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Report of the Chief of Information and Analytical Department of Gazprom neft Maxim Stepanov

21.03.2011

Максим Степанов "Газпром нефть"Stepanov, Maxim Arnoldovich
Chief of Information and Analytical Department of Gazprom neft

March 15, 2011 Radisson-Slavyanskaya Hotel
Oil and Gas Industry Supply Conference – NEFTEGAZSNAB-2011
Good afternoon!
I would like to tell a few words about our Company. During the recent years, Gazpromneft has been developing rather successfully.  We have ambitious plans on our future activities as well as development in the regions. So, I would like to present you this report.
You know, all of you, that an oil company is operating in a highly competitive environment. So, to preserve our competitiveness, we elaborated a development strategy for the nearest future. Here are our performance indicators of the recent time.  Production was approximately 33 million tons, we processed and sold 17 million tons. The company has had like 675 fuel-filling stations.
Our pace has been rather fast. For today, in 2011, the Company is producing like 50 million tons and processing 33 million tons. In addition, we have achieved a good success in oil products sales. Our plans are even more ambitious: to 2020, we plan to produce 100 million tons, to process 70 million tons annually and to sell about 40 million tons of oil products through premium segments.
In order to achieve these targets, we should coordinate our development efforts, developing not only the production area, but the supply area as well. The key objective of procurement and supply is timely provision of consumers with material and technical resources of adequate quality. Key attention is given to minimization of aggregate value. We believe that these principles form the basis of achievement of these objectives.
What did the company providing those performance indicators look like? Our processing facilities were located mainly in Omsk, our production – near Noyabrskaya. You can see that we have grown significantly, first of all, due to our regional sales network. However, to assure the planned target indicators of 2020, we must go beyond our conventional territories. Our projects include the entrance to foreign markets. They include our existing projects in Iraq, Venezuela and Cuba.
This picture represents key elements of the supply process which should be developed. We can achieve our objectives only if we pay our highest attention to all of them. What was typical for the previous system? We used the scheme which was traditional for the majority of oil-producing companies. We used quarterly planning. Our systems were not fully optimal, but, in fact, it was enough on that level.
Our growth has made us perform reorganization, and it included implementation of the principles which helped us to create the effective supply system. This is, however, only the first step to further development. Staying on the same level, we will not be able to maintain the adequate and high-quality supply function required by a growing company.   In terms of planning, we will have at least to review a certain part of our policy.  This will deal directly with the production areas. Here we present its key areas.
The second necessary development component includes the people and motivation. You must know that we have had a rather complex reorganization. At the initial stage of becoming Gazpromneft, we had practically no team of our own, we faced problems with the interface between the communications center and the Company’s subsidiaries and associates, etc. For today, all these problems have been solved.  We spent a lot of time creating a typical model of the organization chart and its introduction at the Company’s enterprises. We pay attention to team-creating matters, and we have achieved a good success with the training and efficiency management programs. 
But all this is not enough. In future, when we purchase international assets, we intend to focus on creation of an international-level team and development of our HR system. Supplier management is one more important area.  In recent times, we have been acting as most of the companies, i.e. the key tool was fulfillment of our obligations and payment. So, in fact, we focused on personal work. But we have had to review our policy, developing long-term relations and paying more attention to analytical work. Our further development, as we see it, is entrance to international markets, additional focus on corporate conditions and benchmarking.
Our basic activities require strict and deep regulation. In the past years, we have advanced far in development of unified solutions, introduction of typical corporate standards and development planning. But we are not going to stop. We are entering foreign markets. Our first solution deals with the existing Serbian asset. On my opinion, it is developing rather effectively and accepts the rules implemented by the corporate center within the Russian Federation.  And, of course, one of the important aspects is automation. This is a tool which enhances efficiency and transparency of the implemented business processes.
In fact, we have made a good progress for today. All our unified business processes at the key enterprises have been automated, the human effect minimized, and we plan further developments. This year, we are completing the integration stage and plan to spread them to the rest of associations, using typical automation solutions.  Here are the main things I wished to tell you. I am ready to answer your questions.
 
- Maxim Arnoldovich, how can the number of sole-source supplies be reduced and the number of long-term contracts increase at the same time?
It is an interesting question. You have to understand that there is no single formula for all areas in this case. Everything depends on the inventory list we have. Long-term relations may be reasonable in some cases, in particular, in terms of positions where it is worth to consider the total cost of ownership.  This is, for instance, the case of automated control systems. Here, when you select a direct supplier, you become tied with him directly in the area of maintenance and spare parts. At the same time, this approach may not provide the necessary effect in case of another inventory list. So, we consider different options. We select the areas for long-term contractual relations, and in case of areas where we have a certain artificial sole-source situation, we develop program market-extension measures.  We search for new suppliers of products and services by means of pilot tests, thus extending this market.
I am not sure whether my answer is comprehensive. As you understand, our activities in this area are many-sided. But no, these approaches cannot likely be combined within a single inventory list.  Nevertheless, we diversify the list and use both approaches.
- How do you select your suppliers? What are the criteria you use?
The criteria are quite different. They include conferences we participate in, activities of our technical services, our commercial activities, placement of information in open sources and on the Company's web sites. So, we try to develop this activity as vastly as possible. At the same time, we keep our Company’s internal substitute database.  If we find a commercial proposal or any other information on the product which is interesting as a potential substitute for the traditionally used items, we include it into this database and start working with our technical services concerning its pilot testing, if required. Then, all will depend on their results.
Last year, we performed 46 successful tests of the products which have been introduced and are now planned for use as absolute substitutes. In other words, performing procurement activities with the help of our technical services, we have the right to expand our competitive environment; and you understand very well what the outcome may be.  I think that it is a very important process of a procurement division, as we, in fact, do not control the market if we focus on sole-source supplies. 
- For now, your planning covers a six-month term. What deviations from the plans do you observe? Will you develop the one-to-three year plans?
- Let me make a small correction: six-month planning does not mean signing of six-month contracts. In our Company, a contract validity period is diversified, depending on the market situation. In most cases – yes, the contracts are signed for a quarter, and now we are shifting to yearly planning by some inventory lists, typically, key inventory lists with understandable consumption volumes. But I should  say that an application campaign does not cover the planning of 100% of our inventory list.   We perform investment activities. Now, when our Company is developing fast, this activity is rather intensive, covering almost 30% of our needs.  And this number is much higher by some areas, due to modernization of the refineries. It matches that of our basic activities and even exceeds it sometimes.
We plan our investment activities after corresponding solutions are made by our Investment Committee. That is why, if to view deviations in general, it will be difficult to report any numbers; but if to consider our needs within an application campaign, deviations are not significant. We make quarterly corrections, and the parameter is close to 90% precision.
You see, it is not real to organize the three-year planning by means of the supply tools only; those who deal with this area professionally will, probably, agree with me. Here, the production planning plays an important role. We and our Company’s business blocks together realize these programs. We have engaged consultants, and I believe that it is quite possible to start yearly planning in a medium-term period. And we hope to start three-year planning by the main inventory list to that time.
- Why do you need alternative supplies if you are satisfied with your supplier?
- We do not suffer from the “process-for-the-process-sake” disease, and it is not our intent to have alternatives for everything. On the other hand, our basic procurement principle says that a product must have adequate quality. If your product has the specified quality, we will look for products of analogous quality and try to compare you with someone else. Certainly, the opinion of our technical specialists is a major criterion in quality assessment. If there is no alternative to your services, we have a sole-source procurement mechanism. But our experience shows that, in most cases, we can find a product which unconditionally meets our requirement.   And when we buy under the sole-source option, we buy at your conditions.  If we have alternatives, we buy at market conditions. Our supply policy represented on the picture I’ve shown aims to enhance efficiency. It is very difficult to regard all parameters in this area, but we try to do it. There are some cases when at first we have a sole supplier, then some competitors appear, And it is our task as a supply division to find an alternative, to offer it to the technical services and, in case they approve it, to make a procurement in accordance with the market conditions.
As for your second question on the pilot testing procedures, we have developed the corporate pilot testing procedure recommended to all Company’s subsidiaries and affiliates. It is as follows. This procedure is mainly related to equipment, the procedure for materials differs a little bit. So, we receive the equipment, carry out the test program. If its results are positive, we purchase this equipment at the market price. Our procurement service is responsible for market price evaluation. If the equipment does not pass the test, we typically return it back to its suppliers. All these agreements are formed with participation of our technical specialists, so to say, “before we leap", before testing.  If we are interested in the certain equipment and you produce it, you may contact us, and we are ready to review your proposal according to the typical terms.
- And what about budgeting of the test program?
- Budgeting of the test program? As a rule, it is included in our operational expenditures.  That means that you deliver the equipment, and the test program is on our account.
- It is known that not all producers work directly with customers. What is your position on this matter? 
- Again, all depends on the inventory list. There are some producers, where direct relations are difficult and non-efficient to build. I can mention, for instance, the producers of computer and office equipment. The volume of their production within an oil and gas company is minor. Hewlett-Packard, for instance. It is a world-known producer, and all that. In fact, building business relations with it, we work with its premium partners in the Russian Federation.  Continuation of work with the same partners on the territories of, say, Serbia, or Cuba, or Venezuela will not be efficient.
This is only one aspect of the matter.  The other includes, for instance, deliveries of the large process equipment. We have a very good experience of international cooperation: when the tender for reconstruction of a Serbian asset was held, the Russian suppliers, to be more exact, producers won the tender at our subsidiary in Panchevo and successfully performed the deliveries. Therefore, unfortunately, there is not a single question, but our main assets are located within the Russian Federation for today. We work for the Company where Gazprom is a major shareholder; so, the Russian producers are our priority suppliers.  In most cases, it brings advantages within Russia. On the other hand, our main criterion is a transparent tender procedure, which shows… Entering foreign markets, we intend to preserve the experience obtained here in Russia, and we plan to use it in the foreign conditions. Of course, we will try to use the experience we’ll gain with our foreign assets in the Russian Federation, in accordance with certain legal limitations, of course.
 - Are you monitoring the procurement process of your counterparts, such as Gazprom, Rosneft and others? Can the procurement price serve as a criterion of the procurement service’s efficiency, and to what extent? I.e. what is a procurement price of a kilometer of cable or pipe applied by you and your counterparts?
- Oh, it is called “benchmarking”, and we all perform it. I think that everyone who deals with procurement deals with benchmarking to some extent. I will not go deep into its specifics, but of course we do it. At the same time, price terms serve as a performance indicator of the procurement service, but with certain corrections.  These corrections depend on the operational conditions of an enterprise, as well as on the terms of an order it receives.
- We want to certify our equipment and to deliver it to Gazprom. We finance the procedure at our own account. On passing the certification, should we pass the stage of pilot tests?
- Our company is a Gazprom’s affiliate. So, the Gazpromcert procedure differs a bit from that of I have mentioned. Gazpromcert includes individual rules of certification. And the question of application of the Gazprom-certified equipment in Gazpromneft is a certain double standard. I.e., if Gazpromneft develops a gas field, Gazpromcert is mandatory. If it is an oil field, that's a different business, and Gazprom certification requirements are not mandatory in most cases. So, if you wish to offer your equipment for Gazpromneft oil projects, first, we should have a need in this equipment, and second, some pilot tests may be required.  But this is more to be decided by technical services, not by supply divisions.  So, please contact us. You have our contact details, and if required, I can help with communications within the Company.
- A small clarification.  Do you give priority to the Russian producers, because they can offer better quality, or because they are Russian?
We do not state the unconditional priority given to the Russian producers. We purchase the products of the required quality, and if it does not comply with our requirements, we will not even consider such proposals. But our experience concerning selection procedures shows that a local producer has more chances compared to a foreign one. Due to certain conditions, there can be some internal pressure. According to the existing data on, say, Gazpromneft, approximately 95% of our inventory list is formed by domestic production. As for the rest of 5%, this is mainly the equipment with complex technical characteristics, and its major part is processing equipment for modernization activities we are performing now. For our production activities, we buy some key imported equipment.  This is mainly computer centers, pipe products and some other items.
- How to get access to information on your procurement plans for the next period: a year or two, with regard to the Gazprom neft’s development strategy?
 - Oh, we have not already reached these targets – two- or three-year planning. Yes, we are trying… Typically, the Company does not publish the full list of purchased products in open sources. Along with the progress in selection procedures, we try to be as open as possible. Our corporate information sources publish regular information on our needs in open bids in accordance with the RF Civil Code, as well as in different forms of competitive selection, from simple tenders and to online ones.  So, click the link and read our proposals.
- Could you tell us about your procurement plans for the next three years?
 - No, and it is clear why: this is exactly our goal. For now, we have no even three-year needs. We have one-year needs, yes, but they include mostly materials, not the equipment.
- Are there pipe products?
- Yes, pipe products…
- How can we get this information?
- But you are working with us, arent’t you? Do you know Alexei Khudoev?
- Do you divide the authorities on selection of suppliers for a parent company and its affiliate?
- Yes, of course.
- And what are the criteria? Price, range of items, sum of a lot?
Gazprom neft practices the following differentiations. Key items of material and technical resources are purchased in a centralized way for all companies by the operational center. This accounts for approximately 80% of the financial component and, typically, 20-30% of the inventory list. The rest part of items is purchased by independent affiliates. For this part, there is a reverse ratio, i.e. 70-80% of the inventory list and 20% of the financial component. As for the inventory list, first of all, the strategic items are purchased in a centralized way.  We have key inventory lists. Since we are an oil company, they include, first of all, pipe products, large process equipment used directly for main activities: submersible equipment, proppant… Well, I think, this is all by the main groups. The rest of items is a matter of selective approach. We continuously perform a certain partial rotation. If we observe a synergetic effect by a group of items which is not centralized, we may, by agreement with our affiliates, take it, work through and then, may be, give it back. Or vice versa. If the items of some inventory list are not used, they are purchased by a single affiliate, there is no sense for us to buy it in Moscow, so, we hand it over to our subsidiaries.  Typically, frequency of this rotation corresponds with the terms of application campaigns, or once in six months.


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