AMBASSADOR'S MEETING WITH ROSNEFT'S BOGDANCHIKOV

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 012912

SIPDIS

SIPDIS

DEPT FOR EUR/RUS WARLICK, HOLMAN, AND GUHA
DEPT FOR EB/ESC/IEC GALLOGLY AND GARVERICK
DOE FOR HARBERT/EKIMOFF/PISCITELLI
DOC FOR 4231/IEP/EUR/JBROUGHER
NSC FOR GRAHAM AND MCKIBBEN

E.O. 12958: DECL: 12/13/2016
TAGS: EPET ENRG ECON PREL RS
SUBJECT: AMBASSADOR'S MEETING WITH ROSNEFT'S BOGDANCHIKOV


Classified By: Amb. William J. Burns. Reasons 1.4 (b/d).


1. (C) Summary. On December 12, the Ambassador met with
Rosneft's President Sergey Bogdanchikov who confirmed that
Rosneft is interested in bits of Yukos but that the rumor it
will purchase Surgutneftegaz (SNG) is a "fairy tale." He
claimed that CPC expansion will be "automatic" once an
inter-governmental agreement (IGA) on the
Burgas-Alexandroupolis pipeline (BAP) is signed.
Bogdanchikov reviewed his company's 2006 (the IPO and
increasing production) and previewed its 2007 and beyond
(even more production and a wider net of partnerships). End
Summary.
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ENERGY SECTOR CONSOLIDATION
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2. (C) Bogdanchikov, joined by the Chief of Rosneft's
Financial Consulting Group Peter O'Brien, said in response to
the Ambassador's question that he did not believe that
"anything extraordinary would happen" about further industry
consolidation. In particular, he said that we should not
believe the rumors about Rosneft purchasing SNG and that
Rosneft would be much better off buying greenfield licenses
than buying a company with worse financial and production
indicators than itself. He said that he had received no
instructions to pursue SNG. Bogdanchikov did admit that
Rosneft is interested in parts of Yukos, in particular some
downstream and greenfield assets. However, they would wait
until the evaluations are completed on the Yukos assets in
January before making a decision on which ones to go after.
He also indicated that they may purchase some smaller
companies in order to boost their reserve base.
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BAP AND CPC
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3. (C) Bogdanchikov was upbeat on BAP and CPC expansion,
indicating that he was "sure expansion will happen in 2007."
While there were other reasons to expand the pipeline, the
Ambassador pointed out that such a decision would certainly
be well-received in the U.S. Bogdanchikov agreed and
indicated that a decision to expand CPC will follow "shortly
and automatically" after the Russian, Greek, and Bulgarian
governments ink an IGA on BAP. Bogdanchikov said that he has
been to Brussels to encourage the EU to get the Bulgarians to
be more proactive and that Prime Minister Fradkov is
personally working on hammering out the IGA. He said the
Russian government is "scared" of approving CPC expansion
without approval of the bypass, but did not elaborate on the
specific fears. He called both CPC and BAP projects on which
Rosneft and Chevron must work on together as "common tasks".
With Russian domestic consumption rising slower than
production, Rosneft is interested in any alternative export
route and thus fully backs BAP (Note: Based on our latest
information, Rosneft will receive a 17 percent stake in BAP).
.
2006 WAS A GOOD YEAR...
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4. (C) Bogdanchikov touched on the highlights of Rosneft's
year from the IPO in July to the (roundabout) purchase of
Udmurtneftegaz from TNK-BP. He emphasized that the IPO was
part of a long-term process to increase the capitalization of
the company and expected that, through organic growth alone,
the company will produce about 2.6 million barrels per day
(b/d) by 2011, up from 1.6 million b/d. In order to reach
these figures, Rosneft spent about $1 billion on 14 licenses
in 2006, many of them near their Vankor oil field. He
expects Vankor to begin producing oil in 2008 and eventually
reach an output of about 600,000 b/d, with more to follow as
the nearby licenses are developed. He pointed out that oil
from Vankor can go either east (to fill the East Siberian
Pacific Ocean -- ESPO -- pipeline) or west and even north
through the port of Dikson.
.
...AND THE FUTURE LOOKS BRIGHT TOO.
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5. (C) For 2007, Bogdanchikov told the Ambassador that
Rosneft will focus on developing the Vankor field, exploring
new fields, expanding the Tuapse refinery on the Black Sea
coast, and maintaining rapid production growth. Rosneft will

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invest a further $1.2 billion in Vankor next year. The
company will also continue its work with TNK-BP to build a
pipeline from the Verkhnechonskoye field (the two companies
are partners on this project) and surrounding properties to
the ESPO. Rosneft, chronically light on refining capacity,
will also continue to upgrade the Komsomolsk refinery so that
it meets global standards.
.
PARTNERING
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6. (C) Bogdanchikov ran through a litany of current and
prospective deals in which Rosneft will partner with other
Russian firms and international companies. He touted the
good relationship Rosneft has with ExxonMobil in their
Sakhalin-1 venture and asserted that all is well on that
project. He also said that they are "close to commercial
discoveries" on the Sakhalin-5 project with BP and have
signed a memorandum establishing joint work on exploration of
arctic seas including the Kara, Laptev, and Chukotka Seas.
On the gas front, Rosneft has agreed to a contract with
Gazprom on price and gas volumes they sell to the gas
company. Further, Rosneft expects at least "one more" major
project with ExxonMobil in Russia and has established a "list
of priorities" with Shell including dealing with difficult
oilfields and downstream asset swaps. Finally, they are
drilling for oil in the Sea of Azov with Lukoil, and he noted
ExxonMobil was one of four candidates that approached Rosneft
to work together on a technologically challenging (due to
deep water) block in the Black Sea.


7. (C) According to Bogdanchikov, Rosneft has an active
relationship with Chinese firms. He said that they have
recently set up two joint ventures with the Chinese. The
downstream JV is set up to sell refined products in China but
this is proving difficult because the price is kept
artificially low by the Chinese government. Bogdanchikov
seemed more upbeat about the potential for the upstream JV,
which was set up to jointly develop newly-licensed fields in
East Siberia. Rosneft also has drilled a promising well with
the Chinese company Sinopec on the Veninsky block on Sakhalin
Island.
.
COMMENT
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8. (C) While some things he said did not ring true (denial of
interest in Surgut, for example),working with no notes and
giving us the level of detail Bogdanchikov did make it
apparent to us that he is truly on top of his brief. Given
his company's stake in the BAP project, he is in a position
to have the information to back up his comments on CPC
expansion.
BURNS