AMBASSADOR'S MEETING WITH ROSNEFT'S BOGDANCHIKOV

C O N F I D E N T I A L MOSCOW 012960 SIPDIS SIPDIS RESENDING MOSCOW 12912 FOR EMBASSY BEIJING 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. . ENERGY SECTOR CONSOLIDATION -------------- . ¶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. . BAP AND CPC -------------- . ¶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... -------------- . ¶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. -------------- . ¶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 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 -------------- . ¶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 -------------- . ¶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. RUSSELL