ROSNEFT CEO BOGDANCHIKOV OPTIMISTIC

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 005835



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DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT

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DOE FOR HARBERT, HEGBORG, EKIMOFF

DOC FOR 4231/IEP/EUR/JBROUGHER



E.O. 12958: DECL: 12/03/2017

TAGS: EPET, ENRG, ECON, PREL, RS, PINR

SUBJECT: ROSNEFT CEO BOGDANCHIKOV OPTIMISTIC





Classified By: Ambassdor William J. Burns for reasons 1.4 (b) and (d)



1. (C) Summary: Rosneft CEO Sergey Bogdanchikov told the

Ambassador December 13th that he is optimistic about the

company's future, noting in particular that its large Vankor

field should come online in 2008. Bogdanchikov dismissed

claims the company was overextended as a result of recent

acquisitions and said Rosneft would be able to secure any

needed credit. He expressed satisfaction with Rosneft's

Sakhalin 1 partnership with ExxonMobil and said he supported

a market price for the field's gas, despite pressures to the

contrary from Gazprom. Bogdanchikov did not see any major

structural changes in Russia's oil industry in 2008 and

insisted Rosneft has no interest in the non-BP half of

TNK-BP. On the Burgas-Alexandropoulis pipeline (BAP),

Bogdanchikov said the day a final deal is signed to make the

pipeline a reality "is the day we will have final agreement

on CPC expansion." Finally, Bogdanchikov dismissed rumors

that he will enter politics in Sakhalin, and indicated he is

staying put. End Summary.



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OPTIMISTIC ON ROSNEFT'S FUTURE, BAP AND CPC

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2. (SBU) In a December 13th meeting with the Ambassador,

Bogdanchikov focused on Rosneft's performance, optimistically

outlining the company's operations and future. Bogdanchikov

claimed Rosneft's 10% organic growth (growth excluding

acquisitions) in oil production in 2007 was among the best

rates in the industry world-wide, and he expected 7-8%

organic growth in 2008. The company is replacing over 100%

of reserves and that its large Vankor field has proven bigger

than expected. He said production from Vankor will begin in

2008, despite construction delays on the East Siberian

Pacific Ocean (ESPO) pipeline. Since Vankor will be

connected to the Transneft system, it would not require ESPO

until 2010, when Vankor production would exceed current

Transneft capacities.



3. (SBU) Bogdanchikov said Rosneft isn't planning further

major upstream acquisitions, but that it would consider

"attractive" opportunities that arise. Rosneft plans to

boost production from the current 100 million tons (2 mbd) to

160 million tons (3.2 mbd) by 2015. Bogdanchikov added that

Rosneft plans to focus more on refining. It will sell less

crude and process more in its own refineries. The company

plans to invest $15 billion in refining by 2020, mostly on

acquiring refineries and upgrading its own.



4. (SBU) Rosneft, as a shareholder in the BAP and as a

shareholder and user of the Caspian Pipeline Consortium

(CPC),fully supports construction of the BAP as well as CPC

expansion. According to Bogdanchikov, "the day a final deal

is signed on the BAP is the day a deal will be signed on CPC

expansion." He was optimistic that these deals would be

concluded soon, as congestion in the Bosporous adds costs for

all producing companies. He predicted that BAP construction

and CPC expansion could both be completed in 18 months once

the agreements are inked.



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TRANSPORT TARIFFS, SUBSOIL AMENDMENTS, AND SAKHALIN 1

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5. (SBU) Bogdanchikov said he believes the GOR will implement

a common pipeline tariff for access to the Transneft system,

which he called more "market oriented," because it would

replace the current differentiated system. (Note: A common

tariff is considered necessary to fund the ESPO, whose costs

have escalated. A common tariff would, in effect, subsidize

the ESPO at the expense of shippers moving oil west.)



6. (SBU) Bogdanchikov was hopeful that anticipated amendments

to subsoil legislation would be passed in 2008, allowing new

license auctions and extending the current five-year licenses

for off-shore production. He also expected that new tax

incentives, currently granted for some East Siberia

greenfield developments, would be extended to cover offshore

projects. He said new license blocks will be complicated to

develop and that companies need to get started on them as

soon as possible.



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7. (SBU) Bogdanchikov was positive about Rosneft's

partnership with ExxonMobil in Sakhalin 1. Regarding gas

sales out of Sakhalin 1, Bogdanchikov said Rosneft believes

that the consortium should seek the best commercial terms,

"regardless of to whom or in what market" the gas is sold.

He suggested, however, that scheduled domestic gas price

increases may help resolve the current stalemate with

Gazprom, which insists Sakhalin 1 gas be sold to it

domestically.



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DEBT RESTRUCTURING AND CONSOLIDATION

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8. (SBU) Regarding Rosneft's vast debt and rumored

difficulties in obtaining credit, Bogdanchikov said the

company already has an agreement with banks to extend the

term of its current $20 billion bridge loan. He was

"absolutely sure" there would be no problems restructuring

its debt on favorable terms. He expressed confidence in U.S.

credit markets, noting that "even the Fed is helping us" keep

debt service costs down.



9. (SBU) Commenting on rumors of further consolidation in the

oil sector, Bogdanchikov said there has been no decision on

merging with Surgutneftegaz, and that Rosneft is not

interested in buying the "Russian half" of TNK-BP. He

claimed that TNK-BP's production efficiencies and assets were

substantially inferior to Rosneft's and that such an

investment wouldn't make sense -- "it would be better to

drill new wells." On the rumored restructuring of the

Ministry of Industry and Energy, Bogdanchikov said that given

the inauguration in the spring, he didn't see time for such

changes. Although "as an oil man" he would like to see a

ministry devoted to energy, he has not seen any preparations

for doing so.



10. (SBU) In response to the Ambassador's question about

Bogdanchikov entering politics in Sakhalin Oblast,

Bogdanchikov said such suggestions were "totally rumors." He

claimed he has never been interested in pursuing political

office and plans to stay on at Rosneft, but did not comment

on recent resignations of three of his deputies.



11. (C) Bogdanchikov's depth, vision, and presentation were

impressive, as usual. His forecast, however, is at odds with

conventional wisdom here. Most analysts with whom we have

spoken believe further consolidation in the Russian oil

sector is inevitable and that, after 10 years at the helm,

Bogdanchikov may be on his way out.

BURNS