№ 5 (May 2008)
Tony Hayward Addresses at Rosneft AGM
BP's CEO talked about cooperation with Russian NOC at the Rosneft's annual general shareholers meeting
Ladies and Gentlemen, my name is Tony Hayward and it is a great honour to address Rosneft’s AGM. I am here as chief executive of BP - BP is one of the company’s largest independent shareholders.
We invested $1 billion at the IPO in 2006 – it has been a really successful investment for us, rising in value by more than 50%.
We made that investment for two reasons:
First, BP is committed to Russia. Russia, alongside the Middle East, is one of the world’s greatest hydrocarbon provinces. But more than that, Russia is a great nation in the process of economic transformation.
Key to the continued successful transformation are three things:
• A fiscal framework that encourages investment – the recent moves in the oil and gas sector are encouraging in this regard;
• A respect for property rights;
• The consistent application of the rule of law.
BP has had a material business presence in Russia for almost 15 years, including our position in TNK-BP and our joint ventures with Rosneft.
We saw the Rosneft IPO as another partnership between Governments on the one hand, and private companies on the other. I know that these partnerships are the policy of the Russian Federation.
BP supports them too, both here and internationally. A key trend for the future of our industry is going to be “reciprocity”, where both sides benefit. And BP’s partnership with Rosneft is reciprocity in action.
The second reason we invested in the IPO is that we like Rosneft the company. BP and Rosneft have known each other for almost ten years. Most recently, we have worked together doing world-scale, frontier exploration in offshore Sakhalin. Our decision to partner with Rosneft in Sakhalin is an example of the state/private model in action. We know Rosneft’s management team and its capabilities very well. We have confidence in them and respect for them.
Rosneft also has a strong corporate governance track record. This is a positive and in our view, as an investor, an essential foundation for success.
Rosneft is doing what it said it would do at the IPO.
• You promised production growth and have delivered:
• 26% overall production growth (12M 07 vs 12M 06);
• 6.4% organic production growth (Q1 08 vs Q1 07).
You promised reserve replacement and have delivered:
• 3-year average reserve replacement of 372% at a cost of only $3.40 per barrel;
• Rosneft now has 21.7 billion boe of SPE reserves, placing it on a par with its Major IOC peers.
And Rosneft promised profit growth and has delivered:
• EBITDA almost doubled in 2007 to reach $14.5 billion
• Net income grew by 80% to $6.5 billion
• Following 11% growth in dividend per share in 2006, Rosneft has now proposed 20% growth in 2007. The dividend is one of the most closely watched signs of progress for any company.
Let me just finish by saying something about the challenges which lie ahead. The Current record levels in the oil price have hit consumers hard worldwide. It has pushed energy security right to the top of everyone’s agenda.
As the world’s largest producer of oil and gas, Russia has a really important role to play by continuing to integrate with global markets. Rosneft will be centre stage and I see three key challenges which will have to be met if the company is to hit its ambitious growth targets.
• First, accessing the unexplored resource base in places like Sakhalin, East Siberia and the Arctic. This resource is world class, but hard to access. It will take longer to develop and will be more expensive to produce. If Rosneft is going to continue to deliver, it will require effective partnerships, new technology and expertise.
• Second, increasing production from the existing resource base. This will require a combination of managing older oil fields to reduce decline rates and bringing on new projects in a cost-effective and timely manner. This will be a test of project management capability and technology deployment.
• The third challenge is managing costs. Everyone in the industry is facing inflation in our supply chain of more than 10% p.a. In Russia, the impact of cost inflation is compounded by a fiscal regime that taxes revenues more than profit. This difficult combination of tax and inflation makes the economics of bringing on new oil fields particularly challenging in Russia. The Government has recently announced some changes to the fiscal structure and all of us in the industry hope there will be more if Russia is to fulfil it’s potential.
But those are challenges for the future. Right now I would like to re-iterate BP’s view that Rosneft is a company which is establishing a strong track record in the oil and gas industry.