KIRILL KRAVCHENKO says that the development of DruzbAdria could increase the oil flow capacity in the Janaf oil pipelineRussian state owned company Gazprom Neft is currently considered the most likely partner to Croatia's Janaf in the DruzbAdria project. It is the fifth largest Russian oil company, which operated for years as Sibnjeft, and was bought out in 2005 by state owned natural gas company Gazprom for 13.1 billon euro. It was the largest-ever corporate takeover in Russian history, and since then Gazprom Neft has vigorously expanded its operations in Russia, and in particular on foreign markets.

The biggest such deal was closed by Gazprom Neft a year and a half ago when it took a majority stake in Serbian oil company Naftna industrija Srbije (NIS) for 400 million euro. Since then the company has become one of the most important business partners to Croatian oil pipeline operator Janaf (Jadranski naftovod), through whose oil pipelines it supplies its chief refinery in Pancevo. And it is precisely the fact that Gazprom Neft, by way of NIS, already collaborates with Janaf, and that it has broad ambitions to grow its business in the region, and enjoys the support of the Russian national leadership in this regard, that makes the company a promising partner to the Croatian firm in seeing this major project through.

Indicative of Gazprom Neft's ambitions in the region is the fact that Kirill Kravchenko has been the managing director of NIS since the takeover. He also serves as deputy to Alexander Dyukov, the chairman of the management board of Gazprom Neft, and is responsible for foreign asset management. This 34-year-old manager, with diplomas in sociology and financial management, and a doctorate in economics, after many years of work experience in major Russian oil companies such as Jukos, in 2007 assumed the post of Gazprom Neft vice president responsible for new technologies, corporate security and human resources. In this exclusive interview for Nacional Kravchenko discusses Gazprom Neft's interest in participating in DruzbAdria, the company's ambitions on the Croatian market and the attempts by NIS to restore the property it lost in Croatia in the 1990s.

NACIONAL: Is Gazprom Neft, i.e. Naftna industrija Srbije, interested in taking part in the DruzbAdria project?
- The chief NIS refinery in Pancevo is currently supplied by Janaf. For us there is no present alternative to Janaf, our cooperation with the company is in good form, but the current form of transport is quite costly. When comparing the price of transporting oil via Janaf with similar oil pipelines in other European countries, you can easily calculate the Janaf is twice as expensive. The reasons lie not only in high rates, but also in the low level of capacity used in this pipeline. We feel that our plans to increase production will serve as the basis of a significant revision of the cost of transporting oil via Janaf and that there will be a justified drop in the rates. The development of the DruzbAdria project could also provide for an increase in the total oil flow transported through the system, while a reversible hook-up between the Janaf oil pipeline and DruzbAdria would provide for the delivery of crude oil to our companies, both in the "sea-oil pipeline" combination, and along the oil pipeline itself, which would be useful for us as the end user. And we are also considering alternative projects.

NACIONAL: Which projects?
- The possibility of constructing a connecting oil pipeline from Serbia towards Romania. It is not a new project, and is currently in the elaboration phase and preliminary cost estimate on the basis of which we would decide which of the two projects pays off more. We expect the completion of all necessary preliminary budgeting by the end of August while a final decision on this strategic issue could be made in September. The decision will certainly be based on economic criteria.

NACIONAL: At Omisalj, Janaf also intends to set up a spot oil market. Is there a chance that you could be a partner to Janaf in this project?
- I am not entirely familiar with the details of this project, although I do know that Janaf has reserved transport capacity for a million and a half tonnes of oil a year precisely for the needs of this future market. When it comes to a project of this kind there are a lot of factors our possible interest hinges on. On the one hand, we usually try to secure the supply of as much oil as possible on the basis of long term contracts, rather than on spot markets, because it is for the most part a cheaper method. We also use certain types of oil and is an open question as to whether these types of oil would even be available for purchase in Omisalj. And it is hard to make any kind of decision until we know the concrete timeframe for the implementation of the entire project.

NACIONAL: Does NIS plan to expand its operations to the Croatian market?

- When we signed the contract on the purchase of NIS we undertook the obligation to make the company a strong regional player, and this was emphasised in their speeches by the presidents of Russia and Serbia. We plan to sell a third of the oil derivatives that NIS will produce after the completion of the modernisation of the refinery to foreign markets, with first priority markets being Romania and Bulgaria, while eastern Croatia, Bosnia-Herzegovina, Macedonia and Montenegro are second level priority markets. It is to be expected, then, that we will have a presence in Croatia, in the Slavonia region in particular, but that the lion's share of our operations will always be concentrated in Serbia, including Kosovo.

NACIONAL: It is known that up to 1990 NIS operated a chain of petrol service stations in Croatia that was confiscated during the war. Will you seek the restitution of this property?
- This is a very sensitive issue and one we intend to resolve exclusively by legal recourse. I am convinced that the best way to address the problem would be by using out-of-court mechanisms, that is to say a settlement between the companies, with the support of other interested parties. But we have also undertaken the first steps to return our property through the courts. The issue of the restitution of property is as much a political as it is an economic one, and given that bilateral relations between Croatia and Serbia have improved significantly over the past year, as have the relations between Croatia and Russia, I believe a satisfactory resolution can be achieved relatively quickly. Efforts to join the European Union can also be an encouragement to Croatia and Serbia to resolve this open question as soon as possible.

NACIONAL: Gazprom Neft purchased NIS a year and a half ago. Are you happy with the company's operations?
SINCE THE ARRIVAL OF THE RUSSIANS, Naftna industrija Srbije has increased its production of oil and has started selling new products, Euro-Super petrol and Euro-Diesel, and abandoned the production of leaded gasoline- Now, a year and a half since Gazprom Neft took over the Naftna industrija Srbije company, with the present retrospect, we can say without a doubt that the company was in a significantly more complex situation than what we expected. Before us nobody undertook an audit of the company's operations in line with international standards, and when we did so, we saw that NIS was in an extremely difficult financial situation. Since then we have succeeded in improving the situation. We have stopped the accumulation of losses, reduced debt, increased investments many times over, the most important of which is the modernisation of our key refinery, increased our own oil production and started producing new products - Euro-Super petrol and Euro-Diesel, abandoning the production of leaded gasoline. We have made significant cost reductions and last year we cut superfluous administrative staff by 20 percent, but also met all of the social welfare obligations we had undertaken in the shareholder's agreement and established a constructive dialogue with the unions. The first success was achieved in close cooperation with the Serbian government.

NACIONAL: A few weeks ago you launched the construction of two important facilities in the frame of the refinery modernisation project. What kind of investment is involved?
- As per our agreement, Gazprom Neft will invest 500 million euro in the project. The hydrocracking facility we started construction on in June of this year will cost 369 million euro. The new facilities will be made operational in mid 2012, which will increase the processing capacity at Pancevo to 4.8 million tonnes a year of European standard products. Overall the NIS strategy will see up to 2 billion euro invested over the coming five years.

NACIONAL: NIS is currently the only oil company in the region that owns refinery capacities and its own local oil finds. Do you expect this fact to allow you to become the regional leader in the future?
- NIS covers about 20 percent of its requirements for oil from its own finds in Serbia. We purchase the rest of the oil we need via open public tenders from the best bidders. At the last tender this was Gazprom Neft's oil trading subsidiary, but only because it really did offer the best terms. Our strategic goal is for NIS to meet about 80 percent of its requirements from its own production by 2020, which requires increased production in Serbia and abroad. Just last year, for the first time in 20 years, we increased the exploitation of oil in Serbian territory by 9 percent. We expect this to increase by another 13 percent this year.

NACIONAL: How is it even possible to finance these kinds of investments while the price of oil remains very volatile and could drop even more?
- Unfortunately, we simply have no choice. We are forced to invest regardless of the fluctuations in price. If the price of oil remains at the current level of between 70 and 80 dollars, we will not change our investment plans. The economic crisis in the region, i.e. the devaluation of national currencies and a drop in the consumption of oil derivatives has a greater effect on our plans. The further escalation of these negative trends could cause us to change our business plans.