Sechin Looks to Raise Oil Output

APPutin visiting a new oil export terminal at the Baltic Sea port of Primorsk on Wednesday, where he turned on the taps.
Prime Minister Vladimir Putin and his new energy policy director, Deputy Prime Minister Igor Sechin, went on the offensive Wednesday to battle claims that the country's oil production was in decline.

"You think oil production is declining?" Sechin said in an interview with Interfax, a first for the secretive former Kremlin insider who has been thrust into the spotlight with his Cabinet appointment this week.

"Let's wait until the end of the year. I'm sure there won't be a decline, but an increase instead," he said, declining to provide reasoning for the claim.

After growing by just 2 percent in 2007, the country's oil production has been sinking since the start of the year as oil firms face heavy taxes while trying to develop untapped fields in Russia's most difficult regions.

Putin offered some hope Wednesday, saying he would support extending tax breaks to regions beyond eastern Siberia, sending the RTS to a new record high of 2406.05. The index surpassed its previous high, hit on Dec. 12, when Putin endorsed Dmitry Medvedev to succeed him as president.

On a visit to the Baltic Sea port of Ust Luga, Putin said he supported introducing seven-year tax breaks for firms working on the continental shelf, in the Timan-Pechora Basin and the Gazprom-dominated Yamal Peninsula.

"It is necessary to introduce tax breaks for companies exploring and developing new deposits," Putin said, adding that he expected oil production to rise by 1.3 million barrels per day by 2015. That figure represents over 13 percent of the country's current oil production, which was nearly 9.9 million bpd last year.

Putin said he had arrived at the expected increase through forward-looking calculations submitted to oil-pipeline monopoly Transneft by the oil firms that use it.

Energy firms, particularly privately held LUKoil, have been warning that Russian oil production could remain stagnant or go into decline for decades to come.

Yet a significant share of Putin's public comments since being confirmed as prime minister last week have been devoted to the need to boost production. He reiterated his support Wednesday for a reduction in taxes on oil extraction, by raising the taxation bar from $9 to $15.

"All of this taken together gives us reason to expect that there will be no problems with filling this pipeline system," Putin said.

The country's state-controlled energy giants, Gazprom and Rosneft, have focused on acquisitions rather than greenfield development in recent years. Gazprom has regularly detailed plans to develop projects on the Yamal Peninsula, first tapped for its potential as a large energy source in the mid-1970s, but has failed to move forward.

The shakeup of those responsible for the energy portfolio in the new Cabinet was one of the more drastic reshuffles, and firms will need time to get to know the new characters, insiders said.

Medvedev stepped down as chairman of Gazprom's board on the day of his inauguration, and CEO Alexei Miller was temporarily appointed in his stead.

Inside the company, Viktor Zubkov, one of Putin's two first deputy prime ministers, is already being referred to as "our new chairman," a Gazprom source said. The firm, which rose to become the world's third-largest company by market capitalization upon Medvedev's inauguration, is due to elect a new chairman on June 27.

Rosneft, meanwhile, is chaired by Sechin, whose top deputy at the firm is Sergei Naryshkin, named chief of the presidential administration on Monday.

Rosneft spokesman Nikolai Manvelov said he expected no major changes when the board of directors convenes on June 5 to approve its new board.

The chief unknown in the Cabinet's energy portfolio is the role of Sergei Shmtako, the little-known former head of AtomStroiExport, a state-controlled company that builds nuclear reactors abroad. Putin named Shmatko to head the newly formed energy ministry.

Insiders and analysts said it was unclear whether Shmtako fell into either of the Rosneft or Gazprom camps. The two national energy champions maintain a notorious rivalry in seeking state support for their expansion ambitions. Large fields, from eastern Siberia to the far eastern shores of Sakhalin island, remain unallocated.

Shmatko's work in the nuclear industry put him in close contact with Mikhail Kovalchuk, head of the politically connected Kurchatov Institute, a spokesman at the institute said. Kovalchuk's brother is Yury Kovalchuk, the head of St. Petersburg-based Bank Rossiya and one of the country's richest men, with a fortune of $1.9 billion according to Russian Forbes.

That, in turn, would put him close to Gennady Timchenko, the head of secretive Swiss-based oil trader Guvnor, who is close to the Kovalchuks and Putin. Guvnor handles a large part of Russia's oil trade, including exports for Gazprom Neft, Rosneft and privately held Surgutneftegaz.

Shmatko takes over from Viktor Khristenko, whose ministry lost its energy responsibilities in the reshuffle this week. Khristenko is now the industry and trade minister. 

"The change is more than just technical," said one source inside an energy firm, who declined to be identified because he was not authorized to comment on politics.

"Relations in Russia are to a great extent personal. Khristenko was a person you could deal with," the source said. "Nobody knows [Shmatko] in oil and gas. He is totally new for us."

"We'll work with whomever we have to," said a source inside a different energy firm, who asked not to be identified because he also lacked authorization to comment on politics. "Who had heard of Trutnev before he was named?" he asked, referring to Natural Resources Minister Yury Trutnev, who was governor of the Perm region before being drafted in to head the ministry in 2004.

Katya Malofeyeva, an analyst at Renaissance Capital, said Putin and Medvedev sought to balance competing clans and interests in naming their Cabinet and advisers.

"The idea was to keep balances in check in this administration," Malofeyeva said. "You have a president associated with Gazprom, and then a deputy prime minister in charge of energy associated with Rosneft. Both sides have direct access to the former president."

"Gazprom has a kind of inertia," said Valery Nesterov, oil and gas analyst at Troika Dialog. "The company is getting stronger and stronger."

"Rosneft can look like its in a defensive position, but the company is strong enough to develop on its own," Nesterov said. "The promotion of Sechin to deputy prime minister indicates that Rosneft will have a strong hand in the government."

The government's decision to cut oil taxes, following intense lobbying from oil firms, came mainly as the result of call's from Rosneft, Nesterov said.

n Medvedev this week named his former law school classmate Konstantin Chuichenko as an adviser. Chuichenko had already been tapped by Medvedev once before, in 2002, when, as Gazprom board chairman, he brought him in to head Gazprom's legal department ahead of key negotiations on a potential merger with Rosneft and the subsequent acquisition of Roman Abramovich's Sibneft, now Gazprom Neft.

Chuichenko, who also sits on the board of Swiss-registered RosUkrEnergo, was a key figure in tough negotiations over Gazprom's sales to Ukraine, Kommersant reported Wednesday.