Half Year 2015 NK Lukoil PAO Earnings Call

LKOH.MZ - NK Lukoil PAO
Half Year 2015 NK Lukoil PAO Earnings Call
Aug 28, 2015 / 12:00PM GMT 

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Conference Call Participants
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   *  Geydar Mamedov
      Goldman Sachs & Co. - Analyst
   *  Andrey Polischuk
      Raiffeisen Centrobank - Analyst

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Presentation
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Unidentified Company Representative   [1]
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 Dear colleagues, we are very happy to welcome you again in our headquarters. There are fewer and fewer of you, but I guess you are only becoming stronger because you are more consolidated now.

 We are ready to present the financial results of our Company for the second quarter of 2015.

 I will begin with the overview of the Board of Directors meeting; we held it earlier today. The Board of Directors talked about the results of the first six months of 2015. We have discussed the tax maneuver on the Company's development. The Board of Directors is, on the whole, satisfied with the work done.

 The financial performance might have been better, but our failures in exploration we have to write off. And gets me ahead of myself, but I want to warn you that we're going to change our strategy, or take no longer risks of exploration abroad, or only enter the projects with the reserves that have been already discovered, and have potential for further growth.

 The projects are of the same scale as the ones that we have in Cameroon and Nigeria. We confirmed the initial in place reserves. Exploration was costly; we were looking for easy [bounty], but it was not there.

 Now, these are forward-looking statements. You're familiar with them; you're professionals.

 Another slide, main events in the second quarter of 2015.

 Our production continues to grow by more than 5%. We stabilized production in Russia. We are getting compensation on West Qurna-2. As of September 1, we're going to cover all historic costs on this project in the two quarters. New ones will be accumulated, but of course that we incurred as of December 31, 2014 will have been compensated. Either it's products in shipment, or products to be shipped just about.

 We started production test of facilities for Kandym, early gas project in Uzbekistan. There were several large projects about which we are going to talk later in oil and gas refining. We have paid record dividends, and it's brilliant that we've got more than $1 billion in the deal with Sinopec that everybody left for buried almost, position of the Company on this deal. With the multipliers it was more than $200 billion.

 Main financial highlights. Net income almost [$1.7 billion]. Net income was supposed to have been the calculated one; [the December one] was in excess of $2 billion.

 Our free cash flow remains stable, although there was a revaluation of the ruble in the second quarter of 2015, and those we cut costs in rubles have increased. Net debt went down. $1.8 billion were paid out.

 Another record dividend payment. I hope you have already received that payment.

 The macroeconomic impacts on environment, not much to be explained here really. All the macroeconomic parameters, except for taxes and costs, are in the negative.

 If you look at the second quarter, the ruble lost almost 15% of its value, which definitely affects our reporting. The last year, when we made reports -- this is last year -- starting from 2016 we will make all our reports in rubles. This is last year when we make them in dollars. So next year it will be easier for us, in accordance with the law.

 As to the present situation, you know my position; the price wars between OPEC and the United States has become hot. Small independent American companies that are protected by the hedging shields reported bravely that they will be ready to exist at $65 per barrel and they will be profitable. What about $40 per barrel?

 Well, I hope that finally today, eight weeks have gone by, and I hope that today there will be fewer rigs. Last week you remember they've managed to find two in the one of the provinces, and there was a Black Monday, and dancing around those rigs. Hopefully, Baker & Hughes this Friday will publish their report saying that the number of rigs is going down, with the exception of Saudi Arabia.

 Price wars is costing everyone; in Iraq the proportion is around [$57/$58] per barrel. Kuwait's budgeting is done at $54 per barrel. Saudi Arabia, the budget said it should be $90 per barrel, but they're quite capable of maintaining prices of $30 per barrel.

 For American independent companies the circumstances are quite dire. In the past, they thought that profitable production would be at $65 per barrel, but now they are counting cost and they are basically not paying taxes.

 They are being very tough with contractors and the fact that they switched to sweet spots they stopped drilling planned fields, but they are now drilling only in the sweet spots, and this will definitely affect the future production. But they manage to bring the threshold to $57 per barrel, $58 per barrel.

 However, I think that we will see, starting from next week, a steady increase of the oil prices and a series of corporate bankruptcies.

 Interesting statistics: today 75% of all oil rigs are in action. They are engaged, but they are kept by the companies that make only 30% of production. All the companies stopped drilling and the companies that have one or two rigs they have to pay wages, make other payments. They can't stop; they can't not drill.

 And anyone who read Bloomberg, about almost $300 billion of debt of American companies, [85%] should be paid out in the next year. I met with analysts, they're the ones who work for Arab companies. The Americans and the British don't. So they are saying that in the second six months of the year there will be several tipping points in the price wars. One of them will be a review of pledges against reserve-based loans.

 In the third quarter, we'll see a mass scale write-off of proved and developed reserves, against which these loans were taken. Financing a company whose debt is traded at $0.20, $0.30 at the dollar is getting financing against oil not produced yet. In Russia this is inconceivable. This is inconceivable everywhere in the world apart from the United States. This kind of financing should stop.

 And even conservative forecasts of Americans have been reviewed. At the beginning of the year, everybody thought that oil production in the US would be around 10 billion barrels. There were even more optimistic projections. Now people are saying 9.1 billion and sometimes even below 9.1 billion, so we'll be losing almost 1 billion barrels in projections. They will be leaving the [market] and then they will just be following the dynamics of corporate bankruptcies.

 So far, there have been no corporate bankruptcies, but when small companies will start leaving the market, for OPEC to keep the tension, to keep oil production at current levels, will lose sense. And I think the quotas will be complied with and oil prices will be going back to the adequate levels. But what is definite is the volatility will remain, will continue.

 Volatility is a key factor and everyone agrees that the main mistake was that we did not insure volatility. We did not provide for volatility and the companies were able to take long hedges, and they are protected with these hedges. You have seen reports for the first and second quarter, 20% to 40% of the EBITDA that small companies get is due to hedging. They are paid for by American banks. And average hedging prices in the first quarter was $87, now it went down to $79. But still, compared to $39 market average, this is still a lot.

 My initial forecast that everything will stop in the fourth quarter will have to be reconsidered. I did not expect Americans to find financing that cheap. Well, it works for them, the banks are not afraid of lending. Well, maybe they are afraid, but they are still lending out to the companies who will not be able to pay back. They're still surviving; they're living.

 And again, big ones, big players, they have dramatically cut their high cost projects. Shale is just one component, one piece of the puzzle. Investment in the North Sea basically has been suspended; investment into oil sands have been suspended; deepwater projects have been suspended. The surplus of oil that exists in the market today has been already arrested. I think that it will dissipate with time.

 I think we'll witness pretty much the same situation as what happened with gas. There was a gas boom, big projections and then, for several years, gas production has been stable, even at low prices. I think the same will happen with the American market. The US will remain a major net importer of oil.

 The same refers to China. There is a lot of play going on around China. China is a global competitor. China sold 20 million vehicles a year. They need fuel; they need gas; they need diesel; they need something. And China is the US plus Germany plus Great Britain put together. India, the same, a lot of cars, it's a big auto market. So there is demand for fuel and the shock that the market withstood, I think that we will feel the aftershock for a while.

 Colleagues apply technical analysis to a [legapolitic] market, when the market is controlled by just one country, to analyze dynamics and sales volumes or capital movement [doesn't] really make much sense.

 So we do not panic; we understand what happens in the market; we expected that kind of dynamics. And, yes, we underestimated the economic power that exists in the United States, the financial power that they can use. It's a fact, but I think OPEC will win eventually.

 Main operating results: [recently] hydrocarbon production abroad has gone up significantly. That's compensation oil; there is a lot of compensation oil because its prices are low. Export of crude oil has also surged by almost 25% and exports of oil products, refined products, has declined by 16%. Export of oil is more profitable than low margin refining because of the tax maneuver. The Company is demonstrating a sustainable production growth.

 Now, speaking about the changes in production, West Siberia is reducing production. In the current price environment, it's not profitable to [fight] for production in West Siberia. There are more profitable projects that are located in better marketing regions in better -- and most of the projects that we consider today, they are subject to tax benefits, so it is a more efficient investment for them.

 And one more slide on the same topic. 1 tonne of oil that we produce in Yarega is more than three times -- well, actually it equals 3 tonnes of oil that we produce in Western Siberia on the shelf and offshore in Filanovsky and Korchagin. The same applies to the Baltic; it's a good field and a good marketing location.

 Next slide. Optimization of CapEx allowed us to increase free cash flow, even despite, let's use the word crisis, in the financial and oil markets. In ruble terms, we increased investment by 15%. We also brought up production and improved our free cash flow. This is a special feature of the Russian tax system, and devaluation, obviously, helped.

 Operating expenses: you see that we are reducing refining costs. We are reducing especially our costs of refining at third parties and affiliated refineries. And we are building up our exports. Effective cost control, devaluation is the main factor, and ruble appreciation that happened in the second quarter obviously had its effect, but our costs are very competitive.

 It is our priority to control our costs in rubles and keep them stable. Of course, Qurna has an opposite effect. Qurna costs are compensated in any case. And when Uzbekistan projects come online, operating capital costs there will start accruing. But there will also be an offset of them. Transportation, SG&A, no surprises there.

 CapEx structure: our main capital expenditure is associated with exploration and production. Refining and marketing, our costs are subsiding. We made massive investments into refining. In 2016, we only have one big project in this area.

 Capital expenditure structure you see has changed. One year ago, it was about 30% of all costs went into refining; now it's less than 20%. And in absolute terms, the numbers are also going down.

 Sales: oil prices had the greatest impact on those results and there was a write-off due to unsuccessful exploration in Romania. The dynamics are given on the next page, changes in SG&A and transport.

 Now, cash flow reconciliation: although a record dividend payment, and despite a payment of our long-term and short-term debt, cash at the end of the first half of 2015 was [$2.7 billion], despite all the drama in the market.

 We maintain a robust financial position in terms of debt to capital, not debt to EBITDA and net debt. Our debt is three times less than that of our closest competitors and our debt is six times smaller than the debt of our remote competitors.

 Looking at our competitive position in the global industry, we are very competitive in everything apart from the capitalization companies' valuation.

 Some new factors: we won a tender from Rosneft; it's not for the first time that it happened and Rosneft is in hysterics. But I don't think it's proper for a state-owned company that declares production of government interests to sue the government, because this is causing reputational political damages to the country.

 Rosneft participated in the tender. If they applied for a tender, if they did, it means that they recognized the terms of the tender. And after the tender has been awarded, it makes really no sense to contest the terms and conditions.

 All 11 members of the commission voted in favor of our bid. We're sure that the hysterics will be over in a while. This is a very good province; it has a very strong potential. There are always risks of exploration. We have three parametric wells there. They are not exploration wells, but the ones that we have there, they tell us that we are looking at good resources, really good resources. It would be better if they were not gaseous but liquid, but it's a good province. It's a two hour flight from [Kugalin]. Probably Kugalin will be our base for development of this area.

 Khatanga has an airport which was recently repaired, refurbished. So already next year, we will set up a projects office like the one we had in [Melhor]. So we'll act quickly. We already have experience. We'll act quickly, so it's a good region if we succeed.

 There is transport infrastructure being built for Yamal LNG, and the tankers, the vessels that will steam in those waters, we'll be able to use them either in the direction of Asia or in the direction of Europe. It will be easier. It will be good for Novatek; it will be profitable because of the sharing of costs with them, and it will be definitely profitable for us. Without Yamal LNG, this project would have had less economic appeal.

 And in the coastal area, which is not really offshore, but it's the coastal area, it's not subject to the law on Arctic development but is also rather promising.

 West Qurna: again, we have covered all historic costs, basically. As of January 1, 2015 we have reached 450 barrels per day. After that, everything will depend on the marketing situation. We are in constant dialog with the Iraqi authorities on renegotiating the terms of the contract, as prices in the market justify that round of negotiations.

 You know the Prime Minister of Iraq visited our field some time ago. He was very impressed by what he saw, and he instructed the government to take certain steps towards enhancing security around that field.

 Kandym: we increased production by 25% when it finally launched. We finally signed all the necessary agreements and contracts, including the contracts with a Korean company, our main contractor. And we have now entered an active phase of development.

 A new line of the pipeline to China is being constructed. The market this way is not limited for us. And although the prices are drifting down, it is still a very good and important project for us.

 Lukoil completed large oil and gas refining projects in 2015, in [Nizhny Novgorod] [Budyonnovsk], [Burgas] and Perm. In Perm, we will have the launch in the fourth quarter 2015. In Volgograd, we have launched new extended capacities, so important projects.

 Again, we discussed the Volgograd project last time. Even in today's environment, EBITDA of $100 million where the first launch is getting even better, this plant will be the best one in Russia when it is completed.

 Slide 29, probably the most exciting one in the pack. We have always had questions about the effect that the tax maneuver has on refining. Even at $40 per barrel, we will have an additional $150 million compared to the previous period [shares] because we invested in the refining.

 We totally support the tax maneuver. We know that those companies who never invested into refining are its main opponents. As I said, in 2016, we will be upgrading. We will have completed upgrading of our all our facilities, apart from one cracker in Nizhny Novgorod where we'll see what happens there. But after that, we will be able to operate at any cracking margin in Russia, even if cracker margins in Russia will be at European levels.

 The government will keep some kind of subsidy for refining otherwise, everything will stop. Nevertheless, investments were made and they proved to be right, and efficient and timely.

 We're also proud to introduced the integrated product for gas production, gas processing and energy in the Perm region. This is a project that will improve processing of associated gas by 35%. That includes also electricity generation. This project includes as well processing of APG into dry gas. We are not selling it to Gazprom at [individual] prices; instead, we use it in our own power plants, and all the liquid NGLs we collect and we use.

 Lubricants: we are a leader in the lubricant segment of the Russian market. We're lobbied reduction of export duties on lubricants, and export is profitable.

 We also managed to address another important issue; coke. They were supposed to have been 100%; now they will be [60%] the coke that we produce in Perm. The coke that we have in Volgograd with unit-based production sites becomes quite interesting in this new regime.

 Lukoil has always been concerned about protecting the environment, and we have always had friendly relations with Greenpeace and other environmental organizations. We are focused on reducing all kinds of discharges, emissions. We avoided spills and other major accidents that could have brought damage to the environment.

 Gas utilization will be almost 95%, where we will not be flaring but utilizing gas to almost 95%, apart from several major fields that we have. Thus, we'll be contributing to reducing the carbon footprint.

 Conclusions: the Company is still focused on the interests of its shareholders, although oil prices are declining. And in dollar terms, investment is already going down; in ruble terms, investment is increased and that's how we maintain production in Russia.

 West Qurna has already paid back; what follows is just recovering the OpEx, the current expenses. And when everything is recovered, we will launch the second phase.

 The Company, despite the crisis, maintains a robust, financial position. We pay back the debt. The treasury diversified our credit portfolio by increasing the share of ruble-denominated loans, which is very profitable in the present situation under ruble devaluation.

 This is the end of the presentation. Now I'm ready to take your questions. Do you want to add anything? No?

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Unidentified Company Representative   [2]
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 No, everything's fine.

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Questions and Answers
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 Geydar Mamedov,  Goldman Sachs & Co. - Analyst   [1]
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 Geydar Mamedov, Goldman Sachs. I've got two questions. Maybe I missed it, I did not see a slide on Hvalynskoye field.

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Unidentified Company Representative   [2]
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 Yes, Hvalynskoye. Hvalynskoye we already have a drilling rig. It was put there yesterday or the day before and in December, we will start drilling one well above 30,000 barrels a day. I just wanted to remind you of the statistics.

 So the question now is just, do we need to push for production in 2016 or we should not, given current price levels. But in any case, in 2016, we will begin production and we will invite all the top management of the country, all the country leaders, there.

 In Hvalynskoye, we are in budget and we are on schedule. The delay that we had because the contractor misuse the money, we have already overcome that challenge.

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 Geydar Mamedov,  Goldman Sachs & Co. - Analyst   [3]
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 Do you have any plans about when you are going to reach the design production?

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Unidentified Company Representative   [4]
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 Well, it depends; it depends on the situation. Technologically, we are quite capable. We only need to drill six wells to reach design production.

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 Geydar Mamedov,  Goldman Sachs & Co. - Analyst   [5]
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 Yes, thank you. And the second question; on slide 5, you are saying that you kept dollar-denominated -- 40% increase year on year at the time of credit in your account. Will this remain your policy with respect to dollar-denominated dividend?

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Unidentified Company Representative   [6]
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 The Board of Directors did not change our dividend policy. Of course, everything will depend on the macroeconomics at the end of the year. As a shareholder myself, I am an optimist and you know my position. Any war has a beginning and it has an end and it has purposes. Right now, we are winning and the enemies are running away from us.

 The market will recover, and the 2009 case, I remember those times, I remember the forecasts that [your bank] made, that we're going to live in the times of the $5 oil, $9 per barrel and then, in a couple of years, the oil prices were at $60 and on $70 and then --

 So as soon as all that analysts realize that the United States, Petrobras, deepwater projects in Africa, in the Gulf of Mexico are not their competitors, the producers were environmentally friendly. [If they] are losing their last subsidies of the US and the EU, the OPEC will bring the prices up.

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 Geydar Mamedov,  Goldman Sachs & Co. - Analyst   [7]
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 Yes, thank you.

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Unidentified Audience Member   [8]
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 Yes, thank you. I have a short question.

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Unidentified Company Representative   [9]
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 Just one question at a time, okay?

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Unidentified Audience Member   [10]
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 Romania, any write-off that we have to expect write-offs? Any comments about Romania?

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Unidentified Company Representative   [11]
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 Unfortunately, to be a Russian investor in the here and now is quite a challenge and Romania is a vivid example of that.

 It's not nice to use the service -- well, it's kind of a witch hunt. You know that our auditors who audited us are well respected, and know the claims that the Romanian authorities are putting forward are not substantiated. They're looking for a black cat in a dark room, but the black cat is not there. And for several years now, the attempts have been made to attack us.

 The plant is working, it's operational. And if in Romania, we see the court will not be just, we have already sent a claim to the European Union, and we will take the case to the level of the European Union. And I think that the European Union court will not look at the political considerations of this case.

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Unidentified Audience Member   [12]
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 May I --?

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Unidentified Company Representative   [13]
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 A court case. It's a court case. Right now, the case is with the court in accordance with the laws of Romania. The court today studies the facts of the case. Our lawyers are working. On average the first instance it takes in Romania up to three years, and the second appeal instance takes about two years, so we are looking at a time horizon of about five years for this court case. We don't expect any events very soon.

 EUR200,000 we've, every month on the account, in accordance with the commitments that we made with the obligations that were imposed on us. So we don't expect any major write-offs there before we exhaust the judicial recourse opportunities. The accountants, the financial, the legal, the auditors, they don't see any grounds for a write-off as of now.

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Unidentified Audience Member   [14]
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 I'm looking at slide 12; this is an interesting slide. It explains your production offshore viscous oil, hard to recover. [Bazhenov] is under sanctions, right?

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Unidentified Company Representative   [15]
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 Tight oil shelf access is limited, the Caspian shelf but you don't want to push with production there in the current price environment. So either we continue reducing production in Western Siberia to compensate the kind of production with new fields will not be possible in the long term.

 And we're only looking in this respect for a period of five years. We are guaranteed for five years with our reserves and the next 10 years we'll make new discoveries. Remember, in Western Siberia we'll be launching [Alor], that's 2.5 billion, 3 billion of production; [Pechinskoye] field, another 1.52 million of production. That's 5 million just in Western Siberia; something that has been already drilled and is ready.

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Unidentified Audience Member   [16]
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 Do you expect any changes in the tax regime in the next five years in Russia?

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Unidentified Company Representative   [17]
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 Talking now about old fields; you know that there are around two draft laws. There is this idea of a tax on added income. It was prepared by the Ministry of Finance. And there is the financial performance tax, or financial results tax, prepared by the Ministry of Energy, or the other way around.

 Anyway, the idea of these two taxes is that they are taxes, not the current fee of the mineral extraction tax. That is to say, tax costs can be accounted for. You'll be able to first subtract some of the costs and then you pay taxes on what is left. But right now, with the minerals extraction tax and there is also export duty, costs are not really a feature. So there is a draft clause, if I'm not mistaken, correct me if I'm wrong, already the middle of next year it will be adopted.

 It will be an experiment, a pilot project for five fields in Western Siberia. And our five fields in Western Siberia around 2021, year 2020, 2021, Russia will switch to this new scheme. It is the objective of the Ministry of Finance to get rid of the minerals extraction tax.

 Why? Because with the minerals extraction tax, it runs contrary to the currency legislation of the customs, the union of Russia, Kazakhstan and Belarus. So probably, there will be some kind of a combination between this proposed new tax on added income and the tax on the financial result. Probably will be eventually some kind of a hybrid tax and some kind of export duty will also be kept. But we think that these proposals are not going to worsen the situation, but actually uphold the new ones. .

 For the Brownfields probably the situation will improve, because the tertiary techniques will be allowed in accordance with these laws. Of course, we have certain limits depending on how much OpEx you will be able to take off because there are different proposals. 2016, $15, it depends, but there will be some kind of allowances in any case. We will be able to account for in the calculation of the tax.

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Unidentified Audience Member   [18]
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 If, in the next five years, your declining production in Western Siberia will be offset by the new discoveries and the new projects. What about the free cash flow? Will it have increased per barrel?

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Unidentified Company Representative   [19]
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 Well, it depends. I don't know, you can't really imagine this. And all the Arabs have gone crazy and the next three or four years prices will stay at $50. But this is a crazy scenario. If you follow common sense, Arab countries in their budgets need $90 or $90-plus and then free cash flow will be more realistic and it will go up.

 We will stop inefficient exploration abroad. It was a lesson learned. We made investments. Those forecasts that we made two years when we were saying that we're going to have a beautiful cash flow curve, they're still valid.

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Unidentified Audience Member   [20]
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 What about tight oil? Do you still manage to --?

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Unidentified Company Representative   [21]
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 We are drilling. We are writing letters to anyone who may be concerned. This is not shale.

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Unidentified Audience Member   [22]
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 It's not shale?

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Unidentified Company Representative   [23]
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 No, it's not shale. It's tight oil. It's not shale.

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Unidentified Audience Member   [24]
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 So you managed to overcome that barrier?

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Unidentified Company Representative   [25]
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 Yes. Frankly speaking, with conventional resources to go into unconventional resources is not really appealing.

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Unidentified Audience Member   [26]
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 (inaudible), [Prosperity Management]. Another question on taxes. You talked about upstream within the framework of the current [comps achieved]. Are there plans to keep the tax maneuver in the downstream?

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Unidentified Company Representative   [27]
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 Are you asking me this question? There is only one person who is against the tax maneuver. Everybody else is in favor. So we think that yes, it should be kept and that any dramatic changes in the tax legislation, especially in the oil sector, should not happen.

 I think in October, November there will be another meeting with the President on oil, and I think the leader of the country will say that things should not change, that the country should be profiting from its oil and not the oilmen should be profiting from the country.

 Today's tax maneuver for downstream, yes, it's positive. What is proposed today is positive. Even at $40 per barrel the refining margin will be positive.

 Apart from (inaudible) which doesn't really make a difference, the three refineries will be profitable. Today Volgograd is profitable and when in [2022] the second cracker will be put on the line and it will be very profitable and highly marginal.

 As to production to keep current profitability, the prices should be around [$70].

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Unidentified Audience Member   [28]
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 Thank you. I have another question; it's a strategic one. Your asset portfolio, is it comfortable for you? Do you think you should buy something or sell something? Are you looking at some assets or technologies to add to your portfolio?

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Unidentified Company Representative   [29]
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 We have already demonstrated the destruction of our assets; they were sold and were sold very well, I think. Our assets in Kazakhstan [have] entered the fourth last stage of production decline.

 There are some ideas, but it's not time to discuss them now. We are thinking about selling our shares in the assets abroad, some of them, a few.

 Whether we want to buy something, we're very interested in Iraq. Syria is still very interesting to us, but we will go into this project only if we get an extremely high level of profitability there and very good yields. We're still interested in Mexico, but they don't have big projects that stand out.

 And we will be monitoring Iran as well. We are cooperating with NIOC, this is the National Iranian Oil Company. We have [our Iran] projects, as you know. We are interested in the offshore projects in the Gulf of Persia.

 But it depends on the sanctions and when the sanctions will be lifted because, right now, the sanctions on Iran will be imposed at the snap of a finger. And also what the government will offer in Iran, what the national regime will be there, the contracting terms, we'll be looking at that.

 And at other projects in Russia, the one that I've already presented today, the geologists tell me that it is very, very, very promising. I keep my fingers crossed, but the geologists are very confident. You know what I think; we won it fairly and squarely. It's just the hysterics of the losers, of those who lost.

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 Andrey Polischuk,  Raiffeisen Centrobank - Analyst   [30]
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 Andrey Polischuk, Raiffeisen Bank. Compensation from Western Qurna, any projections for the second part of 2015?

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Unidentified Company Representative   [31]
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 Wait, we have contract terms. The budget situation is very difficult. In Iraq, every quarter we get about 16 million barrels of compensation oil, so you can multiple 16 million by current prices. Do that math yourselves. Capital costs, we are done with them, almost. There is just OpEx.

 And then, we are slowly and steadily getting ready for the full development of the [scheduled] projects and the other projects are in discussion. Construction of the export pipeline, that should also be compensated with oil prices and a gas program, but this will be done after we are on schedule and after we recover everything.

 And the prices that we there is [$55-plus] really because right now, two days ago, Iraqi oil was $31 -- it traded at $31 per barrel. Iraqi oil traded at a big discount.

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 Andrey Polischuk,  Raiffeisen Centrobank - Analyst   [32]
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 Short question, what is the timeline of interim dividends this year? Is it the same schedule as last year?

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Unidentified Company Representative   [33]
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 According to the plan, we want to pay them out evenly throughout the year. January, end of July/early August, we try to distribute them evenly during the year.

 We're always in touch with the regulator. We can't call them midyear dividends, because I keep getting this question all the time. Once and for all, I hope that we'll be able to get this agreed with the regulator and the regulator will allow us to call them midyear dividends. Call it whatever you like, a rose is a rose is a rose, so call them daily, call them monthly, whatever. Daily, everybody would be happy to get daily dividends.

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 Andrey Polischuk,  Raiffeisen Centrobank - Analyst   [34]
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 A question about drilling. You are drilling less this year compared to other companies, so what is your strategy? What are the reasons?

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Unidentified Company Representative   [35]
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 We were smart. When the prices on oil are going down, why increase drilling? Why offer more of the product that is becoming cheaper and cheaper? If we can ensure production, the required levels of production with fewer drilling, then we are doing a great job.

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 Andrey Polischuk,  Raiffeisen Centrobank - Analyst   [36]
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 By how much can you reduce production, or rather, drilling?

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Unidentified Company Representative   [37]
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 Current levels of drilling allow you to maintain -- we are starting drilling in Western Siberia, in old field where production is less efficient. We are increasing drilling in new and promising fields.

 The flow rate of Filanovsky will be 30,000 barrels. It's the same amount of 500 wells in Western Siberia. A well in the Baltic is also producing about 1,000 barrels.

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 Andrey Polischuk,  Raiffeisen Centrobank - Analyst   [38]
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 What about next year? Do you still plan to curb drilling because new projects will be coming on line?

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Unidentified Company Representative   [39]
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 From what we know today about the future market of oil, we will not increase drilling. We will only do this when price wars are over and the market starts climbing up. To produce for the sake of production, it doesn't make any sense.

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 Andrey Polischuk,  Raiffeisen Centrobank - Analyst   [40]
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 One more question from me; any more offshore projects?

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Unidentified Company Representative   [41]
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 Caspian, we already have Caspian offshore.

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 Andrey Polischuk,  Raiffeisen Centrobank - Analyst   [42]
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 What about other offshore, other shelfs?

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Unidentified Company Representative   [43]
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 The [Arctic] shelf you mean? You know my position; it is not the same as our official position somewhat. I think today investment into the Arctic is political. That investment is not economic; it's not economically justified.

 For the Arctic to work, oil prices should be $120 and up and you need a lot of money. I will not disclose the figures, but I was quoted the price of a well in the [Pechora] field, it's just one well. Just one well, no discoveries, just to be decorated with government orders.

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Unidentified Company Representative   [44]
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 We also have questions from one line and the telephone lines, or do we? Are there any questions from the conference line please? Very well, if we don't have questions from the conference line, are there any questions from the Internet?

 If you have questions to me or to Alexander, then we will answer them. And if you don't have any questions, we'll leave Andrey with you and you can talk to him.

 Any questions left?

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Unidentified Audience Member   [45]
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 Filanovsky has three time the production than in the traditional fields. This is because of -- this is not just taxes, this is marketing as well. Even without taxes, Filanovsky is about [22, 23]. It is still higher. But why don't you want to push production at Filanovsky because in five years, six years, it will change?

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Unidentified Company Representative   [46]
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 Remember how benefits are allowed for a time and for 20 million tonnes?

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Unidentified Audience Member   [47]
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 Why 20 million tonnes? But isn't this subject to this other tax?

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Unidentified Company Representative   [48]
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 Yes, it is subject to the tax regime which has both a timeline, a schedule and a volume of production limitation.

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Unidentified Audience Member   [49]
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 Then I think it will change, why things will change, if the tax will change?

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Unidentified Company Representative   [50]
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 Well, what if, what if. In five years' time who can say what will happen. And there is one rule that everybody learns at the university but probably forgot about it. Never produce the product when there is no demand for that product; always produce more when there is a lot of demand. This investment crunch that we are seeing today, it is still a crunch. All companies have cut their investments.

 As soon as the prices are back, maybe we will be producing 5 million. No decision has been made. We will drill the holes. Investments will be made and then the question is, when and how much to turn the valve? It's the same as in Saudi Arabia.

 In Filanovsky and those fields, you can easily control production because costs are low and the flow rates are high. We can easily control production there.

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Unidentified Audience Member   [51]
------------------------------
 Thank you.

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Unidentified Company Representative   [52]
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 Andrey, will you stay with the investors? Thank you, and the analysts.

 A question, is it better when we meet here or in London? Here? Very good.

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Operator   [53]
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 That does conclude today's teleconference. We thank you all for your participation.

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Editor   [54]
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 Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.




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