TOP INTERVIEWS Interview with Mr. YURY V. MOTOVILOV General Director of "Petrosakh" JSC Yuzhno-Sakhalinsk, July 18, 2002 Could you provide our readers with a brief overview of the progression of Petrosakh, from its beginning as a Joint Stock Company in 1991 until the buy-out by Alfa-Eco in 2000? Petrosakh was created in 1991 as a complex venture that would perform a full cycle of works, starting with exploring oil and gas fields, extracting of oil and gas, and oil processing. The company was created as a Joint Venture using foreign investment: first with American, then Arabian partners. In 2000, the control share packet was purchased by Alfa-Eco. The purpose of starting the company was to build the first oil processing plant on Sakhalin, and now Petrosakh owns the only oil refinery on Sakhalin. After 11 years, the company has been growing very successfully. We have been successful at developing the local oil fields and creating infrastructure for the fields which are far away from populated areas. It is important to note that this company is the main supplier of oil products in the Sakhalin region. Previously, much-needed oil products were imported from the mainland, yet today we can produce them right here and the delivery is much simpler. Currently the company has three licenses for the following activities: Okruzhnoye oil field development Geological explorations and subsequent hydrocarbon extraction onshore at the border sags Shelf explorations for Sakhalin-6 Sakhalin-6 is our major project which will affect the development and increase capacity of our company in oil extraction and production. For this reason, we are directing most of our attention towards this project. As you know in large oil companies like Lukoil, Yukos, turnover and profits margins are essential indicators of the company effectiveness. What are some important financial indicators for Petrosakh? Our company extracts about 250 000 tons of oil annually; 40% is sold in the internal markets and 60% is exported. Generally, the company is profitable. We are also investing money into development, drilling exploration wells and doing seismic survey for Sakhalin-6. The first question is certainly the decision to develop the Sakhalin-6 oil field without a PSA [Product Sharing Agreement]. Does this place you at an advantage over other Sakhalin projects? All the large Sakhalin project are working under a PSA. We got our license under the terms of a commercial risk - we will therefore pay standard taxes as in a regular production, which provides for no particular advantage in comparison with a PSA agreement. Nevertheless, we decided to work without a PSA because it is much simpler and faster to obtain this license. PSA operations require new laws to be written, which always takes a long time. We received our license by working on oil fields, and we will follow existing laws. When we discover the oil, we can extract it without worrying about competition. We hear that Sakhalin-6 oil reserves stand at an estimate of 1bn tons, that production should reach 2.5 million tons of crude oil annually, and that you are already investing $12M for seismic survey services. Can you tell us more about Sakhalin-6 and its future prospects? These numbers are correct. The $12 million is only one part of the investment for the seismic survey. We are planning to invest $73 million dollars - before oil extraction. The entire development of the Sakhalin-6 project will involve more than $500 million, although this is an approximate estimate. After the oil is discovered, our next step will be to perform economic evaluation to be able to provide more exact numbers. I understand that part of oil from Sakhalin-6 will be exported. Are you ready to export, and what are the destinations you are most focused on? Because we receive a license under the terms of commercial risk, we are free to choose whether we want to export the oil or to work with it here - therefore, it will depend on the future circumstances. For now, we have an oil terminal where we can load tankers for up to 40 000 tons, so we have the infrastructure for both production and export. All we have to do is to complete exploration and increase extraction. If everything goes as planned, when you expect first oil? Next year, after the seismic survey is completed, we can start drilling exploratory wells, and if that is successful, we will get oil from our first wells. We believe that our knowledge of the oil field is good enough to arrive at this conclusion, because we know our current oil fields, and we know the structure and geological conditions in the adjacent regions. There was talk that the license was given to Petrosakh in order to reduce the dependency of Sakhalin region on Rosneft. But now, you have agreed to cooperate with Rosneft on the Sakhalin-6 project. Why? We are ready for a partnership with Rosneft. We are striving towards attracting investment for this project, and in the meanwhile, we are doing all the work by ourselves. We are also ready to work together with other institutions and companies. We have deadlines and results that must be achieved - those are the conditions of our license. This year we are doing seismic research with the help from PGS, and after this we will be ready to start drilling. You are a vertically integrated company, engaged in upstream exploration and extraction of crude oil, as well as downstream development through oil processing at your own refinery facilities, and you are also involved in the subsequent sale of petroleum products. Would you say that you are UNIQUE in the region for this reason? We can consider ourselves a unique company in Sakhalin because we work on the full cycle of production. Although Rosneft is a large holding company which is also involved in all upstream and downstream activites, it is comprised of many independent companies all over the country, which specialize in only a part of the cycle, separately from each other. In Petrosakh, everything is done under the same management, in one place. In what areas of your business will you be looking for further investment or joint venture partnerships? Right now we are looking for a partner for the Sakhalin-6 project. Even the largest companies usually do not invest everything in a large project; they attract either bank capital or other types of capital. We are offering our partners two options: to work jointly on the project, or to work on it as a part of Petrosakh, since we have the license for the oil fields. Both options are equally attractive in light of the fact that Petrosakh already owns a full infrastructure that is ready for operations. Petrosakh is 11 years old. What will it look like in 11 more years? I believe that in 11 years we will be one of the largest full-cycle oil extraction and production companies in Sakhalin. There are many great development opportunities in the future... I understand that you have been in the company since its beginnings - 11 years ago. Did you ever think you would become General Director of Petrosakh back in 1991? Yes, I did, and that is what happened. Now I am the General Director, I enjoy my work and try very hard to make the company successful. What was your best experience during these 11 years? Petrosakh was one of the first joint ventures here on Sakhalin and in Russia that was working with foreign investors. We started working with foreign specialists - first the Americans, then the Arabians. We learned a lot from each other, and it has been a very memorable experience. We were given an opportunity to exchange knowledge and to obtain international experience. I have fond memories of the construction and opening of the Sakhalin oil processing plant, since it was the first and the only one here on Sakhalin. Note: WINNE cannot be held responsible for the content of unedited transcriptions.