Professional Documents
Culture Documents
inside
New Appointments in Senior Management (p. 1) Feedback from Analyst Visit to TNK BP Assets (p. 3) Upstream Acquisitions (p. 5)
Interview with Tony Considine, Executive Vice President, Downstream (p. 5) Overview of TNK BP's Refining (p. 9)
Larry McVay has been appointed Chief Operating Officer the position previously held by Mr. Vekselberg. Mr. McVay will lead the Technology, Upstream, Downstream and Oilfield Services streams. Supply Chain Management and Procurement will transition to a direct reporting relationship to him by the end of 2004. Since the establishment of TNK BP in 2003, Mr. McVay has been acting as Deputy Chief Operating Officer. Tom Wright has succeeded Dave Cook as Executive Vice President, Planning and Performance Management. Mr. Wright has held senior BP roles in Commercial Assurance, Finance, and Planning and Performance Management. From 1995 until 2002, he held general man agement positions in BP's North Sea operations. Dave Cook is returning to a senior position in the BP Group. Felix Lyubashevsky, Executive Vice appointed Chief President for Oilfield Services, plans Operating Officer to leave TNK BP effective January 1, 2005, to pursue other business interests. A successor to Mr. Lyubashevsky will be announced in due course. Evgeny Romanov has joined TNK BP as General Auditor. His background includes senior financial and general management positions in the energy industry and significant audit experi ence as a senior manager at KPMG.
Larry McVay has been
Management Structure
Dmitry Manakov has joined TNK BP as Chief of Staff. He has worked for the past eight years with McKinsey & Co. consulting group, where he has gathered extensive experience in Russian and international projects across a number of major industries. On behalf of the Company's management, President and CEO Robert Dudley expressed gratitude for the contribution made by Messrs. Cook and Lyubashevsky during TNK BP's first year. "These appointments optimize the Company's management structure and are a part of TNK BP's healthy evolution from a post merger environment to that of an increasingly mature and well managed organization," said Robert Dudley. "They are also a part of our ongoing work to improve corporate gover nance, increase transparency and closely tailor our manage ment structure to the evolving needs of the business. I am pleased that these transitions are being managed smoothly."
On October 27, 2004, His Royal Highness, the Duke of York, the United Kingdom's Special Representative for International Trade and Investment, formally opened TNK BP's new corporate headquarters at 1 Arbat Street in Moscow. Accompanied by a small number of distinguished guests, His Royal Highness met with Company shareholders and senior representatives and briefly toured part of the new building. "The opening of the new office by such an international and
eminent figure is an honor for our company and demonstrates our role in strengthening Russia's international economic link ages," said President and CEO Robert Dudley. "Working together in the new corporate headquarters will move the Company forward and further consolidate our team." The new TNK BP headquarters on Arbat Street in the heart of Moscow consolidates staff from six different buildings in Moscow. It houses 1,200 people and coordinates the company's operations in Russia and Ukraine.
Government officials, TNK BP shareholders and executives attending at the building opening ceremony (left to right): Member of the Board of Directors Len Blavatnik, President and CEO Robert Dudley, HRH the Duke of York, RF Deputy Foreign Minister Yuri Fedotov, Chairman of the Board Mikhail Fridman, Deputy Chairman of the Board Richard Olver, Executive Director German Khan.
Drilling on Samotlor
looks well underpinned by the identified infield and brown field opportunities." On the visit to Samotlor itself, Gordon Gray noted that "the details on Samotlor provided a high degree of comfort on the upside from mature fields," a point reiterated by Colin Smith of CSFB, who remarked that "in the upstream, there were clear examples of the brownfield opportunity from reworking old fields such as the super giant Samotlor." All the analysts noted with interest the company's 12% pro duction target for 2004 and the 7% per annum goal out to 2007. David Stedman from the Daiwa Institute of Research noted that operational risk of not meeting production targets appears manageable, because "TNK BP is applying standard and proven international technology." Commerzbank's AndrewArcher agreed, saying "the probability is high that the growth commitments given will be delivered and potentially exceeded." However, he and many other ana lysts noted that pipeline capacity could be the major constraint on production growth, commenting that "the risk remains that the planned pipeline additions [from Transneft] could slip behind and that, as a result, output growth for Russia and TNK BP will be restricted." Another concern, highlighted by David Stedman, was that "TNK BP seems to have incomplete data on this very important field [Samotlor]," and that this could undermine future develop ment plans. Nevertheless, analysts appeared generally impressed with the good condition in which they found the Siberian assets. "I expected it to be in much worse shape than this," said one anonymously, while Stedman acknowledged that Samotlor is "a field being well managed from an environmental standpoint." With regard to upstream operations, TNK BP's message on the Kovykta project and the recent Rospan acquisition were also noted. Pascal Menges from Exane BNP Paribas comment ed, "the message on developing gas prospects received greater emphasis than in previous presentations."
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Ryazan refinery
Mark Ianotti was positive with regard to the Company's gas prospects, saying that "high optionality in TNK BP's portfolio also comes from the Kovykta field," although others were more cautious on the timelines involved. Gordon Gray noted that "the project is unlikely to move off the drawing board until Gazprom gains an important role." Following the site visit to Samotlor, analysts flew back for a trip to the Ryazan refinery and a BP retail site. Tony Considine's presentation had focused on the vital role that the Downstream Business plays in monetizing TNK BP's crude production, and as Thierry Baudin from SG Equity Research commented " one of the group's strengths lies in TNK BP's integration with the downstream oil business." The Ryazan refinery visit centered on the modernization project, being carried out at the plant. Vice President of Refining, Doug Harris, made a detailed presentation of the improvements being made at Ryazan and across the Company's refining operations, after which Andrew Archer was interested to observe that "TNK BP will be able to produce more diesel instead of (much) lower value heating oil and to produce high spec gasoline for which there is greater and increasing export demand." Following the visit, analysts appeared similarly impressed by the condition of the Ryazan plant, commenting that it looked "much better than I had expected," "I was pleasantly surprised by the cleanliness and efficiency" and that "an awful lot of work had clearly been done on safety." David Stedman did note that "TNK BP refineries face the twin challenges of man power optimisation and rising energy costs," but the overall consensus on the refining business was expressed by Gordon Gray. He summarized his view, by noting, "TNK BP's refinery network is allowing it to take advantage of strong product demand growth and it gives TNK BP [the ability] to opti mise product flows in order to maximize netbacks." A visit to a BP retail site on the outskirts of Moscow rein forced the impression of TNK BP as a company increasingly adopting global standards. As one analyst commented, "the
BP site we visited could have been a BP site on the outskirts of London." Discussion of the margins generated by the on site convenience stores as well as at the gasoline pump also impressed the analysts, with Robert Kessler from Simmons & Company writing in a research note "The 42 Moscow area BP sites earn an average rate of return of 20% on investment. No wonder TNK BP wants to more than double the number of BP branded sites over the next five years." Meanwhile David Stedman stated that BP service stations in Russia are one of the "best performing retail networks" when compared to BP's global system. The visit achieved its goal of providing analysts and investors with insights into the quality of TNK BP's asset base and a sense of the growth opportunities. As Fred Lucas from Cazenove put it " one year on, the TNK BP story is evolving nicely the base case is turning into reality, the upside case looks more credible." From a BP perspective, the analysts also appreciated the position that the company now has in Russia. "BP wanted to let investors get a feel for the breadth of the opportunity and the capability of the people at TNK BP: These were more than confirmed by the field trip," CSFB's Colin Smith commented. Angus McPhail from ING noted that "TNK BP's presentation highlighted the strong base that BP has established in Russia." The theme of the quality of TNK BP's personnel was also picked up by Andrew Archer, who offered the following compliment: "The analysts' trip showcased the pride, the passion and the professionalism of the people in place within the joint venture." Many other analysts commented on the quality of both the domestic and expatriate staff they had met during the visit. Having said this, the analysts were in no way blind to the risks inherent in operating in Russia. Andrew Archer again com mented that "high taxation and increasing state influence through Gazprom suggest that risks are rising." Gordon Gray added that " the key risks remain political as illustrated by the Russian Government's recent comments threatening the license in the Kovykta gas field." The impact of taxation on profits at higher oil prices was also noted.
Nevertheless, the most lasting impression left by the visit seemed to be of the scope of the opportunity, and the substantial upside potential it offers. Mark Fletcher from Goldman Sachs concluded that "the most interesting points were a reiteration of the company's great growth potential and cost control, uplift in capex and more visibility on the potential of the company's assets." He also noted the uniqueness of TNK BP as a company, writing "while the industry globally is striving to find new proj ects with a positive net asset value, TNK BP management reit erated that it has plenty of projects to develop with positive NAV." Gordon Gray also noted, "the magnitude of the long term upside looks considerable," while Angus McPhail confirmed in conclusion that the results of the trip would give investors "con fidence that BP's investment in Russia will pay dividends." The presentation to the financial community is available for viewing at TNK BP's website.
TNK BP plans to invest $6 million into exploration of these blocks by the end of 2004. Total investment prior to the com mencement of pilot production in 2007 is expected to reach $35 million. As stipulated by the terms of the license agree ments, the Company will cover about 1,200 line kilometers by 2D seismic and 1,100 square kilometers by 3D seismic, and will drill nine exploration and appraisal wells. TNK BP plans to implement large scale development of the Bolshekhetskaya depression in cooperation with Rosneft and LUKOIL, which also have upstream assets in the area. Commercial development in the Bolshekhetskaya depression should begin in 2008, with gross peak production reaching 13 million metric tons per year or 250,000 barrels per day.
Tony Considine: "Each year the Upstream business presents us with a greater challenge."
Interview with Tony Considine, Executive Vice President, Downstream
Q: How would you describe the role of TNK BP's down stream business? TC: The unique nature of the Russian market gives the down stream business a particularly important role in TNK BP. Today Russia is the only country that is both a large crude exporter with significant domestic capacity constraints and a relatively illiquid domestic crude and products market. This means that TNK BP needs to be managed as an integrated value chain in order to fully capture the available margin. The value of integration is very significant. The role of the downstream business is to optimize the margins by managing the value chain from the wellhead all the way to our domestic and international customers. We are responsible for developing the crude export business, for the refining of our remaining crude output, and for the sale and distribution of products. The latter are distributed through the domestic retail network, as well as exported to customers outside Russia. Our overarching objective is to monetize the Company's crude oil production in the most optimal way by balancing sales on the various markets we serve and achieving the highest possi ble average netback price. Q: What is of the scale of the Company's downstream business? TC: In the first half of 2004, TNK BP produced 1.38 million bar rels per day, and our responsibility is to monetize this production. Our Supply, Trading and Logistics organization sold around 900,000 barrels per day as crude on the international and domes tic market. We refined a further 530,000 barrels per day, of which 60,000 barrels per day were purchased from the domestic market. Of the products refined, 220,000 barrels per day were then export ed, while the rest was sold domestically in Russia and Ukraine.
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TNK BP is the third largest of the Russian majors in terms of refining capacity and retail assets. In Ukraine we are the num ber one retailer and the second largest refiner. Q: Is it correct to assume then that export of crude oil is always the most profitable option, and if so, what is being done to maximize export opportunities? TC: Russia produces around 9.4 million barrels per day of crude oil, but only consumes around 2.5 million barrels per day of oil products. Therefore exports are obviously an essential part of every Russian oil company's sales. In common with the rest of the industry, TNK BP is allocated its share of capacity in the Transneft system, equating to around 35% of our total production, and we always aim to fill this quota. The opportunity to expand our crude export sales will come through two different routes. First, Transneft itself is not standing still. It has added a total of one million barrels per day of extra capacity since 2001, and is still engaged in increasing the size of the Baltic Pipeline System to its ultimate capacity of 1.2 million barrels per day in 2006. However, at this time, Transneft has no other major capacity expansion programs that have gone beyond the feasibility stage. So we are taking proac tive steps to maximize our export capacity using existing infra structure. We have been involved, with other companies, in the reversal of the Odessa Brody pipeline, which should add 150,000 barrels per day of capacity to the export system. In addition, we are looking at participating in expanding capaci ty at various port facilities and the potential for adding capac ity to our rail loading facilities. Q: If maximizing exports is a priority, how does the Company balance the needs of the refining and domestic marketing businesses? TC: TNK BP has spent considerable time and effort develop ing a detailed model to identify what the Company's short and long term sales priorities and strategy should be. This opti mization model provides us with a fully integrated view of the downstream business and its associated value chain, and is constantly updated with current logistical, operational, cost and pricing data. This allows us to constantly monitor the net backs available from 500 different monetization routes. And, it
Tony Considine began his profes sional career in Australia, where he held a number of commercial and operational posts in the mining and oil industries. Beginning in 1986, he completed a series of international leadership assign ments in refining and marketing in Australia, South Africa and Europe. Prior to joining TNK BP, Mr. Considine was chief executive officer of International Marine, a global sales and marketing subsidiary of BP that sells products and services to the shipping industry. International Marine operates in 45 countries and has an annual turnover of $3 billion.
is thanks to this model that we understand the changing net back picture in terms of various parameters, for example by season. As a result the prioritization by channel, crude oil exports by rail or barge, domestic crude sales, domestic prod uct sales and export product sales can be shifted according to market conditions. Q: How flexible is the downstream business in adjusting its flow of sales according to the optimal netback situation? TC: At the margin, we can be very flexible on a month ly basis thanks to the flexible structure of our contracts and infrastructure invest ments that have been made, for example, in rail loading facilities both at our produc tion sites and at our refiner ies. As a result, we have been able to export around 55% of our crude output in 2004, well above the pipeline quota. We also use optimiza tion models to help us think about the longer term and to make portfolio decisions about the overall direction of our business. In this
regard, we aim to make fundamental decisions about invest ment in our refining and marketing businesses that will posi tion TNK BP to exploit anticipated developments in the domestic marketplace and optimize its exposure there. Q: So how do you see the domestic market developing? TC: First of all, let me emphasize that TNK BP's domestic market is not only Russia but Ukraine as well. The size of these two markets (145 million and 48 million people respectively) and their forecast fuel demand growth (3.5% and 5% respec tively) make them very attractive in a European context. Our analysis suggests that TNK BP can create significant value working in these two markets, and benefit from the major growth potential in the retail sectors of both countries. In particular, two features of both markets stand out. Firstly, demand is mainly concentrated in major metropolitan areas, dominated by Moscow, St. Petersburg, Kiev and Ekaterinburg. Secondly, as the car fleet moves away from older Soviet era models towards newer domestic and foreign models, demand for higher quality, higher octane fuel is set to increase. Q: And how is the downstream business responding to these prospects? TC: I have mentioned that we see increased netbacks from the sale of higher quality oil products and that, as a result, we are investing in our refining business to deliver these. TNK BP owns five refineries, four in Russia and one in Ukraine. Of these Ryazan, Saratov and Orsk in Russia, and Lisichansk in Ukraine are the main plants, with the two smaller topping
plants close to production assets in West Siberia. In addition, we also have a 50% interest in the Yaroslavl refinery thanks to our interest in Slavneft. Our major refineries have been or are being upgraded in line with our strategic view of the refining business in Russia and Ukraine. We believe that, over time, more highly upgraded refineries will increasingly dominate the market place, while plants with less upgrading potential will gradually be squeezed out. Our key refineries will be positioned to produce more high quality gasoline and potentially desulphurized diesel, while reducing their output of fuel oil, where supply is already significantly in excess of demand. Lisichansk, for instance, is already the most sophisticated refinery in Ukraine. The recent ly completed visbreaker at Saratov has improved the light product yield there. A major project to upgrade Ryazan is well under way and, upon completion, will make Ryazan one of the most complex refineries in Russia (for details on this project, see article on TNK BP refining on page 9). The Yaroslavl refinery, which we do not operate, but in which we are a shareholder, is also undergoing a major upgrade. This means that TNK BP will soon have an interest in two of the best refineries in Russia, both located near big metropolitan markets. Q: How does TNK BP's marketing strategy aim to make best use of the improving output from the Company's refineries? TC: The location of our main refineries close to the core markets of Moscow, St. Petersburg and Kiev is already a major advantage. However, we have also been developing a marketing strategy aimed at exploiting the strength of the
TNK BP Refineries
december 2004
our share of the volumes in each area faster than our share of the sites by upgrading our network to improve efficiency and throughput per site. Q: HSE is a major focus for the company as a whole. How are you addressing this issue in the downstream business? TC: Like other business streams of TNK BP, we are giving HSE high priority from the most senior levels of the organ ization. Since the inception of the Company, 400 senior managers have taken part in an HSE leadership awareness program. We have focused on identifying the highest risk areas across the business and have already started to apply global standards with targets set for mitigating the major risks. We are also encouraging greater transparency in reporting incidents in order to identify problem areas as well as to develop solutions in order of priority. We have started implementing systematic root cause analysis proce dures for all incidents and near misses. This will enable us to get a fundamental understanding of HSE risks rather than just reacting to individual events. Q: What are some examples of these procedures in action? TC: One of the biggest risks we face is that of an oil spill on water as we transport our crude oil or products to market. In order to minimize this risk, we have adopted a set of minimum standards that we apply to any vessels we charter. We now have an agreement with BP Shipping that it will vet any ves sel sailing on international seas, and we will not use any vessel that does not pass this screening. As far as inland waters are concerned, we have developed an interim shipping fleet standard, again using advice from BP Shipping, as no domestic vessels can yet meet the highest international standards. All 34 vessels hired for this season have achieved this standard, and the plan is that each year we will raise the bar of the minimum requirements until, over time, they ultimately reach global levels. We have conducted workshops with all the major vessel own ers to explain our objectives and to help them plan their improvement programs. And we are also planning a seminar for the terminal operators to address key issues such as increasing standards in the ship to shore interface. Many of the problems that we have identified have less to do with equipment, and more to do with management procedures. We have also been developing emergency response and crisis management plans to cope with any significant incidents. It is very gratifying to see these practices being adopted not only by our own employ ees but also by our contractors, who have now started to use the HSE standards introduced by TNK BP even when they are not working for us.
BP retail site
Company's two main brands, namely TNK and BP. The TNK brand already has a major position in the regions and a number of large metropolitan areas, while the BP brand has been focused just on the Moscow market. We have identified a number of areas for expansion of both, and we have significant plans for extending our network of service stations and distribution depots, as well as for enhancing the branding of our retail outlets. Importantly, we will also be aiming to increase our convenience retailing business (sales from service station shops), as we see the potential for 10% to 15% annual growth from this market segment over the next few years. Q: With all of this business expansion, isn't there a risk that efficiency could be undermined or that costs could increase sharply? TC: A very good question. We certainly need to maintain our focus on efficiency, and we are doing this by ensuring that we understand the value generated by each refinery and each mar keting business. We can then set performance management tar gets concentrated on key drivers that can be benchmarked against other domestic and foreign assets. This way, we can tar get operational improvements that will enable us to generate the maximum value from each asset, even as we upgrade and grow the business overall. An important part of this benchmarking process has been TNK BP's recent participation in the annual Solomon study, which ranks refineries in Europe, Africa and the Middle East relative to each other. We were the first Russian company to take part in the survey, and the results have already allowed us to target efficiency improvements that will enhance our long term competitive position. Q: What are the plans for the marketing business? TC: TNK BP's retail network currently consists of over 2,100 branded service stations in Russia and Ukraine, which sell more than 8 billion liters of fuel every year. Six hundred of these are operated by our marketing subsidiaries, while the remaining sites are operated by TNK's jobbers, which own the stations independently. There may be some growth in the overall size of the network, but we expect the major changes to come from the stations' increased efficiency and effectiveness. In order to ensure consistent quality across its network, the Company, over time, may seek to increase the share of outlets that it directly owns. More importantly, though, we will be measuring the market effectiveness ratio in each region. This looks at the volumes we sell in a particular region as a share of total sales divid ed by the number of sites we own there as a share of the total number of sites. We will clearly be aiming to increase
Q: Finally, what, in your opinion, is the outlook for TNK BP's downstream business? TC: Every year the upstream business presents us with a big ger challenge as it continues to deliver production growth. Going forward, our job will be to continue finding optimal ways to monetize this production and to maximize the net backs earned by the Company. It is as challenging a task as ever, but we have the right people, the right assets and the right strategy to complete this task. Our optimization model gives us flexibility in a very dynamic market. Our refining assets will provide us with an increasingly high quality prod uct to sell into the expanding and upgrading Russian and Ukrainian markets, as well as for export to Europe. And our marketing business is increasingly focused on maximizing the retail margin in the core metropolitan markets, utilizing the very strong brands within our portfolio. I believe that TNK BP is well on track to achieving its strategic goal of becoming a world class Russian company, with Downstream making a major contribution to this result. As we move toward that goal, I am also determined to ensure that its achievement does not undermine the health and safety of our employees, our environment and the com munities where we operate. And we will continue to demon strate our commitment in this area. Overall, I personally am very pleased with the quality of the people and the team, which we have built here in TNK BP's Downstream. We have demonstrated that together we can meet the challenges and deliver the results the Company seeks.
TNK BP's two main refining assets in Russia are the Ryazan refinery and the Yaroslavl refinery, in which TNK BP is a shareholder through its 50% stake in Slavneft. Both refiner ies are important because they are located in direct proximi ty to the large and dynamic Moscow market. Both are well positioned to supply Moscow and to serve as transshipment points for exports. Modernization programs currently in progress at both refineries will move them to the top quartile among Russian plants. The Saratov refinery is located on the Volga River. This plant provides access to southern Russia markets, as well as trans shipment opportunities to export crude and products by both rail and river. This plant recently received a new visbreaker unit under a program begun by the heritage company SIDANCO. The Orsk refinery is a relatively small (130,000 barrels per day) plant close to the Kazakhstan border, which is important to TNK BP's retail position in that area. In addition, the two topping units mentioned above (Krasnoleninsk and Nizhnevartovsk) take advantage of the quality of crude pro duced in West Siberia to supply products to the local market. Lisichansk is TNK BP's most important asset in Ukraine. It is Ukraine's most modern refinery, and is well positioned to meet local market demand. Lisichansk is a cracking plant, equipped with a large FCC unit with a gasoline yield of 28.6% sub stantially higher than the Russian average of 16%.
"As a major refiner, we need to address a number of challenges that face the industry as a whole," says Doug Harris, TNK BP's Vice President of Refining. "These include a general over capacity of crude distillation, a lack of upgrading units, and a structural surplus of fuel oil and diesel in a marketplace where the major trend is the growth in demand for high octane gaso line. We expect the market to continue to demand an increas ing amount of higher quality products over the coming years. The graph on page 10 clearly demonstrates our estimate for growing gasoline demand combined with an increasing fuel oil surplus. This illustrates the commercial importance of ensuring that our refineries are sufficiently upgraded to meet this changing demand pattern." TNK BP's three largest refineries Ryazan, Yaroslavl and Lisichansk are well positioned for the markets they serve, and are ahead of most of the Russian refineries in terms of upgrade capability and technology. Modernization programs currently in progress will bring these three into the top quar tile of the Russian industry in terms of their technology, loca tion, logistics and product quality. The Ryazan refinery has been the focal point of a large scale modernization program since 1998. Begun under heritage company TNK, the modernization program is set for comple tion in 2005. The Yaroslavl refinery, currently operated by Slavneft, is also benefiting from a major modernization pro gram (see insets on Ryazan and Yaroslavl). Investment is being made into upgrading the Lisichansk refin ery, which plays a vital role in supporting TNK BP's major retail presence in Ukraine. With its fluid catalytic cracker unit (FCC), this refinery is the most modern plant in Ukraine. A new bitumen unit was commissioned in 2004, and a new iso merization unit is to be commissioned in 2005. As TNK BP evaluates plans to optimize asset utilization at Lisichansk, low cost de bottlenecking investments are already yielding impres sive results that will generate further value from sales both to the domestic and European export markets.
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completion of the VGO as part of the Ryazan modernization program, which is currently in progress," says Doug Harris. "There will be significant opportunities for optimization and de bottlenecking, which typically are not capital intensive. Minor investments will be required for sustaining the business and for minor commercial development." Over the longer term (more than three years), spending on upgrading capacity to produce clean fuels will be tied to the RF government's policy on fuel specifications depending upon how fast the government moves to intro duce new fuel standards. Potential investments may be tied to projects to begin or expand specific product exports, or by the need to capture specific market opportunities that may arise in the future.
Investment outlook
In line with TNK BP's strategy, other TNK BP refineries will continue to focus on maximizing profits from their respective local market. Local refinery supplies are key to maintaining presence on the regional retail markets of Russia and Ukraine. Supplying the local markets will be the key role for refineries such as Orsk and Saratov. The latter will continue to supply local markets while also serving as an important crude trans shipment point on the Volga River. "Over a one to three year horizon, we foresee no need for major capital investment in our refining assets, other than
For example, the Company scored in the bottom quartile in terms of energy usage, mechanical availability, personnel numbers and utilization. Current low costs relative to a Western environment means that these poor scores have not yet affected the Company's position in the overall cost cat egory. But they also indicate the areas in which the Company needs to focus in order to maintain a competitive cost advantage as the Russian economy matures and costs converge towards world levels. "The key task is therefore to bring up our refineries from the bottom quartiles before the cost structure changes," says Harris. "For instance, energy is the single biggest cost, accounting for 25 35% of
Solomon Quartiles
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total refining costs. Energy is inexpensive in today's Russia, and the Company currently pays only about half of what a German refinery would have to pay. However, as Russia de bottle necks its export infrastructure, energy costs will rise. So energy savings programs are going to be a high priority for our refineries going forward." Utilization and availability are key drivers for the profitability of any refinery. Russian refiner ies, are affected by regulations that require turnarounds on an annual and bi annual basis. So improving performance in this area will be a regulatory as well as an operational issue. The Company embarked on a review designed to identify the root causes of reliability problems, and to develop new performance metrics aimed at improving maintenance and repair schedules and timescales.
Ryazan refinery
causes of safety problems quickly and to share the lessons learned. A new corporate safety performance standard has been implemented, focusing on risk assessment and mitiga tion as well as personal protective equipment." The proce dures inherited from our heritage companies are very sound, and regulate processes such as operating units, managing emergencies and documenting handoffs very well. Emergency preparedness is also very strong. This is a solid basis on which we began building our new HSE policies," says Harris. "Our contractors will also be included in all our HSE programs, as we strive to build an HSE network of high performance professionals."
As indicated by the personnel index (i.e., number of employ ees), labor is another major cost item. It accounts for 12 15% of total costs. While labor costs have been low to date, over the past few years, they have demonstrated a significant upward trend of 10 14% annual growth. As a consequence, labor productivity is another area of focus. The purpose of participating in the study has been to under stand where the Company ranks on key measures and to plan targeted improvements, rather than to aim for the first quar tile in all categories, Harris emphasizes. "An example of this is the fourth quartile on the personnel index, which indicates that TNK-BP employs more people at each plant than our peers," he says. "This could be interpreted as an indication of inefficiency, but may also be due to structural factors within the regional economies where we operate. For instance, in a relatively remote region where the Orsk refinery is located, we need to employ larger numbers of staff for maintenance work. It would be very difficult to outsource such work to contractors as there are none available locally." "We will be using the Solomon study to identify where the TNK BP operations are out of line with our peers and will address solutions as appropriate to each situation. We have identified and begun working on four areas, aiming to bring our refineries up to international peer group standards: ener gy savings, personnel optimization, utilization of profitable units and margin focus. At this point, we are the only Russian company to have committed to undergo such benchmarking studies on a regular basis, although others may follow."
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Economic Development and Trade, approved an increase in the oil export duty. Effective December 1, 2004 the duty increased to $101.0 per ton. The previous tax increase took place on October 1, when it went up from $69.9 to $87.9 per ton.
Investor Relations
Ruslan Nickolov Phone: +7 (095) 787 9630 Fax: +7 (095) 787 8837 E-mail: rznickolov@tnk-bp.ru
Investor Relations (Fixed Income) Dmitry Logvinenko Phone: +7 (095) 745 7854 Fax: +7 (095) 787 9675 E-mail: ddlogvinenko@tnk-bp.ru
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