Q2 & H1 2013 Novatek OAO Earnings Conference Call (IFRS)

NVTK.MZ - Novatek PAO
Q2 & H1 2013 Novatek OAO Earnings Conference Call (IFRS)
Aug 13, 2013 / 01:00PM GMT 

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Corporate Participants
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   *  Mark Gyetvay
      Novatek OAO - CFO
   *  Alexander Palivoda
      Novatek OAO - Head - IR

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Conference Call Participants
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   *  Oleg Maximov
      Sberbank CIB - Analyst
   *  Karen Kostanian
      Bank of America/Merrill Lynch - Analyst
   *  Maxim Moshkov
      UBS - Analyst
   *  Artem Kosenko
      JPMorgan - Analyst
   *  Timur Salikhov
      BCS Financial Group - Analyst
   *  Geydar Mamedov
      Goldman Sachs - Analyst

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Presentation
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Operator   [1]
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 Good day, and welcome to the Novatek Second Quarter and First Half 2013 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Oleg Maximov, senior analyst, oil and gas managing director, Sberbank, CIB. Please go ahead, sir.

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 Oleg Maximov,  Sberbank CIB - Analyst   [2]
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 Thank you. Good afternoon and welcome. I'm Oleg Maximov from Sberbank. And this is Novatek's Second Quarter 2013 IFRS Results Conference Call.

 With us today, as usual, is Mark Gyetvay, Chief Financial Officer and member of the Board of Directors of Novatek, and Alexander Palivoda, Head of Investor Relations. Mark, over to you. Please start with your presentation. Thank you.

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 Mark Gyetvay,  Novatek OAO - CFO   [3]
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 Thank you, Oleg. Ladies and gentlemen, shareholders and colleagues, good evening, and welcome to our second quarter 2013 earnings conference call. I would like to thank everybody for joining us again this evening and extend our sincere gratitude to Sbarbank CIB for organize and hosting our earnings conference call.

 Before we begin with the specific conference call details, I would like to refer you to our disclaimer statement as is the normal practice. During this conference call we may make reference to forward-looking statements by using words such as plans, objectives, goals, strategies, and other similar words which are other than statements of historical facts. Actual results may differ materially from those implied by such forward-looking statements due to known and unknown risks and uncertainties, and reflect our views as of the date of this presentation.

 We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events.

 Please refer to our regulatory filings, including our annual review for the year ended the 31st of December 2012, as well as any of our earnings press releases and documents throughout the past year for more descriptions of the risks that may influence our results.

 Traditionally, the second quarter marks the beginning of the seasonal shift from peak to trough. And as expected, this quarter highlights the significant variability in our production and earnings results on a seasonal quarter-on-quarter basis.

 The second quarter of 2013 also marked the beginning of the transition from selling [of] raw material, stable gas condensate, to the market end of a slate of petroleum products with the successful launch of the Ust-Luga gas fractionation and trans-shipment complex on the 19th of June, an event attended by many of the analysts on the conference call this evening.

 During the quarter, to get ready for the formal commission of the facilities, we began ramping up the inventory feedstock and operational line-fill at the Ust-Luga complex prior to the processing of the first tanker of finished products by transferring approximately 214.000 tons of stable gas condensate, thus reducing the volumes of stable gas condensate available for sale.

 This is obviously a temporary transition which will eventually work its way through the inventory, processing and sales cycles going forward.

 Another key variable to consider when analyzing our quarter-on-quarter results is the significant relative changes in the inventory volumes for natural gas and liquids between the respective reporting periods.

 We substantially reduced our volumes in natural gas in underground storage due to the extended cold weather this past winter season, resulting in stronger seasonal demand, as well as landed a significant volume of stable gas condensate that was in transit at year end due to our DES, or destination-ex-ship commercial marketing policies.

 Consequently, this meant that our first quarter financial results were very strong, relatively speaking, on -- on the back of the significant inventory movements as well as the peak winter demand season.

 I noted on our last conference call that we have begun moving more volumes of stable gas condensates to the Asian-Pacific region. And this market shift in geographical deliveries had notable changes in logistics, timing and pricing. We will continue to deliver hydrocarbons products to the Asian-Pacific region going forward, but it will be in the form of finished oil products rather than stable gas condensate.

 We anticipate that the last tankers of gas -- of stable gas condensate will be dispatched in the September-October time frame. Therefore, all deliveries to market will be finished oil products unless advised otherwise.

 Overall, we delivered another set of reasonably strong financial and operational results for the second quarter and the six months ended the 30th of June 2013, relative to the year-on-year comparative results, as well as financial and operational results consistent with our expectations quarter-on-quarter, despite the apparent seasonal variations.

 We continued to deliver robust natural gas and liquid production growth consistent with our annual guidance, reported double-digit earnings growth, and generated sufficient operating cash flows to fully fund our capital expenditure program despite reporting negative free cash flow during the current reporting period.

 I would now like to discuss some of the key projects and begin tonight's call by discussing the Yamal LNG project.

 During the second quarter, and throughout the first half of 2013, we continued to make significant progress in the port construction activities, development drilling and other important workstreams consistent with the project work plan and timetables. All contractors for the long-lead items have been selected, and draft contracts have been approved and forwarded to Technip and JGC, the main contractors for execution.

 Specifically, Air Products will supply the cryogenic heat exchangers. General Electric will supply the compressors and gas turbines for the LNG plant. Siemens will supply the gas turbines for the power plant, and the French companies, [Entropose] and VINCI will be responsible for the LNG tanks.

 We also successfully placed all the invitations to bid as part of the open-book tanker process for the LNG plant, and have begun receiving tender offers from participating companies and contractors.

 We will expect to receive the remaining offers by mid to end of September. These bids will be analyzed together with our main contractors, and only after this process is completed we'll be able to provide additional comments on the project's total capital expenditure program.

 In terms of ongoing infrastructure work, we completed the installation of piles for the material offloading facilities, approximately 950 meters long, which allows us to begin the dredging operations at the port's harbor.

 As you recall, the dredging operations is financed by the Russian government. And as of last summer, approximately 1.5 million cubic meters of soil was excavated. Currently, there are 13 vessels working on the dredging operations, and we expect that approximately 8.5 million cubic meters of soil will be dredged during this navigation period.

 We anticipate that the port facility will be launched by year end, which will allow us to receive [year-end] supplies and construction materials.

 In addition, the design project for the ice production facility, also financed by the Russian government, is finalized and has been submitted for state expert review. The tender process for this construction work has already begun.

 Another important workstream relates to the logistical or shipping aspects of the Yamal LNG project. We have recently announced that the South Korean company Daewoo Shipbuilding and Marine Engineering Ltd., recognized as the world's largest builder of LNG carriers, has been selected as the shipbuilder for the construction of 16 new Arc7 class LNG tankers, as well as the signing of a binding slot agreement.

 The slot reservation agreement sets the preliminary contract price per vessel, the schedule of production and the estimated delivery dates. Moreover, the slot reservation agreement provides for the cessation of rights to finance and purchase the ice-class LNG tankers to a third-party shipping company approved by Yamal LNG.

 We have short-listed seven shipping companies as part of the shipping tender process and we anticipate that this tender will be finalized in the coming months.

 As part of the shipping tender process, an agreement has been signed with Sovcomflot and Vnesheconombank for the procurement of two ice-class LNG tankers which will be ordered from Daewoo. The estimated plan is to have the first two of the 16 tankers delivered by 2016, and these two tankers will be used to test the main logistical routes prior to the commencement of the LNG plant.

 Sovcomflot is widely recognized in the global shipping industry as the most experienced shipping company in Arctic navigation, and currently has 50 ice captains with extensive Arctic expertise. They also involved in LNG transport, with a present fleet of six LNG carriers and another four LNG carriers under construction with expected deliveries in 2013 and 2014.

 A lot of progress has also been made, besides the ship and workstream. In terms of production drilling, four well packs have been prepared for drilling operations. And as of today, four horizontal production wells have been drilled, of which two have been tested and confirmed the expected geology of the South-Tambeyskoye field.

 These early results give us high confidence in the field development plan that has been formulated for the South-Tambeyskoye field. And we will continue to proceed forward with the current drilling operations. Another Arctic-class drilling rig is presently being fabricated, and will be mobilized on-site once it's completed, most likely in early 2014.

 The South-Tambeyskoye field has 43 hydrocarbon bearing layers, and the development plan will initially target the lower layers first, which contain wet gas resources similar to the Cretaceous deposits located at the Yurkharovskoye field.

 This field development plan is justifies technically by easier well placements and economically by exploiting maximum gas condensate volumes at the start of commercial production. The majority of wells will be drilled horizontally, and the initial flow rates from the wells already completed were 1.5 to two times higher than initially planned.

 There have been many questions raised for senior management on the [form out] of an additional equity stake in Yamal LNG project. And some of the commentary has been extremely negative, implying that the delays in announcing a new partner confirmed the challenging nature of the project.

 We have repeatedly refuted these comments as unfounded and have consistently advised our shareholders that significant due diligence would be undertaken and that appropriate time was necessary for the potential entrants to conclude this important work.

 At the recent St. Petersburg economic forum, we signed a framework agreement with the Chinese National Petroleum Corporation, or CNPC, stipulating that CNPC will acquire 20% equity stake in the Yamal LNG project, conclude a long-term sales and purchase agreement for the purchase of at least three million tons of LNG per annum, as well as working closely with us in organizing external financing from Chinese financial institutions.

 This announcement was another landmark deal for the project and demonstrates, from an industry perspective, the commercial viability of the project. The deal's expected to close in October with the formal execution of transaction documents. And once concluded, we will provide additional information to the market on this transaction.

 We now have two super-majors, Total and CNPC, representing combined 40% equity stake, confirming the technical, operational and commercial merits of this transformational project. And so, hopefully, we can begin seeing some value accretion [on loft] to Novatek, as well as silencing some of the project's critics.

 If still not convinced, in a related development, we have been actively discussing the sale of an additional equity stake in the Yamal LNG project to another industry consortium, and these discussions are advanced and proceeding constructurally from our standpoint. We will provide additional updates on future conference calls or upon the conclusion of another transaction.

 More recently, we completed our initial project finance kick-off meeting with expert credit agencies in Paris. And these two days [in] meetings was extremely positive from a due diligence perspective on a comprehensive project activities to date, as well as the feedback we received from the ECAs on project financing.

 A series of upcoming meetings are planned over the next several months, as well as site visits. But it is imperative and instructive to get firsthand feedback on the project's bankability as well as positive feedback from the ECAs as to the content and source of materials, supplies and contractors becomes evident.

 Another important question remains open at this particular moment is the change or amendment to the export law to liberalize liquefy natural gas. In this crucial area, we have been actively involved in these discussions and have previewed drafts of the amendments, which will be discussed by the State Duma in September.

 We remain confident that the export law will be amended to allow the Yamal LNG project to export LNG. And our confidence mirrors those comments voiced recently in an interview by Energy Minister Alexander Novak, who stated that the law restricting the export of LNG on the territory of the Russian Federation will be amended and will become effective on the first of January 2014.

 According to Mr. Novak, the fundamental decision on export rights for the independent gas producers is already in place and some technical terms are being finalized. There are no plans by the Russian government to regulate the markets and customers. However, they would like to avoid any potential conflict with pipe gas going to Europe. And Gazprom has also voiced a concern in their initial comments, but subsequently, they have relaxed their position and will accept the independence role in exporting LNG from Russia.

 The liberalization of the LNG export market is clearly imminent, and again confirms the strong support received from the Russian government in relation to our Yamal LNG project and the role this landmark project plays in meeting the strategic goals as outlined by President Putin of Russia, capturing 15% of the global LNG market.

 The Yamal LNG project is progressing rapidly, and the progress achieved to date in terms of construction and infrastructure activities, logistics, the contractual tender process, field development, and the market end of the plant's future LNG output has without question enhanced the project's overall credibility.

 The project's sponsors have approved the Yamal LNG operating budget and have been investing capital to ensure the aggressive completion targets are met. The question surrounding export liberalization will be finalized in the near term, and the commercial market end of the remaining volumes of LNG output is well advanced at this point in time. We are targeting a final investment decision, or FID, around the third or early fourth quarter of 2013.

 The Ust-Luga complex began processing stable gas condensate into finished petroleum products in early June. And as of the end of the quarter, the facility processed 184,000 tons of condensate, which was equivalent to the same volume processed during the month of July.

 The output of marketable products increased from 155,000 tons in June to roughly 185,000 tons, which included the reprocessing of all specification products than the initial plan [outlined].

 We now have the fractionation unit process in the range of all products that meet international specifications. And as of today, three tankers carrying approximately 257,000 tons of [napa], one tanker of 16,000 tons of -- of bunker, or ship, fuel, and one tanker of 15,000 tons of kerosene have been shipped to the market.

 In terms of construction activities, we are approximately 90% complete on a second splitter unit. And we expect to begin tests in this facility in October with the formal operational launch in the latter part of the fourth quarter.

 As I've mentioned many times in the past, the formal commission under the Ust-Luga complex represents a significant change in the liquid marketing strategy whereby we will be marketing a completely new range of petroleum products across diverse regions, as well as significantly expanding a number of customers for our output.

 We will require some time to normalize these marketing activities and confirm the [net back] enhancements. Our marketing will be based on a combination of term agreements, as well as utilizing the stock market, as we are viewed as a new player in this particular market.

 Presently, we have averaged approximately $50 per ton additional margin over the selling of stable gas condensate, which is reasonably consistent with our commercial marketing expectations.

 At Ust-Luga, we will need additional operational time to optimize the plant's input-output capacity. But we remain confident that this investment will enhance our position in the market and achieve the value added margins from selling finished products rather than a raw material.

 During the second quarter, the Purovksy processing plant populated at approximately 97% capacity. And for the six months ended the 30th of June, the plant processed 2.4 million tons of unstable gas condensate, representing a year-on-year increase of 21%. The Purovsky processing plant expansion activities are currently under way, and we expect the first 3 million tons, or two trains of 1.5 million tons each, to be completed October, with the remainder of the further expansion activity to 3 million tons to be completed in early 2014.

 The expansion work will increase the processing capacity at the Purovksy plant from 5 million tons per annum to 11 million tons per annum, and will be required, due to the expected significant increase in unstable gas condensate output from the SeverEnergia fields, as well as increased output from our existing asset portfolio.

 I would like now to make a few comments about our upstream business. During the reporting period, we continue to make good progress in terms of expiration and field development activities. And I will highlight some of the notable achievements, as well as ongoing work activities.

 During the first half of 2013, we discovered a new gas condensate field called a Urengoyskoye field, which resides within the boundaries of our North- Russkoye license area. The discovery consists of seven hydrocarbon bearing layers, with an estimated recoverable C1/C2 reserves of approximately 16.5 billion cubic liters of natural gas and 2.3 million tons of liquids. We are in the process of preparing a development plan for this new field.

 We drilled approximately 26,000 linear kilometers of exploration during the period, of which approximately 65% was performed on our joint ventures. We also ran approximately 2.7 thousand square kilometers of 3D seismic and another 610 kilometers of 2D as part of our ongoing geophysical and geological activities. We are actively performing exploration work at the Utrenneye field in the Gydan Peninsula, as well as other license areas.

 We undertook a series of development activities at our core fields, particularly ongoing development activities to exploit oil bearing layers at the East-Tarkosalinskoye field as well as pilot tests in oil -- oil rims at the Yurkharovskoye field. With the additional work performed on the Yurkharovskoye fields' core [valengin] deposit, we have increased the plateau level of the field from 36.5 billion cubic meters of natural gas to 37.2 BCM.

 We are presently spending an additional capital at the Yurkharovskoye field to build a new booster compressor station. And funds will be spent over the next two years with a compressor booster station expected to be operational in 2016. Once commissioned, the field plateau level will increase to approximately 38 BCM per annum.

 At Nortgas, we are presently on schedule to launch the eastern dome in the fourth quarter of 2013, which will increase the North-Urengoyskoye field productive capacity to approximately 10.7 billion cubic meters of natural gas and 1.4 million tons of unstable gas condensate from its present capacity of 4.2 BCM of natural gas and 400,000 tons of liquid.

 At the end of the second quarter, we completed the gas gathering facilities which are currently being tested, and have completed approximately 95% of the work related to construction of the gas treatment facility.

 Our commitment to exploit the field's hydrocarbon resources in a timely manner is consistent with our historical track record of bringing projects on stream within budget and on schedule.

 During the reporting period, we also increased our equity stake in Nortgas from 49% to 50% as previously speculated we would do, and as a result we are now paying the independent gas producers' rate for the mineral extraction tax as well as continuing to offtake our equity share of natural gas and 100% of the unstable gas condensate.

 We continue to make good progress at SeverEnergia's Urengoyskoye and Yaro-Yakhinskoye field during the period. At the Urengoyskoye field, we completed the construction of the gas and gas condensate pipelines, and will commence work shortly to install equipment for the gas treatment facility.

 We also successfully drilled two horizontal wells out of the total 22 wells drilled to date into the [Achimov] formation, with the horizontal sections averaging approximately 600 meters in length.

 Due the successful drilling of horizontal wells, our geology team is currently reassessing the development plans at the Urengoyskoye field. The flow rates from the horizontal wells have exceeded two times the vertical wells, dependent on the length of the horizontals, which will lead us to reduce the number of wells to exploit the field.

 Currently, the horizontal wells average about 20% to 30% more cap ex per well than a vertical well with hydrofracture, but the additional flow rates clearly justify the additional cost per well and will ultimately reduce the overall forecasting capital expenditure to exploit the field.

 The field's development activities are on schedule, and we plan to launch initial production around April 2014.

 At the Yaro-Yakhinskoye field, a number of work activities are presently under way, but none were completed during the reporting period.

 Infrastructure work to backfill areas such as well pads, roads and areas surrounding the gas treatment facility and other units is approximately 70% completed, and ongoing pipeline work for the gas and gas condensate pipeline is presently under way.

 We were on schedule to work activities to date, and we plan to launch this new field sometime during the early part of the third quarter 2014.

 There were reports in the media that Novatek acquired all of the retail activities of Statoil on the Polish market, but I would like to reiterate that these news reports were erroneous, as we only acquired 122 LPG tanks combined with the respective supply contracts for a transaction value of approximately $500,000. This acquisition was a minor transaction but supports our wholly owned subsidiary's commercial activities by adding roughly 500 tons of LPG used mainly for household heating in the Polish market.

 For the first half of 2013, our natural gas production increased by roughly 9% year-on-year, which was driven largely by our launch of the Yurkharovskoye field, the first and second stages of Tambeyskoye field, as well as a proportional equity share of Nortgas production post acquisition.

 In terms of liquid, we increased our production output by 11.9% year-on-year, which was largely driven by increase in crude oil production at the East-Tarkosalinskoye field, the two respective launches at the Tambeyskoye field, and our equity share of production from Nortgas.

 Our production growth for natural gas and liquids in July continue to remain robust, as recently reported by CDU TEK, the central dispatching unit of the fuel and oil complex, increasing year-on-year by 10.4% and 15.4% respectively as compared to the comparative reporting period.

 Despite the reasonably strong production rate we have achieved year-to-date, our annual guidance for natural gas and liquid production remains unchanged at 7% to 8% growth in natural gas and approximately 9% for liquids as of this conference call.

 For the six months ended the 30th of June 2013, we reported positive organic growth of natural gas at our Yurkharovskoye field, which was slightly offset by declines in gas production at both the East-Tarkosalinskoye and Khancheyskoye fields.

 The decline in gas output at the East-Tarkosalinskoye and the -- and the Khancheyskoye fields were largely attributable to an operational decision to optimize output of wet natural gas at the Yurkharovskoye field to maximize unstable gas production during the reporting period.

 We achieved positive growth contributions from our equity share of natural gas production from Sibneftegaz as well as [commence purchasing] from Nortgas effective the 1st of January 2013.

 We continue to purchase natural gas from Sibur, a related party, and during the first half of the year we purchased approximately 3.4 BCM of natural gas from this entity for resale in the domestic market.

 On a quarter-on-quarter basis, we had a total decrease in both our core production and purchases of approximately 1.7 BCM, or 9.7%, essentially representing the seasonal adjustment between reporting periods.

 We also had a massive swing in inventory volumes between the first and second quarters of 2013 of roughly 2.4 BCM. In the first quarter 2013, we withdrew approximately 1.4 BCM of natural gas underground storage facilities for eventual resale to the market, representing a strong seasonal demand for natural gas in the cold winter months.

 This withdrawal of natural gas was completely reversed in the second quarter, where we -- we injected into underground storage approximately 1.4 BCM for later use in -- in the peak winter season.

 For liquids, we increased our production volumes, including our share of purchases from our joint ventures, for the first half of 2013 by 24.7%, driven largely by the production growth of crude oil from the East-Tarkosalinskoye field, the launch of the two stages of product at Tambeyskoye and the production contributions from the recent acquisition of the 49% stake in Nortgas.

 On a quarter-on-quarter basis, we managed to slightly increase our liquids production, including our share of equity purchase by 2.5%, but also had a large swing in inventory movements during the respective reporting periods.

 In the first quarter, we managed to significantly reduce the volume of inventory in transit as reported at year end and recognize these volumes as revenue in the reporting period. However, in the second quarter, as previously noted, we began to transition volumes of stable gas condensate processed at the Purovsky plant as raw material feedstock to the Ust-Luga complex. As a result, we recorded an inventory build-up of approximately 292,000 tons in the current period as compared to withdrawal of 296,000 tons in the first quarter.

 Our inventory volumes tend to fluctuate period-on-period as a normal course of our business, but the build-up in the second quarter was largely attributable to the start-up of the Ust-Luga complex, which will eventually work itself through the inventory sales conversion cycle as is normal practice.

 In terms of sales volumes, we significantly increased a portion of our natural gas sales to end consumers to approximately 89% from roughly 70% in the second quarter 2012, and -- and maintained the same relative sales mix quarter-on-quarter.

 The change was largely driven by new gas sales contracts concluded in 2012, as well as the acquisition of an 82% equity stake in Gazprom Mezhregiongas Kostroma in December.

 During the quarter, we reported total gas sales to end consumers of 13 BCM, which represented an increase of 56% year-on-year but a seasonal decrease of 22% quarter-on-quarter.

 Within our end customer sales category, power companies and large [additional] customers represented approximately 94% of the sales volume delivered, or approximately 83% of our total gas sales for the quarter.

 Total natural gas sales for the reporting period, inclusive of X field sales aggregated 14.6 BCM of natural gas, representing a year-on-year growth of 8.8% and a -- and a similar corresponding seasonal decline of 22%.

 Geographical regions representing greater than 10% of our sales volume during the current reporting period included the Chelyabinsk and [Perm] regions and the city of Moscow.

 Collectively, the city of Moscow and the Moscow region represented approximately one-quarter of our sales volumes, which influences the distance transported to market. Our average distance-to-market was approximately 2,200 kilometers, representing an average increase of 265 kilometers year-on-year and approximately 300 kilometers quarter-on-quarter.

 Correspondingly, reported a significant year-on-year increase in our transportation expense for natural gas during the current quarter -- quarter -- excuse me -- primarily due to the high proportion of end customer sales as compared to the second quarter 2012, the average increase in average distance-to-market in both periods, and a change in the purchase agreement with Sibur, and a transport tariff growth of 7% effective July 1st, 2012.

 Our average net backs for natural gas sold to end consumers increased by 182 rubles per 1,000 cubic meters, or by 12.3% as compared to the second quarter 2012, and were slightly lower by roughly 54 rubles per MCM, or 3.2% quarter-on-quarter. Whereas our X field sales price increased by 13% year-on-year, but was lowered by 7.4% quarter-on-quarter.

 During the second quarter, the Federal Tariff Service, or FTS, adjusted the wholesale gas prices to end consumers by 3%, effective the 1st of April 2013, which obviously had an obvious negative effect on pricing during the later part of the second quarter.

 In July, the FTS recalculated the minimum and maximum wholesale gas prices for end consumers, and effective the 1st of August, the average wholesale and consumers prices were raised by 3%.

 Overall, we -- we were pleased with the relative strength in our gas pricing for both end consumers and X fields in the reporting period, despite the reduction in the regulated tariff in April and a change in the regional mix of our sales.

 The biggest impact on our -- on our reported revenue for the period was a corresponding reduction in liquid sales year-on-year and quarter-on-quarter due to the transition of raw material feed stock with the commencement of process at the Ust-Luga complex as well as the inventory movements I discussed earlier this evening.

 These items should not have been a surprise this quarter, as they were flagged on a previous conference call, as well as discussed at the commission of the new facility in June. Specifically, we had notable decreases in volumes of stable gas condensate sold, which was slightly offset by an increase in volumes of crude oil sold and to a lesser extent, LPG and other products.

 The transition to the Ust-Luga complex is obviously a temporary situation, as we've already begun to ship finished products to the international markets.

 On a total barrel of oil equivalent basis, we produced approximately 108 million barrels of oil equivalent, representing an average total hydrocarbon production per day of approximately 1.2 million barrels today.

 We did an excellent job during the second quarter managing our overall operating expenses despite the increases year in year in transports expenses, consistent with the growth in volumes sold to end consumers, the increase in average distance to market and the increase in a transport tariff to 7%, as well as continued practice of purchase in natural gas and liquid hydrocarbons.

 There were no material surprises in our G&A expenses. Our balance sheet and liquidity position continue to remain strong throughout the reporting period, despite a slight increase of RUB2.1 billion and our overall deposition this quarter relative to the year end balance. We secured a $1.5 billion syndicated loan facility from 10 commercial banks, of which $500 million was drawn down during the quarter.

 Although we were negative free cash flow during the second quarter 2013, mainly due to higher capital expenditures in the reporting period, which was offset by a lower operating cash flows, we remain confident that we will continue to fund our capital expenditure program to internally generate cash flows and have the ability to meet all of our debt obligations and liabilities when they become mature or become due for payment.

 We spent approximately RUB17.4 rubles in capital expenditures, excluding a payment for a mineral license, which represented a significant year-on-year and quarter-on-quarter increase of 42% and 54%, respectively. The major increase in capital spent represented the funds spent on the compressor booster station at the Yurkharovskoye field, ongoing crude oil drilling at the East-Tarkosalinskoye field, and funds spent on the Ust-Luga complex and the Purvosky process and expansion.

 We remain committed to our initial guidance between RUB50 billion and RUB60 billion for the full year 2013, which includes approximately 10 billion rubles of carry-over capital from the prior year -- essentially meaning that our capital expenditure program will remain reasonably flat year on year.

 In conclusion, Novatek reported another set of solid financial and operational results for the second quarter 2013, consistent with our expectation of seasonality and the formal launch of the Ust-Luga complex. I believe we have demonstrated once again that our commercial marketing efforts deliver more volumes of natural gas to end consumers as well as a geographical mix of sales is a sound policy and further solidifies our domestic market position vis-a-vis other suppliers.

 The announcement of the CNPC transaction where a 20% equity stake in Yamal LNG was a major news story for us in the reporting period, and we welcome CNPC, together with our strategic partner Total, in delivering a world-class LNG product -- project, excuse me, in the Arctic zone. Much progress has been made in a relatively short period of time, and we look forward to provide periodic updates on the status of various workstreams in upcoming conference calls as well as investor meetings.

 I would like to end this earnings conference call by reminding everybody that we are fully committed to ensuring sound corporate governance and financial transparency; that senior management's primary attention is focused on delivering our key projects on time and with the proposed budget, like Ust-Luga, or the early launch of the eastern dome of Nortgas. And by maintaining this commitment and achieving these targets, we can continue to create sustainable value for all of our valued stakeholders.

 Thank you very much. I now open the session to questions and answers.



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Questions and Answers
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Operator   [1]
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 Thank you. (Operator Instructions). We will take our first question from Oleg Maximov. Please go ahead, sir. Your line is open.

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 Oleg Maximov,  Sberbank CIB - Analyst   [2]
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 Hi, Mark. And thank you for the presentation. Just maybe three questions from -- from me all on upstream side.

 Just a year ago, we thought that [Yurkharovskoye] field capacity is 34 BCM, then you raised the guidance to 36.5 billion. Now you're saying 38 billion cubic meters, which, you know, effectually I guess created, you know, 4 billion cubic meters, right?

 And do you think that this new plateau comes at the expense of the long-term production of the field, or should we move the entire, you know, production curve of the field upwards?

 So, in other words, do you think that this new plateau will translate into higher -- you know, into higher [pools] reserves at the field or not?

 The second question on Urengoyskoye field, if I heard you correctly, you were sort of trying to hint that the -- you know, your upstream people believe that production can be raised, you know, from -- from these, you know, elephant fields within -- within SeverEnergia. So, you know, is this kind of a correct assessment or not?

 And the third question on your -- on your production guidance on the gas side of 7% to 8% this year do you think that this kind of looks a little bit conservative given that, you know, so far this year, Yurkharovskoye field is outperforming pretty massively, you know, the -- the initial expectations? Thank you.

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 Mark Gyetvay,  Novatek OAO - CFO   [3]
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 Thank you, Oleg. On -- on the first question, I think it's just a function of, you know, as we continue to draw, you know, additional wells at the Yurkharovskoye field, as has historically been the case, we then find an additional layers or deposits for future exploitation.

 And I -- and I believe the -- the ability to, you know, demonstrate reserve growth is -- is evident in the field as well as maintaining this plateau for a longer period of time. I think those two elements are in the field.

 And I think we should assume that given the results today and our ability to increase the plateau level over the last couple of years as a result of additional drilling confirms that there're still hydrocarbon bearing layers to be found at the Yurkharovskoye field.

 On the second part of the question, and -- and return to SeverEnergia particularly relating to Urengoyskoye field -- you know, I think it's -- it's a function of, you know, not that we think it's going to massively change the production profile of the field.

 I think -- I think the results of the horizontal well -- you know, when I said it was coming in at 1.5 to two times higher than expected -- was really no different than the original change in plan we had at the Yurkharovskoye field when we adopted the larger bore wells and started -- and started drilling longer horizontal legs to these particular fields.

 I just became evident that we can redevelop, redesign the field program, which meant that we can reduce the number of wells needed to -- to exploit the field. Although the capital expenditure per well increased, it justified that initial spend, because the flow rates were substantially higher than the vertical wells.

 So I don't think I would -- I would feel comfortable to say -- at this point in time saying that, you know, Urengoyskoye field's going to be higher than anticipated. I just think that, overall, we'll probably end up reducing the number of well stock needed to exploit the field, particularly to get it up to the plateau levels and -- and [possibly over] the life of the field in terms of its maintenance project.

 And, your third question, I don't think it's -- I don't think it's -- you know, I don't think it's a question of being conservative at this particular point, because we're seeing, you know, quite a change in the market place, you know, as we look at what's happening in Europe and, you know, the demand being pulled into Europe and Gazprom's, you know, strong exports for the particular summer months.

 I think it's -- it's reasonably in line with our expectation for the demand growth in Russia, considering that overall GDP has -- has slowed down, the growth has slowed down. And I think it's kind of premature at this point right now until we sort of move away from some of the social spending to see how economic activity picks up and we can again, you know, look at this maybe in the third quarter, but right now, I believe, it's not -- it's not trying to be conservative. I think it's our realistic assessment of what we think demand will be for the remainder of the year, which will be in line with those -- more or less -- targets we've set.

 Although, I understand your point. I understand that, you know, given so far year to today we're above that, but I think it's still a little -- a little premature, because now we're in to the second leg of the -- of the trough period. And it just depends on how -- how long, you know, we go into the second leg of the trough, or conversely, how quick we go into a winter months. If we go into a winter months or a colder winter earlier -- you know, obviously opposite of what happened this past winter, you know, where the winter tended to be later in the year -- you know, it could alter -- it could affect or alter our forecast for a particular year.

 But, right now, I think it's -- it was a collective decision on the ground, both from a commercial as well as senior management that the guidance we provided for the market was reasonable in this -- in this current environment.

------------------------------
 Oleg Maximov,  Sberbank CIB - Analyst   [4]
------------------------------
 Okay, great. Thank you.

------------------------------
Operator   [5]
------------------------------
 Our next question comes from Karen Kostanian of Bank of America. Please go ahead. Your line is open.

------------------------------
 Karen Kostanian,  Bank of America/Merrill Lynch - Analyst   [6]
------------------------------
 Mark, thank you very much for your presentation. I apologize. I joined a little bit late. So if you have touched upon what I'm going to ask again, my apologies. But two questions.

 First, your contract on the Yamal LNG with CNPC, when do you expect the final signing of the agreement?

 And, second, I just wanted to hear your thoughts about the upcoming LNG liberalization, as announced by Mr. Dworkovich, whether you expect this to be a full liberalization, or, you know, a partial liberalization.

 And finally, given that this is coming up, do you expect, and are you in talks to sell an additional 10% stake to another partner? And have these talks, if they occur, have they been more active with the upcoming LNG liberalization?

 Thank you.

------------------------------
 Mark Gyetvay,  Novatek OAO - CFO   [7]
------------------------------
 Karen, just quick on the first question.

 I mean, we expect to -- to finalize all the [transaction] documents by the 1st of October. So that will officially close the CNPC transaction.

 In terms of the -- the second -- the second question on the LNG exports -- I mean, you know, it's -- we believe, as I mentioned in my discussion, that -- that this is imminent and that it will be changed

 I can't comment at this particular point whether it's going to be full liberalization or partial liberalization. You know, I think we'll wait to see how that -- how that materializes. But I know it will have a positive impact on our Yamal energy project. So irrespective of whether it's partial or full is irrelevant for us at this particular juncture. Because as I mentioned, it's not the government's intent to control markets and their customers.

 I think -- I think in terms of its impact on our -- on our marketing side of the LNG, you know, I think we're already beyond that. I think, actually, if you look at the marketing element of -- of the Yamal LNG, we actually have more demand for the volume produced today that are being discussed for potential contracts.

 So, I mean, I think that the -- the -- the demand for the offtake has been pretty strong. And -- and I believe we'll have some very, very positive news on those fronts in the near term, in terms of additional LNG contracts signed.

 Now, it's -- it's not a function -- I -- I think -- I think it's probably a mistake to associate the signing of an export liberalization with an increased sale, or potential sale of a -- of a stake in -- in Yamal LNG -- it's not 10%, it's actually 9%.

 You know, I -- I think -- I think the announcement of the CNPC contract, you know, was more an impetus to get people in, you know, on notice that there's only 9% remaining. So if you've been sitting in the -- on the sidelines anticipating or thinking about it, you better move pretty quickly, because it's the company's decision on whether or not they're going to sell this or retain it ourselves. And post a CNPC transaction in -- announced in June we had a significant level of activity from interested parties to -- to discuss the additional equity stake.

 And as I reported earlier, we're already in advanced stages, so I think -- I think, you know, hopefully in the near term we'll have some more positive news to report in terms of the additional equity stake.

 But at this time, I -- I don't really want to go into it, as we don't really discuss speculations or market rumors, other than to say that when a transaction is finalized, we'll -- you'll hear it and we'll discuss it in the marketplace.

------------------------------
 Karen Kostanian,  Bank of America/Merrill Lynch - Analyst   [8]
------------------------------
 Okay, thanks, Mark.

------------------------------
 Mark Gyetvay,  Novatek OAO - CFO   [9]
------------------------------
 You're welcome.

------------------------------
Operator   [10]
------------------------------
 Our next question comes from Max Moshkov of BCS.

 Please go ahead. Your line is open.

------------------------------
 Maxim Moshkov,  UBS - Analyst   [11]
------------------------------
 Thank you very much for presentation. A couple questions. First, when do you actually expect to receive proceeds from the stake sale to CNPC? And second question -- what do they call this liberalization of LNG export -- would you adjust your long-term production (inaudible)? And when we should reasonably expect it to happen. Thank you.

------------------------------
 Mark Gyetvay,  Novatek OAO - CFO   [12]
------------------------------
 On your first -- on your first question, yes. I mean, when the transaction closes, you know, we'll make -- we'll announce just like we did with Total transaction, we'll -- we'll provide an update on the terms and conditions. So there will be a payment made on -- for -- for the entrants into the stake, as well as a recouping of prior cost, as we've already defined many times before. And it was representative of -- of the Total -- the Total transaction.

 So I think it's best to wait till we conclude it, and it's expected by the 1st of October.

 Your second question -- I -- I don't think it's the LNG exports that are going to change or drive the strategy. I -- I think what we need to do, quite honestly -- and the discussion has been already bantered around among senior management -- is that, you know, post the December 2011 strategy update there has been changes to the business. You know, there has been changes with acquisition of Nortgas. You know, there has been changes with, you know, Kostroma you know, regional distribution.

 So I think there's questions that I think that we want to sit down and discuss to look at it, you know, sort of a fresh approach on how we're going to approach the market. You know, we've also seen, you know, the emergence of Rosneft on a consolidation of some of the other, you know, industry participants, although we don't believe that the market has expanded dramatically. You know, it's -- it's more of a question of consolidation. You know, we have to assess these into our longer-term strategy.

 So I -- I believe we'll -- we'll tackle that question sometime in the third or fourth quarter, and hopefully, by the spring of next year come out to the market with an updated or revised strategy to take those factors into consideration.

 But right now, we -- we don't really have any comment on that, other than it has been and is currently being discussed at the senior management level, at the management board. And once we prepare something, we obviously need to seek approval by the board of directors before we can publish that in the marketplace. And I don't anticipate that happening until sometime in the early spring.

------------------------------
Operator   [13]
------------------------------
 (Operator Instructions)

 Our next question comes from [Artem Kosenko] of JPMorgan. Please go ahead. Your line is open.

------------------------------
 Artem Kosenko,  JPMorgan - Analyst   [14]
------------------------------
 Yes, hello. Hello, Mark, and everyone. Just a couple of questions on the liquid side, actually.

 You have referenced that your netback premium, if I was -- if I heard it correctly, was around $15 per ton. In that net -- over condensate. In that context, I was curious if you could update us with your understanding of the current [naphtha] export duty, and whether or not there's any kind of progress in your negotiations with the state on this situation.

 Second question was on Gazprom's performance year-to-date and potential impact on -- on the domestic market from elevated export volumes that they are sending out, whether or not you see any kind of room, you know, domestically, to sort of step up and perhaps capture some of the market or maybe, you know, compensate the redirectional volumes. And that's -- that's about it.

 I also wanted to know if you can expand your storage capacity for -- the underground storage capacity for gas by I guess renting or leasing more of it from the monopoly, whether or not you're pursuing this opportunity. Thank you.

------------------------------
 Mark Gyetvay,  Novatek OAO - CFO   [15]
------------------------------
 The answer to your first question, I think you said 15. It's actually 50, 5-0 --

------------------------------
 Artem Kosenko,  JPMorgan - Analyst   [16]
------------------------------
 Oh, okay.

------------------------------
 Mark Gyetvay,  Novatek OAO - CFO   [17]
------------------------------
 So it's -- it's more -- it's more -- I mean, we're anticipating something around $50 to $70 range, and it looks like it's in the $50 range right now, netback enhancement, which is consistent with our expectations. So we're pleased that the -- you know, the moving into the product stream, it will enhance the overall revenue stream for the group.

 In terms of naphtha tax, it's a little more difficult to answer at this particular -- particular point in time because these discussions are ongoing and, you know, obviously they're sensitive questions that -- that need to be addressed. But we are -- we're clearly -- and I believe this was also addressed by Mr. Mikhelson at the launch at -- at Ust-Luga in June; that we are in discussions with the government on this. That's one of our key strategic points moving forward, to try to get this law changed. But I think it's going to take a little effort and some time before that's finalized.

 So I guess one of -- one of these questions was, you know, there's no definitive answer at this particular point, just like the export, you know, liberalization law, you know, although we're -- we're more confident that that's going to happen sooner, the naphtha change, the naphtha tax, I think we just going to have to wait a little bit and -- and see what transpires from the discussions we have with the relevant ministries.

------------------------------
 Artem Kosenko,  JPMorgan - Analyst   [18]
------------------------------
 Right.

------------------------------
 Mark Gyetvay,  Novatek OAO - CFO   [19]
------------------------------
 And your second question in -- in relation to the export markets, I mean, you know, I think it's -- it's funny, you know, the market has picked this up and are jumping on, you know, sort of the bandwagon in relation to an increase in export markets.

 And the reason why, you know, fundamentally, the reasons have not really changed. I mean, you know, indigenous production on European markets are declining, have been declining for years, you know, which is probably irreversible trends.

 You know, this year -- again, any -- any cold spell in -- in weather, you know, some countries -- some storage take the risk of waiting to determine when they want to refuel. And if you look at historic facilities in Europe today, you know, they massively withdrew storage to deal with the cold weather.

 And I think the last element of this is the -- you know, I believe it's not sustainable to continue to expect, you know, cheap coal will be exported from the United States and used in European power generation. Although -- although, you know, that has happened over the last year or so, I think it's -- it's contradiction to the, you know, climate control and carbon disposal policy. So I think there's going to be some [dates] over that issue.

 But, you know -- you know you definitely got to applaud that Gazprom has been able to pick up these additional volumes, and I think it is inevitable that day would happen.

 How that translates back to the domestic market, I think, leads into the question that Oleg Maximov had about our ability to revise our production guidance.

 You know, let me just put this deftly, we are there. We're ready. We will deliver additional volumes on the Russian domestic market if the market needs it. And -- but it's hard to say if there is a direct linkage to the export route whether or not it's going to have any -- an impact on -- on -- on the Russian domestic market.

 And the other -- the other notable change, I think, you know, the market and investors should be focused on is that there's a dramatic shift in LNG that's going out of the European market due to the tightness in the Asia-Pacific market.

 So overall, I think you can characterize the global gas industry, particularly as it relates to certain geographic regions as being very tight. And I think this will remain so for the foreseeable future, which, theoretically, should help all participants.

 Hopefully, it provides us with an additional opportunity to deliver more gas on the Russian domestic market, because, as I mentioned, we are prepared, we do have the capacity, and we will deliver gas if the market needs it. But more importantly, I think it goes very well for our LNG offtake arrangements that we're doing right now -- that there's a clear need in the market for volumes coming in LNG, and I think our -- our project and the timetable fits those expectations.

 And on your last point, you know, it's -- it's something that we have -- we have discussed with Gazprom for many, many years as we were trying to balance out what would be the optimal level of capacity. And I believe we're looking at, you know, maintaining probably up to 3 BCMs of natural gas availability to us. But as we saw previously, it's subject to availability, so it's not a definitive, you know, volume of gas that we can inject. It's also subject to availability.

 But if it -- if it's available for us and we need to inject gas we will do that. And we inject gas to try to bring it closer to the market regions in which we operate and then withdraw it later on, either in the fourth or first quarter when demand picks up.

 So we have talked to Gazprom, and I think there's a gentleman's agreement that we could put up to about 3 BCM of gas in the underground storage facilities.

------------------------------
 Artem Kosenko,  JPMorgan - Analyst   [20]
------------------------------
 Thanks, Mark. It sounds like you've been reading some pretty solid research that's been put out by the banks, because those were the -- exactly the same things we've been highlighting for the past couple of months.

------------------------------
 Mark Gyetvay,  Novatek OAO - CFO   [21]
------------------------------
 It's happening in industry.

------------------------------
 Artem Kosenko,  JPMorgan - Analyst   [22]
------------------------------
 Yes, well, I guess it's true.

 Thanks again.

------------------------------
 Mark Gyetvay,  Novatek OAO - CFO   [23]
------------------------------
 You're welcome.

------------------------------
Operator   [24]
------------------------------
 Our next question comes from Timur Salikhov of BCS. Please go ahead, your line is open.

------------------------------
 Timur Salikhov,  BCS Financial Group - Analyst   [25]
------------------------------
 Good evening, Mark. Good evening, Alexander. Thank you very much for taking my questions.

 My question's regarding Yamal LNG. In the LNG delivery contracts which Novatek signed [today], has the company defined the price and terms? And if yes, and even if not, do you plan to update investors on the key parameters of the pricing formula so that we could get a better understanding of the project's economics of future returns?

 And also the upcoming LNG export liberalization, what kind of impact, if any is it going to have on the LNG delivery contract negotiation process with customers?

------------------------------
 Mark Gyetvay,  Novatek OAO - CFO   [26]
------------------------------
 The first question is relatively straightforward. The answer would be yes. When -- when the time is appropriate, you know, we'll obviously disclose some of the terms and additions of the major offtake agreements. But I can tell you, all the contracts that we're talking about now are standard LNG contracts that take into consideration the appropriate benchmark pricing for that particular region.

 So if it's, you know, the Asian-Pacific market it's going to be sort of a, you know, Japanese fruit cocktail, you know, plus or minus, you know, percentage of that. And in Europe it would be based on the European contract. So there's no -- there's standard -- standard terms and conditions that are expected inside the LNG market. So I -- I think, you know, you could assume dependent on where the markets are going that those types of benchmarks will be used.

 I think, you know, there are questions on whether or not, you know [Henry Hubb] will be introduced into the equation, but right now we have not accepted those terms and conditions in any of those discussions.

 And your second question, I kind of alluded to earlier. You know, I don't -- I don't believe as we speak today right now that the export liberalization law is having any negative bearing on our ability to continue marketing LNG. And I think -- I think, from the updates that I received recently from the marketing group, it's clear that the demand for the offtake exceeding current supply.

 So, you know, we obviously have -- it's just a question I think of where the shift goes. You know, what's the proportion going to Europe, or what's the proportion going to Asia will ultimately be determined as we -- not -- not the export liberalization law, is we as a trader balance out where we believe is the optimum market for maximizing the returns on our -- our LNG sales.

 So I think the -- I think to equate the delays in the export liberalization law is probably not an accurate statement at this particular point in time.

------------------------------
 Timur Salikhov,  BCS Financial Group - Analyst   [27]
------------------------------
 Definitely clear, thank you, very much.

------------------------------
Operator   [28]
------------------------------
 (Operator Instructions)

 Our next question comes Geydar Mamedov of Goldman Sachs. Please go ahead, your line is open.

------------------------------
 Geydar Mamedov,  Goldman Sachs - Analyst   [29]
------------------------------
 Hello, Mark this is Geydar Mamedov from Goldman Sachs. I have two questions. One is on domestic markets. One is on LNG.

 On domestic market, it seems like the government, at least at this stage, sees the gas prices growing in the coming couple of years by 5%, 6% per annum at least in terms of the indexation that's going to happen from the July 1st.

 And, obviously, with the introduction of the MET formula, we're going to see the adjustment to the MET rates for (inaudible) from independent producers that were adopted at the end of last year.

 My question is, have you done the calculation of what's the rough MET rates you're going to be paying in the 2014 and 2015 with the 5%, 6% annual gas price increase? So that's my first question.

 And second, on LNG market, if I recall correctly, at the end of last year there were some headlines that said around 80% of the LNG volumes from the Yamal LNG have been pre-agreed for sale. And I was wondering if you plan to announce any -- any additional contracts on the LNG pre-sale either like in -- during the third quarter or fourth quarter -- basically by the end of this year? Or is it something that we shouldn't be expecting? Thank you.

------------------------------
 Mark Gyetvay,  Novatek OAO - CFO   [30]
------------------------------
 It's -- the first question's kind of a tough question, because it's one of those things where, you know, obviously -- obviously there's been a lot of debates going on right now. And probably what I would say, you know, at this particular juncture nobody's going to believe me, but it -- it's -- you know, we -- we have taken a long look at the pricing market.

 And -- and I believe, you know, the position that we have taken on the domestic market was that, you know, the government has outlined a program in place and that they would stick to that program, you know, despite some changes. And -- and some of those changes were the introduction of this, sort of, export marketing adjustments of the three -- plus or minus 3% that came into effect beginning of January 2013.

 And I think -- I think if you look at the overall expectations of -- that the analysts had in our results based on the reduction of 3%, I think we've been able to successfully maintain a reasonably consistent pricing by the end customer as well as a geographical mix in our -- in our portfolio.

 Now we know that if August 1st they're going to increase again by 3%. As of July 1st, they increased it by 15%, you know, as was expected, which I think -- I think largely, we know, most of the investors and analysts did not anticipate that they would -- they were skeptical of whether or not they were going to do.

 So I -- I, you know, hate to make any predictions on this other than say that, you know, we're in discussion with our commercial people. You know, this is a regular discussion that we have, you know, through our management planning meetings. And, you know, the question is raised periodically about the pressure applied to our commercial people based on the current pricing.

 And, the feedback we received is that there's really no -- no pressure being received by the -- there's no pressure being exerted by -- excuse me -- the customers in relation to the gas sales that we have.

 Now, that doesn't mean that everybody's particularly happy with the current tariff. And I mean -- I mean, I think if you listen and you ask and you poll all the customers, I think they would always say that they want lower gas price, you know, without question, but I don't think that's a realistic situation.

 And I think -- I think the industry, you know, led by Gazprom and now with the lobbying efforts of -- combined with Rosneft and ourselves, you know, I think we're going to -- we're going to fight for, you know, an additional -- or at least fight to maintain what was already agreed to in the pricing model.

 Now, given that, that question is raised, you know, let me -- let me do state that, I'd have to say at this particular point in time, there is pressure on, you know -- from the government on the growth of the tariff. So, you know, there may be some adjustments to that tariff, as you rightly said. Whether it's 10% or 5% or 6% remains to be seen.

 So there is pressure in terms of adjustment of tariffs, but I think it's -- again, it's one of these things that's premature to make that decision at this particular point. And we -- we as an independent gas producer, you know, at least look at it and say that the MET, you know, 'We'll take this into consideration,' you know.

 So it's -- one of the component parts of the calculation, although it may not have, you know, a one-to-one weighting factor, but it is taken into consideration in the algorithm for the MET, which is -- I think was an important concession that we've achieved in terms of the -- of -- of the tax -- the new tax policy, because, you know -- you know, going forward, I -- I think anybody has to come to the expectation that prices will not continually rise forever.

 I mean, that has to be understood by analysts and it has to be understood by investors. You know, the Russian domestic market is a market that's long on natural gas, and it does not have to pay the same tariff and the same rate as countries that are short natural gas. So we've got to assume that at a certain point in time, this tariff growth rate that have been, you know, in place since 2003 are going to go away, going to be inflation adjusted.

 And that -- and that's what our business plan calls for. Our business plan calls for the government maintaining this 15% tariff increase for three years, maybe adjust it down to 10% on the latter part of the year and inflation adjusted thereafter.

 So I -- I think we just all got to come to the realization that, you know, at a certain point in time, you're not going to see this, you know, large growth in the rates of tariffs. So the MET calculates, takes into consideration and, you know, we're happy with the situation.

 You know, we would like to provide you, obviously, with more definitive information. But, you know, we'd all just be speculating at this particular point. And we just got to wait to see what direction the Russian government goes in terms of the natural gas price.

 But -- but, you know, we believe that they'll stick to the -- they'll stick to the, you know, plan as put in place for the next couple years. There may be some pressure on the latter part of the -- of the increases. And we, together with our industry participants, will continue to lobby for maintaining that level as we expend more capital in developing some of the more remote fields, you know, is going to justify, you know, the argument of maintaining the price.

 On the second -- on the second part of your question -- again, it's one of these things that eventually we'll come out with -- with disclosing the general accounting additions of our LNG contracts. So I -- I don't want to go into it at any particular time.

 You know, we -- we do have three sales already confirmed. We do want to wait a little bit to give us the flexibility of maximizing the regional distribution of gas once this export law is changed, and we have clarity on where we believe we would maximize the revenues to the particular project.

 So I think -- I think it's a little premature to answer that question. But, yes, we will provide the details on future conference calls. And, yes, we will eventually start talking about, you know, the terms and conditions, et cetera. And you'll -- and when the plan is operating, you'll obviously -- you'll see that information in the financial results, as well as our table that we provide on the average realized LNG prices we receive.

 So, yes, but it needs a little more patience from the market to wait until these -- these things are resolved first, and we'll disclose them.

------------------------------
 Geydar Mamedov,  Goldman Sachs - Analyst   [31]
------------------------------
 Thank you.

------------------------------
 Mark Gyetvay,  Novatek OAO - CFO   [32]
------------------------------
 You're welcome.

------------------------------
Operator   [33]
------------------------------
 As there are no further questions in the queue that will conclude today's Q-and-A session. I would now like to turn the call back for any additional or closing remarks.

------------------------------
 Mark Gyetvay,  Novatek OAO - CFO   [34]
------------------------------
 I don't have really additional closing remarks except that, you know, thank you for, you know, your support in the company. And -- and although we still see, you know, a little volatility in the share price recently, you know, we believe that, you know, the projects that we -- we've undertaken, the projects that we've put in place, you know, have been on time and on schedule as -- as we advise the market.

 And we're just looking for with a -- with a conclusion of the CNPC deal and a potential, you know, another partner coming in to the Yamal LNG project, we just like to see at what particular point we should start unlocking some economic value to our share price in relation to the market recognizing that Yamal LNG is forthcoming and that it does have some value assigned to the group as we are investing capital and making significant progress along the project.

 So, with that said, we'll probably provide a lot of updates and [direct] investor meetings at conferences throughout the remainder of this year on Yamal LNG. You know, we'll advise you again on the progress we make in terms of our discussions with the banks in terms of project financing. And, as always, we're available to answer any -- any questions that you may have of the group, including any questions you may have for Mr. Mikhelson directly.

 With that said, thank you very much. And we look forward to seeing you again in the near future. Thank you.

------------------------------
Operator   [35]
------------------------------
 Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. You may now disconnect.




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