November 02, 2005, 00:00 / Interviews and profiles

INTERVIEW: Leonid Mikhelson, CEO and co-owner of NOVATEK

NOVATEK CEO Leonid Mikhelson is considered one of the most successful and mysterious Russian businessmen. His less fortunate colleagues are at a loss as to how Mikhelson manages to run his own gas business in a market monopolized by Gazprom and maintain excellent relations with the management of the concern. Mikhelson even turned the failed deal to sell a 25% stake in NOVATEK to the French Total to his advantage by successfully placing shares on the London Stock Exchange. People who know Mikhelson well claim that the secret of his success is simple: he is guided by the principle “A businessman should not be greedy.” Leonid Mikhelson spoke about relations with Gazprom, Total and NOVATEK shareholders in an interview with Vedomosti.

NOVATEK is my life. It is incorrect to translate it into numbers.”

– Your life resembles an American success story – from a foreman to a billionaire. How did you get into the gas business?

– My father was the director of the Kuibyshevtruboprovodstroy construction trust, the largest in the Ministry of Oil and Gas Construction. He took me with him everywhere where the company built oil and gas pipelines - to Central Asia, the Volga region, Siberia. So I started going to the oil and gas fields before going to school. After graduation, the choice of work was predetermined; it was impossible to imagine another life. He started in 1977 on the construction of the Urengoy – Chelyabinsk gas pipeline, and worked as a foreman, a section manager, and a chief engineer. In 1987, he headed the union trust “Kuibyshevtruboprovodstroy”, from which the NOVATEK company traces its history.

– For a long time you were engaged in the construction business, but then you refocused on gas production. How did this happen? Who helped you?

– We have been creating NOVATEK with partners over the past 10 years. At first there was one composition of shareholders, but during the development of the company it changed a little. We started raising money through the construction business and created an enterprise from scratch, which is now called NOVATEK.

– Forbes magazine placed you in 33rd place in the list of the 100 richest people in Russia, estimating your fortune at $900 million. Do you agree with these conclusions?

– I consider such ratings to be incorrect in principle. However, the compilers of this rating greatly exaggerated the size of my fortune. I have funds in my accounts, but if they had been counted correctly, I would not have been included in any such list at all.

– But you are a major beneficiary of NOVATEK. After the IPO, you control almost 30% of the company’s shares, which are worth about $2 billion. How much do you value NOVATEK’s business?

– The NOVATEK company, its business is my life. It is incorrect to translate it into numbers. And the capitalization of NOVATEK can be seen every day in quotes.

– In the summer, your company had a very successful IPO. The shares left at the maximum price – $1675 – with a price range of $1475–1675. Even during the placement it became clear that demand was several times greater than supply. You could have earned several tens of millions of dollars more, but you did not listen to the advice of consultants who suggested revising the price range upward. Why?

– Even after conducting an IPO, I do not consider myself a major specialist in the placement of shares. But I am convinced that selling your own shares is not like trading watermelons: if you want to get a ruble, name the price 10 rubles. and start haggling. Our consultants actually suggested adjusting the price corridor upward, but we did not agree to this. After the publication of the price corridor, it would be incorrect to return and discuss a new one, in my opinion.

I personally participated in the road show and communicated with many investors. And almost all of them became our shareholders. Some of them bought our shares for speculative purposes and probably sold them after a few months. But there were also strategic investors; they came to our company for many years. We have to live and work with them. I want everyone to be happy – and our new shareholders too. I expect them to support our future decisions related to the development of the company.

“The name of the company “Leviticus” is taken from the Bible”

– On the eve of the IPO, NOVATEK sold part of its assets. Large blocks of shares in Selkupneftegaz and Tambeyneftegaz went to Rosneft and Gazprom structures. What was this connected with?

– Two years ago we approved a program to consolidate our assets. We bought out shares in enterprises that were strategically important to us and exited those companies in which we had no management. The decision to sell shares in Tambeyneftegaz and Selkupneftegaz was made a long time ago, and the sale of the above-mentioned assets to Rosneft and Gazprom simply coincided with the start of the IPO.

– Former vice-governor of the Yamalo-Nenets Autonomous Okrug Joseph Levinzon played an important role in the creation of NOVATEK. Many consider him a major beneficiary of the company. They even say that the name of the Levit company, which owned 46.6% of NOVATEK shares, stands for Levinson and Comrades. This is true?

– Joseph Levinzon was neither a shareholder nor a beneficiary of NOVATEK. The name of the company “Leviticus” is taken from the Bible. This is the name of one of the five books of the Old Testament. Assumptions that Levinzon, as vice-governor, allegedly helped NOVATEK, including obtaining licenses for fields, are groundless. This is easy to check, all information is open. Those who make such conclusions should compare the dates.

Levinzon became deputy governor in 1996, and the right to use the subsoil for our main deposits - East-Tarkosalinskoye and Khancheyskoye - was obtained earlier, in 1992-1993. We acquired the company that owns the license for the Yurkharovskoye field on the market. This deposit was discovered by geologists in the 70s, and at the same time the reserves were put on the state balance sheet. Talk about Joseph Lipatievich understating the reserves of the Yurkharovskoye field is groundless; at that time he was still a schoolboy. We also acquired licenses at auctions and competitions. We did not participate in the privatization of Purneftegazgeologiya, but bought its shares on the secondary market. It became part of NOVATEK in 2001.

– But he is also on the board of directors of NOVATEK.

– Joseph Lipatievich, being the director of Purneftegazgeologiya, really played an important role in the formation of NOVATEK. He proposed establishing the Tarkosaleneftegaz company, which to this day is our main production asset. Joseph Lipatievich joined our board of directors when he worked in the district administration and oversaw the economy and fuel and energy complex of the region. As vice-governor, he served on the board of directors of subsidiaries of Gazprom, Rosneft, and Sibneft operating in the Yamal-Nenets Autonomous Okrug.

“Having a strategic foreign investor has both pros and cons”

– Even after the IPO, it remained unclear who owns the blocking stake in NOVATEK. The investment memorandum disclosed only the owners of 63% of the shares (top managers and members of the board of directors). Do you have some unknown strategic partner?

- You are wrong. After placement, a little more than 10% of the package remains unopened. These shares belong to minority shareholders. Each of them accounts for less than 3% of the company's shares, and they are not included in the management and board of directors of NOVATEK. Information about who is the current shareholder of the company is publicly available. Before entering the London Stock Exchange, we disclosed all shareholders in accordance with the new requirements of European legislation, which came into force on July 1, 2005.

– Gazprom has never expressed a desire to become a shareholder of NOVATEK?

– No, we were not given such offers. If they do, naturally, we will consider it.

– Why didn’t the deal with Total take place? Do you regret it?

– From the very beginning, we considered two options for the development of events - an IPO or a deal with a strategic investor. When there was a delay with the decision of the antimonopoly authority [on the deal with Total], we immediately switched to preparing for the placement of shares. In December–January we placed 3% of shares on the MICEX and RTS. And then, one might say, we decided that we would complete the process of consolidating the company by raising funds on the stock market.

In addition, having a strategic foreign investor as a shareholder has both pros and cons. Especially when it comes to a company of the size of Total. It has its own interests, and it is not necessary that they fully correspond to the interests of NOVATEK itself. For example, we have plans for the development of petrochemical production, and when a year ago we shared these plans with Total, at the beginning of the discussion I did not see much interest on their part in our plans. These projects in the future could compete with the projects of the French company.

– So far you are not planning to attract large investors as shareholders?

– No, we are not negotiating on this topic.

– Several years ago, NOVATEK was going to create a joint venture with Itera, but the partnership did not work out. Why? What is your company’s current relationship with Itera?

– A lot has been said about this project, and I don’t want to repeat myself. “Itera” is still our serious partner in the gas business; it has a very professional team. We are satisfied with this cooperation.

– In 2001, an additional issue of shares of Purneftegazgeologiya was carried out, as a result of which the share of Gazprom’s subsidiary, Zapsibgazprom, was reduced to 8%. Gazprom has been suing for a long time for the return of shares of Purneftegazgeologiya. How did you manage to avoid a serious conflict?

– In general, it was not Gazprom itself that was sued, but its subsidiaries. Their goals did not always coincide with the interests of Gazprom. As a result, we bought out the remaining stake in Purneftegazgeologiya from Gazprom structures. And, in turn, they sold to the concern the company that owned the license for the Zapadno-Tarkosalinskoye field. It was right. Gazprom developed this field at its own expense and carried out production there.

– NOVATEK is a unique company that managed to defend its independence from Gazprom and at the same time maintain good relations with the monopoly. How?

– I am often asked: share your “know-how” of working with Gazprom. I always answer this by saying that there is no “know-how”. No one encroached on our independence, we did not have to fight with anyone or defend ourselves from anyone. There has never been a question of independence or lack of independence. We created all the basic mining and processing enterprises from scratch, and acquired the right to use subsoil in the manner prescribed by law. NOVATEK is an example of how an independent gas producer can exist and develop in the Russian market.

– Maybe, on the contrary, this is an example of an exception that confirms the rule? Other private gas companies have not been so lucky. Gazprom almost forced Itera out of the gas business, taking away its main gas assets, and Northgas had to transfer a controlling stake to the monopoly.

– We are constantly engaged in a dialogue with Gazprom about increasing NOVATEK’s production and obtaining permission to accept our additional volumes of gas into the gas pipeline system. These issues, of course, do not have simple solutions in technical and production terms. But there are no other questions. We jointly look for mutually acceptable solutions, implement them and move on. In July of this year, we signed a partnership agreement with Gazprom, which cemented the basis for constructive relations between our companies for the future.

– How do you feel about Gazprom’s export monopoly? Should independent companies receive their share of gas export revenues?

– I support a centralized export policy. The European Union writes gas directives for the whole of Europe. And we need such coordination. There is Gazexport, there is a developed policy - export through a single channel. It must be preserved. It is logical that some private companies want to participate in export revenues. But we are relying on the domestic market. We are interested in growing our share in the Russian market and providing gas to new consumers. If by 2010, while maintaining the existing tax burden, domestic gas prices reach the level determined by the “Energy Strategy of Russia” and amount to $60 per 1000 cubic meters. m, then supplying gas to Russian consumers will be profitable.

“The share of independent companies could grow to 40%”

– Do you have plans until 2010?

– We are going to reach a production volume of about 45 billion cubic meters by 2010. m of gas. In addition, we plan to increase condensate production. This year we will produce somewhere just over 2 million tons of condensate with a growth potential of up to 5 million tons. Our share of income from liquid hydrocarbons is already about 40%. The development of the raw material base is impossible without the creation of new condensate processing capacities. This year, the first stage of the Purovsky condensate processing plant began operating; we are planning to build a second stage with an increase in the volume of raw material processing to 5 million tons per year. The plant produces stable condensate and liquefied hydrocarbon gases. These products are the raw material base for the development of petrochemical projects. Most likely, we will develop these projects in partnership with companies that are represented on the petrochemical market today. A memorandum of cooperation has already been signed with the government of the Omsk region and the Titan group, which provides for the design of a petrochemical complex in this region.

– Do you plan to acquire oil assets?

– NOVATEK is first and foremost a gas company. We produce very little oil – about 200,000–250,000 tons per year. The basis of our resource base is gas condensate fields, so first of all we will invest in the production of gas and associated gas condensate and in the creation of processing infrastructure.

– You will probably need large investments. Are you planning large loans or issuing Eurobonds?

– The proceeds from the placement were used to complete the consolidation. This allowed us to reduce our loan portfolio by two thirds, since its increase was primarily due to the consolidation of assets. Most recently, on October 14, we repaid the Credit Notes (CLN) we raised in April 2004 to develop our manufacturing base. The current loan portfolio, in principle, allows us to attract financing for new projects. In the first quarter, we expect to issue Eurobonds worth more than $500 million. And then we will proceed from expediency.

– How do you see the future of the gas market in Russia? How can we create conditions for the survival and development of independent gas companies?

– Today, the share of independent producers in the domestic market of the Russian Federation is more than 20% of gas consumed. Taking into account the growth in the volume of Gazprom’s export contracts and the potential of independent producers, their share may increase to 40% in the coming years. This is beneficial to Gazprom and will allow it to increase export volumes.

By 2020, Gazprom plans to reach production of 580–590 billion cubic meters. m. At the same time, according to McKinsey, the production volume of independent producers could reach 250 billion cubic meters by 2020. m of gas. So, an equal partnership of all gas producing companies will make it possible to fulfill Russia’s international obligations and provide Russian enterprises with the necessary volumes of gas.