The head of LUKOIL, Vagit Alekperov, led the oil industry when oil cost $9 per barrel. Stability in the tax system will now help the industry, and with it the whole country, to survive, he is sure

Head of LUKOIL Vagit Alekperov (Photo: Ekaterina Kuzmina / RBC)

— A year ago in Davos, we discussed the fall in oil prices, but we did not yet know what awaited us ahead. Now oil costs less than $30 per barrel, and this is not a fall, but a collapse. When will he stop?

— Personally, I am guided by the fact that the average price in the second half of the year will reach $50 per barrel, because there are no objective reasons for the current low prices. The political situation in the Middle East is quite complicated. But the main thing is that $400 billion of investments simply left the global oil industry last year. Most likely, this year the figure will be the same. Basically, we all continue to fulfill our obligations to shareholders by reducing investments.

— Will the fall in investment lead to a decrease in production and higher prices?

- Right. At least for some period of time. We saw a cycle, a whole decade, when oil prices were not regulated by anyone. As a result, in 1990 the price reached $9 per barrel. But there was also a short period, in 2008–2009, when, due to market regulation by OPEC, the price quickly returned to above $100. Unfortunately, today OPEC has exhausted its ability to fulfill this mission, since its individual members have ceased to influence the crude oil market.

— Last year you called low oil prices “man-made.” What factors led to this? For example, you, more than anyone else in Russia, worked with the countries of the Middle East. Do you understand to what extent Saudi Arabia will keep prices low while increasing production?

— It’s difficult to shift all problems related to price only to Saudi Arabia. Yes, it is a major, defining player, but the trend we are seeing now has been decades in the making. When the price was high, forecasts were made that it would rise even higher - to $170–200 per barrel. This gave impetus to the development of alternative energy and energy-saving technologies. And today we see that Europe is already setting targets to meet 20–30% of its energy needs from these sources. Cars that run on electric, alternative energy have become quite popular. We must see and take these trends into account. This means that we should no longer be oil and gas companies, but energy companies. Therefore, when we talk about oil, we must keep in mind a complex of factors and a combination of circumstances that led to such a sharp drop in its price. Everyone predicted a decline to $50–70 per barrel, but no one predicted less than $30.

— You said that some OPEC members have lost their influence. Which countries did you mean?

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— I mean Angola, Nigeria, Indonesia - countries that today are no longer among the largest exporters, but only satisfy their needs. Today, only three countries export: Saudi Arabia, Abu Dhabi and Iraq. And Iraq, no matter what the price, will have to export - the country needs to solve its social problems. In Iran, the population is still waiting for the sanctions to be lifted.

— You have already experienced many such downfalls: at the end of the Soviet Union you already worked in this industry, in 1998 you managed a company, and in 2008 too. What does this fall look like? And what consequences will this lead to for the country?

— What the market is demonstrating today is the scenario of the 90s. What happened then? The industry was able to mobilize and, through consolidation, reduce its costs. The creation of BP, ExxonMobil - all this happened in the late 1990s - early 2000s. Companies grew larger, cut costs and were able to survive. The same thing will happen now. The market has already begun to demonstrate this trend.

“But I’m not talking about the consequences for the global oil industry, but about the consequences for Russia, because every time in Russia the fall in oil prices was associated with dramatic events.

“Nobody came up with anything other than cutting costs.” This applies to both companies and the country. Today we need to abandon capital-intensive projects that provide returns in the long term. No matter how great the temptation to implement them may be, now we need to mobilize and withstand a certain period of time. It can last two years or five years. We need to mobilize and survive. Of course, it is necessary to support the country's defense capability and social programs. But many irrelevant projects need to be abandoned. Perhaps we need to stop building roads and instead maintain the infrastructure that already exists. We are also mobilizing and reducing investment programs.

— We have come to the topic of interaction between oil companies and the state. Now we are approaching $25 per barrel - this is the cut-off price at which most of the money goes to the budget...

“The oil workers don’t have any money left now!” Oil workers spend all their money on investments, on the development of Russian industry. If we stop spending them, a huge number of single-industry towns, especially those associated with ferrous metallurgy, the pipe-rolling industry, light industry, and mechanical engineering, will simply stop. This must be understood: we are not saving anything today. Our balance sheets are transparent and understandable for the Ministry of Finance and the government.

“Nevertheless, the government is increasingly remembering, for example, the income that you receive due to the devaluation of the ruble. What logic can motivate officials? They need money from you in order to redistribute it to everyone.

- We need to do privatization. Nothing new has been invented since the 1990s. Privatization then gave impetus to the growth of oil production and attraction of investment.

“It’s as if we are in negotiations now.” And I’m trying to understand whether the state has such a position towards you - do I need money from you for everyone?

- Of course have. The easiest way for the Ministry of Finance is to increase the tax burden on the oil and gas industry. Because it is transparent and understandable, its reports are published and there is no need to communicate with anything else. The entire industry is well administered and analysed. Of course, this is generally an easy option, but it will lead to disaster.

— As far as we know, the Ministry of Finance is currently discussing the possibility of increasing mineral extraction tax payments. This is true?

— Nothing is discussed with us. If this question is raised, it will be without us. Everything is behind the scenes.

LUKOIL is the largest Russian private company in terms of revenue and capitalization and ranks second in the RBC-500 rating. The controlling stake belongs to the management, the main owners are the founder and president of the company Vagit Alekperov (22.94%) and vice-president Leonid Fedun (9.78%). LUKOIL accounts for 2% of world oil production and 1% of world proven oil reserves (second place in the world among non-state companies). It produces at 464 fields. The group of companies also includes 14 refineries (petroleum products and petrochemicals) and a network of 5.8 thousand gas stations. LUKOIL's revenue for the nine months of 2015 amounted to $74.7 billion, net profit - $2.3 billion (US GAAP). The company's production last year amounted to 85.65 million tons (data from the Central Dispatch Department of the Fuel and Energy Complex).

— How much will LUKOIL have to reduce investments?

- Today we approved three options: $30 per barrel - real, $40 - optimistic and $20 - crisis. The previous scenario assumed $50 per barrel. Based on $30, we will have to cut approximately $1.5 billion from the $8.5 billion investment planned for this year.

— What if it’s $20?

— That’s another $1.5 billion, or about 24%.

— Did the devaluation of the ruble have any positive effect?

- Today, all our “connectors” are raising prices, but we cannot raise prices for our product - gasoline and diesel fuel, because these are social goods. Obviously, its price is stable. We do not raise prices, which means we cannot compensate for the losses we are incurring today. The excise tax increased by two rubles. This all comes at the expense of our profits. This is an unfair expression: “excess profits due to devaluation.” We simply don't have it. We are not compensating for increased costs. If we raise the price of gasoline, our average sales receipt will simply fall, since people will have nothing to pay for it. They simply won't buy it.

— Let's return to the topic of interaction between LUKOIL and other large companies with the government. It is clear that the economic situation is difficult now. Do you have any request to the government? What needs to be done for business or specifically for the oil industry to reduce the negative consequences of falling prices, sanctions, unavailability of loans and other problems?

— Absolutely all these proposals are structured and were presented to the government. We have an excellent industry program. I am deeply convinced that if we ensure the stability of the tax and legal framework, if there is no fuss, we will get through the crisis situation. I mean not only the industry, but also the country. We understand our responsibility. The fact that we demonstrate such stability in gasoline prices is clear evidence that our oil companies are socially responsible. And are responsible to the government for how they regulate their economy. We have never regulated our economy at the expense of the population. We were always available for dialogue.

— So the main thing is not to change the existing tax regime?

- Certainly. Why is stability needed? During a crisis period, there is no need to make any revolutions, reforms or tax changes. Then the population will feel the government's confidence in overcoming these difficulties.

— When you, along with other major businessmen, met with Vladimir Putin on the eve of the New Year holidays, did you formulate some kind of request?

— We did this at the government level. Putin - not yet.

— Last year you said that LUKOIL management consolidated control in the company. Are you still buying shares?

- No. The current shareholder structure is optimal. There is no so-called controlling shareholder. I have no more than 25%, this gives confidence to our shareholders that control is not concentrated in one hand.

— How much does Leonid Fedun have?

— A little more than 10%. Plus management shares, incentive programs, through which managers increase their package. All this gives us the opportunity to understand that the majority will support this or that initiative when voting. Today we will not change the structure of share capital. If it becomes necessary to support the company's capitalization, we will increase the treasury stake in shares.

— How does this fit with the payment of dividends?

— We have never failed to pay dividends. Last year they approved 60 rubles. and clearly paid interim dividends in January.

— You had several assets put up for sale: gas stations, assets in Europe. Still selling even though it's not the best time?

- Yes, we sell. Processing is just going through the worst period of its development. And factories today earn good money. Even ISAB, a complex plant, is showing excellent results this year in terms of both net profit and EBITDA. We are negotiating the sale of our assets in the Baltics, maybe in Poland, because there is no integration with our production facilities there. Plus, of course, the tension that exists over Ukraine affects the company’s activities. Especially in Eastern Europe.

— You yourself said that now is a good time for consolidation and mergers. Are you going to buy any assets?

— If there is something that deserves our attention and will not undermine our financial stability, we will, of course, consider it.

— Inside Russia?

— We look at all projects. Both inside and outside.

— Will you go to any tenders for licenses this year?

- We went out. They have now applied to the Barents Sea, to the Norwegian part: they are not allowed to enter ours yet. And there the Norwegian government classified us as a class A company. There are very few such companies in the world.

— The issue of the participation of private companies in the development of the Russian shelf seemed almost resolved back in the summer. Why didn't it work again?

— The solution to the issue has been pushed back again. I don’t fully understand what is holding the government back, because the mineral resources belong to the state. Why doesn't it give them away? I still don’t fully understand this question.

— You said that it is necessary to carry out privatization, that this is a way to replenish the budget. Should privatization be carried out in the oil industry?

- Certainly. Why do the state need so many companies? The state regulates the industry through the subsoil.

— Are you talking about Bashneft?

– “Bashneft”, “Rosneft”... We must carry out privatization.

— Would you be interested in participating?

- I don't know. How would this happen. We are an operating company after all. We are not a financial fund that buys and makes money. Operations are important to us. We are the largest operator in the world and not the worst.

— Should this be interpreted as meaning that you would participate in privatization?

- This is state property. How the government decides what conditions will be developed is how we will live and work.

— Are there any indications that the government is ready to privatize these companies?

— Not yet, but there are talks. The Ministry of Finance and the Ministry of Economic Development are talking about this. The objects of possible privatization are Bashneft, Rosneft, and Transneft. Conversations are ongoing.

— Where can private companies get money for such purchases? The borrowing market is still practically closed. Has anything changed for you in this regard over the year?

— It’s easier to borrow against real assets. And then LUKOIL still has an investment rating today. I still think there will be money for our company, for our assets.

— Are you planning some kind of borrowing program for the year?

— We reduced our debts by almost 9% last year. We have fulfilled our obligations to creditors. This year we will set aside approximately $1 billion more to pay debt and interest.

— Is there a need to refinance?

- Let's see, we are negotiating. Including with Russian banks, but we are not forcing this situation. They are simply set up for a payment schedule. After all, we want to work through the first quarter of 2016 and then understand how the government will behave.

— I have a personal question for you. Now is a difficult time to run a company, would you like to involve your son in this process right now?

- No. He still has to undergo training. Must undergo an internship in some large Western company.

— Not in the Russian one?

- No, in the western one. He has already worked in Western Siberia for more than two years. I understand the principle. I understood how people extract oil, how wells are repaired, and I smelled oil. Now he is in the central office, but, I hope, by the spring he will defend his master’s degree, and next year he will go to a large Western energy company for a year and a half.

— And for how many years is this “involvement” program designed?

“For another year and a half or two, then I’ll watch.” But my goal is not to make him a successor.

— Over so many years, have you formed some kind of pool of managers around you with whom you would be willing to share authority? How long can you manage LUKOIL, you’ve been doing this for 20 years?

- Yes, sure. But this crisis situation is still pushing towards stability. As soon as we feel that the situation has stabilized, we will definitely take up this matter.

— While there is a storm, are you at the helm?

- While there is a storm, there must be a helmsman who is trusted.

Vagit Alekperov

Oil plan

Occupying the post of Deputy (in 1990), and then First Deputy Minister of the Oil and Gas Industry of the USSR, Vagit Alekperov, together with Minister Leonid Filimonov, developed the concept of a vertically integrated oil company. Nine years later, this concept became the basis of Alekperov’s doctoral dissertation. At the same time, in 1990, Alekperov had a son, Yusuf, who graduated from the Russian State University of Oil and Gas in 2012. Gubkin with a degree in development and exploitation of oil fields.

From ministers to the Forbes list

In 1992–1993, Alekperov created the LangepasUrayKogalymneft oil concern, on the basis of which LUKOIL OJSC was created in 1993, and left the ministry.

In 1996, LUKOIL was the first Russian oil company to place its ADRs in the West; the securities were listed on the London and Berlin stock exchanges, thanks to which Alekperov was included in the Forbes list a year later. At the same time, Alekperov began building his own tanker fleet, became concerned with the introduction of computer management technologies, and received Microsoft founder Bill Gates as a guest.

Alekperov and the state

In 1995, Alekperov was included in the board of the Ministry of Fuel and Energy, which is an advisory body whose orders were binding on enterprises and organizations of the fuel and energy complex. However, by order of Vladimir Putin in 1999, Alekperov, together with Sergei Bogdanchikov (at that time the president of OJSC NK Rosneft), Rem Vyakhirev (then head of Gazprom) left the board.

Foreign projects

LUKOIL received a share in the first international project in 1994 - the company bought 10% in the project to develop the Azeri-Chirag-Guneshli oil field, the largest in the Azerbaijani sector of the Caspian Sea. In 1997, LUKOIL, together with Zarubezhneft and the state enterprise Foreign Economic Association Mashinoimport, signed a contract with the Iraqi Ministry of Oil for the development and production of one of the world's largest oil fields, West Qurna-2 (geological reserves are estimated at 35 billion barrels). Due to international sanctions, the partners were unable to begin development of this project; after their cancellation, LUKOIL returned to Iraq, but began production at West Qurna-2 only in 2014 (LUKOIL now owns 75% of the project). Since then, LUKOIL has significantly expanded its international presence - the company is represented in 34 countries.

Lyudmila Podobedova participated in the preparation of the interview

Vagit Alekperov - RBC: “Oil workers now have no money left”