the host regions. We help children, the elderly, veterans, we build hospitals, schools, kindergartens, we provide them with necessary equipment, we finance children's sports. Our focus is on investing a major portion of the funds to invest in specific projects and seeing the results of those investments.

There are many requests. But we allocate funds to help those who really it. I’ll give you a number: last year CPC spent more than RUR 100 million on aid.

I can assure you that for the duration of the CPC Expansion Project our social support to the host regions in Kazakhstan and the Russian Federation will be further extended. That aid will go in two directions: funds annually allocated by our shareholders as part of CPC’s base business activities and some amounts that were secured, so to say, “in battle”, at the time the Expansion Decision was made.

— Did you say "in battle"? ...
— Well, nobody has taken the profit issue off the agenda. That was what the consortium was established for. But we need to understand that we cannot keep taking all the time. We need to give back too. Now that understanding has been achieved. Which is we are very grateful to our shareholders for.

— This year marks the 15th anniversary of the signing of the CPC Restructuring and Shareholders Agreement and 10 years since the date of the first tanker loaded at the Marine Terminal in Yuzhnaya Ozereevka near Novorossiysk. What in your view makes this project unique?

— In my opinion, this is one of the most successful projects in the energy sector in the former USSR. It is a sort of a showcase for investment by foreign companies in a standalone project which is producing a real value. Of course, the same consortium members do not always see things related to CPC’s functioning and future the same way. But they do have a common objective, that is to make sure the project is successfully implemented, generates profits and that the company prospers. The CPC Management sees its role in, being aware of that common goal, coordinating ways to achieve it and making them consistent. Then it will be easier to reach the objective and to date my predecessors have coped with the task successfully.

— And when the rotation time comes and the position of General Director goes to another Government or a Producer Company, will Russia's interests be protected?

— Certainly, Russia’s interests must be met, it can’t be otherwise. Firstly, because the Russian Federation is the largest shareholder in CPC, and secondly, the larger section of the pipeline passes through the territory of our country. So I can't imagine a situation where the project would have occurred without taking into account the interests of Russia.

— Nikolay Valeryevich, you are described as an excellent negotiator. Did you have a chance to use that skill while in the post of the CPC General Director?

— Those who call me that highly exaggerate my abilities. I have had the privilege to work with some negotiators who were much more skilled and experienced than me. Those were people bred in the Soviet system and communicating and working jointly with whom were the best school for me. As for using negotiating skills in the current activity, that is certainly something that is there. Virtually the entire management process in this diverse company is a negotiation process. You have to constantly to persuade someone, find arguments in favor of different options. The brain, as they say, does not stagnate. Perhaps, that is what makes my work interesting.