Cablegate: Embassy Moscow

VZCZCXRO3474
PP RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #5835/01 3511257
ZNY CCCCC ZZH
P 171257Z DEC 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 5883
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 005835

SIPDIS

SIPDIS

DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT
EUR/CARC, SCA (GALLAGHER, SUMAR)
DOE FOR HARBERT, HEGBORG, EKIMOFF
DOC FOR 4231/IEP/EUR/JBROUGHER

E.O. 12958: DECL: 12/03/2017 TAGS: EPET ENRG ECON PREL RS PINR

1.(C) Summary: Rosneft CEO Sergey Bogdanchikov told the Ambassador December 13th that he is optimistic about the company's future, noting in particular that its large Vankor field should come online in 2008. Bogdanchikov dismissed claims the company was overextended as a result of recent acquisitions and said Rosneft would be able to secure any needed credit. He expressed satisfaction with Rosneft's Sakhalin 1 partnership with ExxonMobil and said he supported a market price for the field's gas, despite pressures to the contrary from Gazprom. Bogdanchikov did not see any major structural changes in Russia's oil industry in 2008 and insisted Rosneft has no interest in the non-BP half of TNK-BP. On the Burgas-Alexandropoulis pipeline (BAP), Bogdanchikov said the day a final deal is signed to make the pipeline a reality "is the day we will have final agreement on CPC expansion." Finally, Bogdanchikov dismissed rumors that he will enter politics in Sakhalin, and indicated he is staying put.

End Summary.

------------------------------------------- OPTIMISTIC ON ROSNEFT'S FUTURE, BAP AND CPC -------------------------------------------

2.(SBU) In a December 13th meeting with the Ambassador, Bogdanchikov focused on Rosneft's performance, optimistically outlining the company's operations and future. Bogdanchikov claimed Rosneft's 10% organic growth (growth excluding acquisitions) in oil production in 2007 was among the best rates in the industry world-wide, and he expected 7-8% organic growth in 2008. The company is replacing over 100% of reserves and that its large Vankor field has proven bigger than expected. He said production from Vankor will begin in 2008, despite construction delays on the East Siberian Pacific Ocean (ESPO) pipeline. Since Vankor will be connected to the Transneft system, it would not require ESPO until 2010, when Vankor production would exceed current Transneft capacities.

3.(SBU) Bogdanchikov said Rosneft isn't planning further major upstream acquisitions, but that it would consider "attractive" opportunities that arise. Rosneft plans to boost production from the current 100 million tons (2 mbd) to 160 million tons (3.2 mbd) by 2015. Bogdanchikov added that Rosneft plans to focus more on refining. It will sell less crude and process more in its own refineries. The company plans to invest $15 billion in refining by 2020, mostly on acquiring refineries and upgrading its own.

4.(SBU) Rosneft, as a shareholder in the BAP and as a shareholder and user of the Caspian Pipeline Consortium (CPC), fully supports construction of the BAP as well as CPC expansion. According to Bogdanchikov, "the day a final deal is signed on the BAP is the day a deal will be signed on CPC expansion." He was optimistic that these deals would be concluded soon, as congestion in the Bosporous adds costs for all producing companies. He predicted that BAP construction and CPC expansion could both be completed in 18 months once the agreements are inked.

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TRANSPORT TARIFFS, SUBSOIL AMENDMENTS, AND SAKHALIN 1

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5.(SBU) Bogdanchikov said he believes the GOR will implement a common pipeline tariff for access to the Transneft system, which he called more "market oriented," because it would replace the current differentiated system. (Note: A common tariff is considered necessary to fund the ESPO, whose costs have escalated. A common tariff would, in effect, subsidize the ESPO at the expense of shippers moving oil west.)

6.(SBU) Bogdanchikov was hopeful that anticipated amendments to subsoil legislation would be passed in 2008, allowing new license auctions and extending the current five-year licenses for off-shore production. He also expected that new tax incentives, currently granted for some East Siberia greenfield developments, would be extended to cover offshore projects. He said new license blocks will be complicated to develop and that companies need to get started on them as soon as possible. MOSCOW 00005835 002 OF 002

7.(SBU) Bogdanchikov was positive about Rosneft's partnership with ExxonMobil in Sakhalin

1. Regarding gas sales out of Sakhalin 1, Bogdanchikov said Rosneft believes that the consortium should seek the best commercial terms, "regardless of to whom or in what market" the gas is sold. He suggested, however, that scheduled domestic gas price increases may help resolve the current stalemate with Gazprom, which insists Sakhalin 1 gas be sold to it domestically.

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DEBT RESTRUCTURING AND CONSOLIDATION

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8.(SBU) Regarding Rosneft's vast debt and rumored difficulties in obtaining credit, Bogdanchikov said the company already has an agreement with banks to extend the term of its current $20 billion bridge loan. He was "absolutely sure" there would be no problems restructuring its debt on favorable terms. He expressed confidence in U.S. credit markets, noting that "even the Fed is helping us" keep debt service costs down.

9.(SBU) Commenting on rumors of further consolidation in the oil sector, Bogdanchikov said there has been no decision on merging with Surgutneftegaz, and that Rosneft is not interested in buying the "Russian half" of TNK-BP. He claimed that TNK-BP's production efficiencies and assets were substantially inferior to Rosneft's and that such an investment wouldn't make sense -- "it would be better to drill new wells." On the rumored restructuring of the Ministry of Industry and Energy, Bogdanchikov said that given the inauguration in the spring, he didn't see time for such changes. Although "as an oil man" he would like to see a ministry devoted to energy, he has not seen any preparations for doing so.

10.(SBU) In response to the Ambassador's question about Bogdanchikov entering politics in Sakhalin Oblast, Bogdanchikov said such suggestions were "totally rumors." He claimed he has never been interested in pursuing political office and plans to stay on at Rosneft, but did not comment on recent resignations of three of his deputies.

11.(C) Bogdanchikov's depth, vision, and presentation were impressive, as usual. His forecast, however, is at odds with conventional wisdom here. Most analysts with whom we have spoken believe further consolidation in the Russian oil sector is inevitable and that, after 10 years at the helm, Bogdanchikov may be on his way out. BURNS

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