OREANDA-NEWS. October 25, 2010. Published: The magazine of GAZPROM, № 9.

Igor Makarov, Chairman of the Board of Directors of ITERA International Group of Companies, responded the questions from the magazine, reported the press-centre of ITERA.

– What are the Company’s results in the first half-year of 2010?
– We’ve achieved good results thanks to cold winter. The Company’s proprietary production was 5.5 billion meters of gas during the six months of the year. Out of that amount, ZAO Purgaz produced 3.69 billion cu m, OAO Sibneftegaz produced 1.8 billion cu m, and OAO Bratskecogaz produced 1.77 million cu m of gas.

Gas sales
– Talking about gas sales, we had sold 8.2 billion cu m of gas. Traditionally, the majority of the sales (7.8 billion cu m of gas) accounted for the Sverdlovsk Region. The remainder supply was distributed as follows: 242.7 million cu m were supplied to the Perm District, 85.1 million cu m to the Moscow Region, 135 million cu m to Latvia, and 11.3 million cu m to Estonia. The difference between the proprietary production and sales was compensated by the gas we bought from other producers. Moreover, we happened to sell about 1 billion cu m of gas from underground storages.

It is necessary to point out that gas consumption went up primarily thanks to enterprises of housing and utilities. This affected payments for gas. In the heating period of 2009–2010, the indebtedness by consumers in the Sverdlovsk Region doubled to reach Rub. 4.3 billion in the half-year end. Out of that amount, Rub. 3.2 billion accounted for enterprises of housing and utilities. The situation remains critical at this point in time. The total indebtedness reduced down to three billion Rubles by August 20. Out of that amount enterprises of housing and utilities account for Rub. 2 billion. This is why we will be able to get a final balance only in the year-end when it’s clear whether or not debts are going to be settled.

– What are your plans for 2010?
– Our plan is to fulfill our obligations. In the first instance, it is to raise production of Sibneftegaz to 10 billion cu m of gas a year. The plan includes selling about 17 billion cu m of gas, including 15 billion cu m of gas to the Sverdlovsk Region. We shall continue supplying gas to Latvia, Estonia and Georgia where we own blocks of shares in gas companies. We expect to deliver about 50 million cu m of Russian natural gas to Georgia. OAO ITERA-Georgia, our affiliate, sells not only Russian, but also Azerbaijani gas in that country. They do it via nine gas enterprises. Our main objective in that country is to get back an old debt for gas supplied. That debt is about USD 100 million. Recently we signed a Memorandum with the Government of Georgia in which memorandum they promised to settle this debt.

– What about the development of Bratskecogaz?
– So far, we have been producing small quantities of gas in the Irkutsk Region. We sell that gas to Gazprom. It is a known fact that the RF Government appointed Gazpom a coordinator for the Eastern Gas Program. We are currently negotiating with Gazprom the sale or exchange of our block of shares in Bratskecogaz (79%). 

– Do you plan new projects in Eastern Siberia?
– So far, we do not.

– Is there success in exploring hydrocarbons in Kalmykia?
– ITERA has spent about USD 100 million on geological exploration in Kalmykia. It is quite an amount for our Company. We did find gas and oil but the resources are very deep (at about 7 kilometers) and contain a lot of hydrogen sulphide. This is why we do not plan to develop fields in Kalmykia. It is because we won’t be able to generate profit from the sales of hydrocarbon raw materials. We continue geological exploration in that region, though.

– What projects are being implemented in Turkmenistan?
– We shall be doing geological exploration jointly with Zarubezhneft in block 21 located in the Caspian Sea shelf. This year we shall accomplish a geochemical scheme of the block and begin 2D and 3D seismic exploration to be completed in 2011. The entire work shall be fulfilled based on an open international tender. The Project is indicatively valued at USD 6 billion.

Turkmenistan
– According to preliminary assessment, the recoverable reserves at this block are 219 million tons of oil and 92 billion cu m of associated gas. According to expertly forecast, resources of non-associated gas may account for another 100 billion cu m. In case the resources are confirmed, we shall be selling commodity gas and, based on consent by the Turkmenistan administration we are going to construct a nitric fertilizers plant with an annual capacity of 650 thousand tons of carbamide. Oil from the fields could be exported or supplied to the Turkmenbashi Oil Processing Plant. The expected depth of the pay horizon is 6.7 to 7.2 kilometers. This is the most critical parameter of the Project. No one has ever drilled wells to such a depth in the Turkmen sector of the Caspian Sea.

ZarIT, our joint enterprise with Zarubezhneft, owns a geological exploration and production licenses for blocks 29, 30 and 31. This project is currently frozen. Sooner or later Turkmenistan and Iran would agree on how to divide the shelf portion they own. Then, we start operating on those three blocks. Even more so, because block 21 is next to block 29.

Moreover, ITERA has completed construction of the Central Kara Kum – CS Yulanly gas pipeline. Our Company shall also be involved in construction of the East –West gas pipeline. ITERA plans construction of a segment of that pipeline on a turn-key basis.  We shall be constructing the pipeline and supplying the required components including pipes, gas-compressor units, electric equipment etc.

– Did you manage to sell non-core assets (oil fields)?
– We have sold our oil fields in the Khanty-Mansiysk District. We did not have time to do it in the Orenburg Region because of the crisis. We shall do it, though. To be a full-fledged oil company, one has to produce at least 10 million tons of oil a year and to have a proprietary oil processing plant. Our fields did not allow for production of that size. This is why we decided to get rid of them.

– Why did you decide to get involved in coal production?
– First, we bought a company involved in production of methane from coal in the USA. That business was interesting to us because gas was expensive in the USA and the Government there provided tax benefits for such projects. It is true, that in Russia it is unprofitable to produce methane from coal because the gas price is drastically low. Sooner or later, though, this situation is going to change to the better so ITERA would be able to deal with methane from coal.  We decided to begin with production of coal at Apsatski coal field in the Trans-Baikal District. We expect to start production of coking coal in 2018.

– You have been talking about getting rid of non-core assets long ago and to concentrate on the gas business, and now you decided to deal with coal. Why?
– ITERA Oil and Gas Company shall concentrate on the gas business. This Company shall have nothing to do with coal production. There is also ITERA International Group of Companies which also deals with construction, power industry, methanol… 

– What is the fate of projects related to production of hydrocarbons in India and Nigeria?
– We established SUNTERA to implement overseas projects. That company had participations in licenses to conduct geological exploration in the seven on-shore blocks in India and two on-shore blocks in Nigeria. We recently decided to dispose of those projects. We have sold all our assets in India, and we are in the process of selling our assets in Nigeria. ITERA is producing oil in Nigeria, but the profitability of that project turned out low, and the state was changing the rules all the time.

– How is the US business doing?
– It is quite a success. Itera USA was established in 1992. It is involved in production and investment activities in the field of power energy and production of resource development. It owns companies or shares in companies. Particularly, Dune Energy, Inc. is doing exploration and production of hydrocarbons in the Gulf of Mexico coast in Louisiana and Texas, as well as in the north of Texas in the Fort-Worth oil and gas province. Itera Rig, LLC fabricates and operates drilling rigs for oil and gas exploration on contracts with third countries. Drilling rig #1 of Itera is currently used for boring for oil and gas in loamy shale Barnet deposit west of Fort-Worth.
USA

– Itera Ethanol, LLC had made a joint investment of US\\$ 61.6 million in BioEnergy International, LLC, a research and production company. Its basic business was development of bioreactors to produce fuel from renewable sources based on a proprietary biochemical catalysts technology. BioEnergy used a grant from the State of Pennsylvania to construct and operate an ethanol production plant in Clearfield (Pennsylvania).

Archer Group, one of our companies, is involved in buying timberlands in North Florida, Georgia, South Carolina, Alabama, North Carolina, Tennessee, Mississippi and Lousiana to construct quality country housing. Jacksonville Properties Holding Corp. (an Itera USА affiliate) owns commercial real estate in Jacksonville (Florida).

– Tell me about power generation and methanol production projects.
– We are going to commence construction of a power plant in the Kstov area of the Nizhni Novgorod Region with a capacity of 900 mW in the near future. We have gas. So, it is profitable to turn it into power with a view of receiving additional profit. Moreover, they asked us to construct a few small power plants in the Sverdlovsk Region, but the companies that were interested to buy that electricity asked us to freeze those projects because of the crisis. We continue investing in the Sverdlovsk Region, though. ITERA shall construct 17 gas-fired boiler houses with an aggregate capacity of 83.3 mW, 94 kilometers of town connection and distribution gas pipelines in 2010-11. Work shall continue to create an Automated Gas Directory and Documentation System. Over Rub. 900 million shall be allocated on the above objectives.

Methanol and development
– We shall begin construction of a gas chemical processing complex for production of methanol with an annual capacity of 600 thousand tons in the first quarter of the next year in Nizhni Tagil (the Sverdlovsk Region). The complex is valued at Euro 304 million. It is going to be commissioned in 2013.

– You got problems with developer projects. Did you manage to solve them?
– It is true we had problems with developer projects in Moscow and the Moscow Region. The audit had proven our former partner was not quite honest in fulfilling its obligations. So, many facilities bought on ITERA’s money were excluded from the Group and registered within schemes that were unclear to us. Now, the situation has been normalized. We returned our assets. It is true though we had to spend the whole year on lawsuits. ITERA shall continue implementing all of its developer projects in the near future.

– How do you plan your cooperation with Gazprom?
– Gazprom is ITERA’s principal partner. We plan to develop all our joint projects. Primarily, this is the gain in yield in the fields of Sibneftegaz.

– Do you support an idea of Alexander Krasnenkov to join Purgaz, Sibneftegaz and Nortgaz?
– Yes, we do. We think that the creation of such a company could be of benefit to Gazprom and to us. The new company could place some of its shares at an Exchange. This could produce a positive result on capitalization of Gazprom, an owner of a controlling block of shares in that company. Moreover, the new enterprise could develop smaller and more complicated gas fields which are of little interest to 100 percent affiliates of Gazprom. One by one neither Purgaz, nor Sibneftegaz, nor Nortgaz has prospects. These companies would have to be wound-up as soon as they produce the entire gas on their license areas. In any case this issue has to be decided by Gazprom.

– Would you be able to agree about distribution of participations in the new company with Farkhad Akhmedov (owner of 49% shares in Nortgaz)?
– I do not see any problem. Should amalgamation come true, an independent auditing of all the three companies would be accomplished. So, we shall agree on distribution of shareholdings without problem. Should Farkhad Akhmedov wish to sell his block of shares at a market price, we would be prepared to buy it.

– Is Sun (India) still a shareholder of Itera Holdings Ltd?
– Not any more. We had signed an agreement with Sun to buy out the shares in Itera Holdings Ltd. The deal is near completion. 
 
– Tell me about the success of Katyusha, your team of bicyclists.
– Our team was established only one and a half year ago. Now it has entered an elite of the world bicycling. After Giro d’Italia race, Katyusha got the first place in the world classification this June. It is true though we went down to the third place in team classification after Tour de France, but our racer occupied the second line in the international rating of bicycle racers. Besides, singlets of Katyusha racers carry the logo of Gazprom and I am very much thankful to Alexei Miller, Chairman of the Board of Directors of Gazprom for the support to bicycling. He is the member of the Board of Guardians of the Federation of Bicycling of Russia (FBR).

– You headed the FBR this June. Is there a possibility that our bicycle racers can win medals at the London Olympics of 2012?
– It is a difficult question. The Russian bicycling is in a decline stage now. All training bases of the former USSR are now beyond the borders of Russia (the Caucasus, Central Asia). Russian racers have no place to train. The Krylatskoye center in Moscow was constructed for the Olympic games of 1980. Today, it does not meet international standards. Moreover, it is prohibited to use federal auto roads for bicycle races in Russia. Special tracks are non-existent. As a result, Katyusha has to train in Italy where all necessary conditions exist and where competitions of bicyclists happen time and again. To revive bicycling it is necessary to construct new training bases and sufficient tracks. We plan to do it near Sochi.