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From Debtor to Leader: How Serbian Oil Company Thrived Under Russian Management

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When in 2009 Russia's Gazprom Neft acquired a controlling stake in Petroleum Industry of Serbia (NIS), critics claimed that Belgrade had made a bad trade for Russia's non-recognition of Kosovo. But under the Russian management NIS has become the largest single contributor to Serbia’s budget. Sputnik talked to its Chairman of the Board of Directors.

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Back in 2009, Russia's Gazprom Neft, the oil arm of Russia's gas giant Gazprom, acquired a 51% stake in Petroleum Industry of Serbia (Naftna Industrija Srbije, NIS) for 400 million euros. Back then critics of the deal claimed that Belgrade made a bad bargain, paying the price for Russia's non-recognition of Kosovo’s independence.

In July 2009, Gazprom Neft Chief Financial Officer (CFO) and Deputy Chairman of the Management Board Vadim Yakovlev was elected Chairman of the Board of Directors by the Serbian NIS’s existing board.

In several years, from an ineffective company drowning in debt, NIS has grown into one of the most successful enterprises and the largest budget contributor in Serbia. Since 2009, Gazprom Neft has invested over 2.5 billion euros – not only in new technologies, but in the company's social programs as well.

Sputnik Serbia sat down with NIS’s Chairman of Board of Directors Vadim Yakovlev to talk about the company's growth.

For the last five years, he said, NIS has been delivering a direct profit to its shareholders in the form of stock dividends. This is still the case today, despite the challenging situation in the oil market.

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Vadim Yakovlev commented on the poor state of affairs of the company back in 2009.

"It was caused, in the first place, by the absence of a distinct development strategy. When it was privatized, NIS had accumulated around one billion euros in debt and was making a loss of half a billion euros annually," he told Sputnik.

Given an annual shrinkage of oil extraction volumes, ineffective oil processing, a weak distribution network, one doesn’t need to be a great economist in order to see the fate of such company, Yakovlev said.

At that time, the Serbian government did not have the means to turn the situation around. Nowadays, NIS is the largest and the most efficient company in Serbia, contributing up to 15 percent of the country's budget. In eight years it has transformed from a national player in the oil and gas market into a successful regional energy holding.

According to the Chairman of the Board of Directors, from 2017 to 2019, the company is planning to invest over 800 million euros into its development projects, including the second stage of the modernization of the Pancevo refining compound. It has already invested 500 million euros in its modernization, which has enabled the compound to produce up to 4.8 million tons of oil products per year, including 1.2 million tons of diesel oil. Further investments, he said, will transform Pancevo into one of the best oil refineries in the world.

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Vadim Yakovlev also commented on the widely criticized hydraulic fracturing method, used for extracting Serbian oil deposits. He said that this particular technology has undergone numerous stages of development and the method applied in Serbia is the most secure operation possible. It is applied only where the standard extraction technologies have been proved ineffective, including for the shale oil deposits in the US, in Europe and the Balkans.

Importantly, before using the hydraulic fracturing method, NIS tests the sealing capacities, so it not only controls its own activities, but corrects the errors which have been made in the past.

"For the last years, NIS has remediated over 120,000 square meters of land in Serbia, which had been polluted with oil products before the privatization, and has eliminated up to 200,000 tons of production waste which had accumulated for 30 years," Yakovlev told Sputnik.

He further revealed that from 2010 to 2016, NIS invested over 11 billion Serbian dinars (over $103 million, over 90 million euros) into environmentally friendly projects.

The Chairman of the Board of Directors also commented on criticism that apart from contributing to the Serbian budget, NIS is also underpaying large sums due to the considerable privileges on the extraction of natural resources, granted by the Serbian government.

Yakovlev said that the privileges have not been granted just to Gazprom Neft, but it was a consistent policy of the Serbian government. Similar forms of tax support of complicated projects are common in many countries – the US, Russia and Hungary included.

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"At the time when NIS was privatized, the tax percentage rate for the extraction of natural resources was 3%, and the government extended it for the company's large investment projects until the payback period," he told Sputnik.

He further explained that oil extraction in Serbia, given its quantity, quality and geology of deposits, is a very complicated and costly business, which requires serious investments. Without the support of the government, NIS could not have made the same investments into the development projects as it has done for the last eight years, and the contribution to the country's budget would have shrunk. However due to the favorable investment climate, NIS is increasing its contributions every year.

Yakovlev revealed that in 2016 alone, the company contributed 145 billion Serbian dinars ($1,367billion, 1,196 billion euros) to the country's budget. Back in 2008, he said, it was only 55 billion ($518 million, 453 million euros).

NIS is not simply a business project which provides over 11,000 working places, he said, it also has a very powerful social program.

"We have come to Serbia for the long-term. We also seriously invest into cultural and social projects. Together with Emir Kusturica (a Serbian filmmaker, actor and musician) we have conducted annual classical music festivals. We have restored the Russian cemetery in Belgrade. And are currently participating in the restoration of mosaics of the cupola of the Serbian Orthodox church of Saint Sava. These are the largest projects, however there are a lot more," he concluded.

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