CNBC Exclusive: CNBC Transcript: Igor Sechin, Rosneft CEO, Speaks with CNBC's Steve Sedgwick Today

WHEN: Today, Thursday, June 19th

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Rosneft CEO Igor Sechin today. Following are links to the interview on CNBC.com: http://video.cnbc.com/gallery/?video=3000285895 and http://video.cnbc.com/gallery/?video=3000285900.

All references must be sourced to CNBC.

CNBC's Steve Sedgwick (SS): Sir, Russia is hosting the World Petroleum Congress this year in Moscow. What's the key message for the WPC this year?

Igor Sechin (IS): This year has been a very responsible and successful year for Russia, and for Russian oil and gas businesses. I think that they were reasons for choosing Russia and Moscow as the host of the World Petroleum Congress. The reason for this is that the Russian oil and gas industry is an important element of the global oil and gas industry, and its contribution to the world's hydrocarbon production is significant - including 16% of oil production and 19% share in gas production. And it is one of the reasons that Moscow was chosen as the place of the World Petroleum Congress this year.

In the World Petroleum Congress we had 400 countries participating, and about 30 leaders from the ministries of the oil production companies were part of the congress. And I should say that the forum has been successful and has been very fruitful for the global oil and gas industry

The position of Rosneft company that I presented at the forum generally reflects the overall attendances in the world oil and gas industry.

I will briefly explain the position in order not to distract you from this important interview. First of all oil, the demand for oil, oil products and hydrocarbon generally exists and it keeps growing. And this growing demand is a challenge to the global oil industry.

The second thing that we need to point out is what is it that we are proposing and offering to the world's community in order to meet this challenge.

Currently the production is in decline in the most conventional fields. In order to ensure our security we need to focus on new fields. And most of the reserves to be developed in the new fields are challenged reserves including offshore reserves. The development of new fields challenged reserves and offshore reserves will require new technological solutions. It will result in the use of expensive equipment and techniques in the development of new infrastructure. And therefore the price of hydrocarbons should be such that it offsets the investments in the development of the new fields.

And another topic that we brought up at the World Petroleum Congress is ensuring the equal conditions for the industries, equal operating conditions.

By this I mean the regulation in the oil industry, the taxation and also creating new incentives for further development and growth. It is sufficient to mention that the taxation level in the oil industry is about 1.5, two times higher than in other industries.

SS: So from a Russian government perspective, what they need to do is to give you more incentives via a better regulatory regime, a better taxation regime. Is that what you, as head of Rosneft, is pushing for?

IS: I will go back to your question a little bit later and first I will complete the description of our position that we presented at the World Petroleum Congress if I may.

There's another principle that seems very important to us, and that requires the attention from the entire oil industry and this is the guarantee of honouring the contractual obligations by all parties.

We think this is a critical thing and especially now because the political risks are aggravating this year. We think that the power industry as well as the food industry are so sensitive that taking some political decisions and sanctions with regard to these particular industries are counter-productive and they are incurring significant damage to both consumers and producers. And therefore we suggested to our colleagues that we should include various political sanctions among force majeure. Because previously the force majeure circumstances did not include potential political sanctions. And it is very important because it would give the company a tool not to write off the money as losses.

And there's another thing that requires discussion, this is the improvement of the arbitration system. And because if the country where the arbitration court is located during the political sanctions, it is not likely that the arbitration would be objective.

And so the special attention to fulfil a contractual obligation is a key to the operations of the oil industry. Because I should mention that the investment cycles in the oil industry are much longer than election cycles. And this determines our responsibility. And in any case, we need to ensure the fulfilment of contractual applications. And I think that this is a key thing and our colleagues understand it. And the forum once again proved the high level of trust that high corporate culture and the existence of what I would call, a corporate club.

And going back to your question about incentives that are provided by the regulators in Russia. And I would like to inform you that our government and the president have been paying special attention to incentives in the oil and gas industry. And the last year we managed to have a number of incentives in the oil industry to be legalised in the government documents, and first of all it has to do with the operation of the difficult to recover reserves and offshore operations. And in my mind, the current Russian tax code that relates to the offshore development is the most liberal in the world. And I would like to point out that this initiatives and incentives were legalised. And the last year we received a very good proof of liberalisation of the gas market and also with the respect to LNG exports.

And I would like to say that this activity always involve very difficult discussions because of this permanent desire to get more in terms of the income part of the budget. But it's true not only for Russia but for all other countries. For example everyone has been criticising the Russian gas suppliers for the high gas cost for the European consumers. But when you look at the price structure for the end consumer, you will see that the forty percent of the price, is the price of supplies. And the remaining sixty percent cover the excise, taxes, storage, transportation costs, etc. And therefore sometimes it is useful to go and look deeper in the situation in order to reduce the number of questions from suppliers. And basically they generate the income a part of the budget not only in their country but also in the consumer countries. And in order to complete the conversation about the World Petroleum Forum, I told our colleagues what in our mind are the key events of this year.

And it seems to me that there are two key events in the global industry. And those two key events will be two projects with our American partner with Exxon Mobil. So with the first event I will start in a few days. And I'm talking about the installation of the world's largest unique offshore platform in Sakhalin, the platform called "Berkut" or the urn. And this is a unique platform and it will have a pad with a forty-five wheels operating. And the total weight of the structure is two hundred thousand tonnes. And about one hundred and fifty thousand tonnes is the weight of the substructure. And it is today [Wednesday] that the top side of the platform was delivered to Sakhalin. And we will be preparing for the installation of the top side. And we will monitor weather conditions. And in a few days the top side will be mounted on the substructure. And in sometime, we will start the operations.

And the other event that I have mentioned, is a strategic one for the industry. In August we will start the exploration drilling in the Kara sea. And this is also as part of our joint project with ExxonMobil. And it is going to be a significant event for the industry, because according to our sub-surface teams we can expect large discoveries in this area. And about 30 oil and gas structures were identified based on the previous work. And one of the structures is called Universitetskaya-1 and its area is 1,5000 sq. kilometres and the net base thickness is 550 metres. And I would like to wish good luck to all participants of this project and we hope that everything will work well as we planned. And we are also monitoring ice conditions in that area. And tentatively we will start operations in the first half of August.

SS: You mentioned that very exciting development with Exxon which starts in August. How important for you and for Rosneft are those relationships with Exxon, with Statoil, with BP for driving your growth strategy. They seem absolutely key for your expansion that you have good, strong international partnerships.

IS: As I said, Rosneft is a member of the global oil sector. And I'd like to point out that sometimes we are not perceived in the right way and we are considered as a state-owned company. And in fact we are an international public company. And our shares are traded on the London Stock Exchange and we are meeting all the requirements of international regulators and our shareholders include largest international companies and funds. For example, BP has a large interest in our company. And BP holds about 19.75% of our shares. And they are not just our partners they are our shareholders. And we understand our responsibility and we will use our best endeavours to guarantee the investments and to make sure that our operations meet all norms and requirements that apply to international public companies. In addition, we also work with them on the joint projects. And we are working as partners with almost all world oil majors such as ExxonMobil, Statoil, ENI, BP and a lot of others. And lately we have been implementing a large number of projects in challenged reserves and shale oil. And our Western partners are leaders, obviously, in this area. And it is only natural because the structure of our company's reserves is the world's best and initially, the difficult to produce reserves were not one of our priorities. But at the same time the shale oil deposits are located in the areas with developed infrastructure. And this is a serious reason for increasing production level from this type of deposits. And we really appreciate our co-operation with our Western colleagues and Western partners from the companies that we have just mentioned. And the cooperation with these companies allows us to do asset swaps. It may not be widely known but as part of this cooperation we get access to the fields and the Gulf of Mexico and the USA, Canada, Alaska. And, as a result, we exchange technology, we swap assets and in general it stabilizes the situation in the entire industry. And, we are also a large importer of the equipment.

And this is also a very important area of our cooperation, for example, with General Electric. And, we appreciate this work, and we will do our best to make sure this activity is performed on schedule and without any disruptions.

SS: You mentioned that you're an international, publicly listed company on London Stock Exchange, and that is the case, but you also have a major stake holder, BP with 19.75, you have the Russian government with the best part of 70%, does it matter to you if there is there is an increase in Russian privatization programme and a talked-about stake sale, possibly just under 20%, actually goes through our not. Does it matter to you if the Russian government has 70% or 50% and whether you have the current public listing of your stock or if you have a great publicly traded amount of stock?

IS: I think that it would be in the best interest of the company in terms of its economic and financial situation to increase the listing of its shares in the stock exchange. It would be good because no doubt that it would increase the company's capitalization.

In terms of the impact of the key shareholders on the company's activity, it doesn't particularly matter whether the government holds 69% or 50% plus one share. And I also think that if the government maintains the controlling package of shares, it would be in the best interest of the company and of the state. And also, of the minority shareholders. Because as the government has the controlling package, it provides additional privileges to our company in terms of accessing offshore licenses.

And this is an essential element in maintaining the company's capitalization, and I think that minority shareholders understand that. And for this particular reason, the company currently holds 46 licenses in the Russian continental shelf. And this is what allows us to implement the projects that I mentioned, including the project in the Kara Sea.

SS: So, may I ask a slightly different question, under what timescale would you like to see the major shareholder, the Russian government, lessen its stake to 50% plus one share. Would you like to see that on a very short time scale or do you appreciate it has to take a bit longer?

IS: Who are you asking this question to, is it your question to the government or to the company? As far as the company is concerned, it doesn't matter to us. If we appointed an operator in selling the shares, we would be able to sell the share efficiently at any time, notwithstanding market conditions. And to ensure the maximum efficiency of the shares selling. But, the government may have different arguments. Like, the planning of the income part of the budget. Or implementation of some major projects that require additional sources of funding. So, if we get such instruction, we would do everything.

SS: In terms then, let's move on from the shares and look at the greatest challenge that you see for your company. The greatest challenge to carry out your vision given everything we are seeing. Given the geopolitical situation, given what we're seeing with very strong and stable price environment which is helping, what's the greatest challenge you have for growing your company in 2014?

IS: Our key challenge that has existed, and will remain, is ensuring maximum efficiency... in any conditions. What's important to the oil companies and what affects on their capitalisation…. Are the developments of their resource base. A powerful oil company should be underpinned by good fields and we will definitely be growing our resource base.

We need to use the market demand. We are planning to completely the upgrade of our refining industry and through the increase and production of oil products that trade the best on the market, we will ensure additional economic opportunities.

And secondly, to gain a strong position in the sales markets. And I think that our trading activity is arranged in a very efficient way at the moment. And in some cases we have moved to long term contracts. And not only with China because the deal with China is probably the most famous due to its scale.

But we also signed similar long term contracts with European companies, European consumers. For example such company as Vitol, Glencore and others. And I am talking about 10 year contracts. And earlier I mentioned the high value of the contract. It's very important to us. And in addition we would like Rosneft to become a powerful service company itself and we are working to achieve this. And there's a lot of work to be done in this area.

SS: And will you be pushing as well as part of the strategy to push more into gas pipeline? And perhaps work with the government to be another partner rather than just Gazprom having their monopoly?

IS: The most efficient way is to sell our volumes in the market using our existing infrastructure. If there is no such infrastructure we said that we are prepared to participate in the creation of such infrastructure. We will be choosing the most efficient way to sell products. And we will be working within the framework of the legislation currently in force.

SS: Can I refer back to your answer regarding the big China deal as well, because when I spoke to Mar. El-Badri at OPEC he said 88% of the new barrels they sell are being sold to China and the East as well. Although you have very big contracts with European countries and European customers as well, is the focus on expansion in the East and looking at China and the rest of the emerging markets?

IS: The last year our company produced 240 million tonnes of oil equivalent of hydrocarbon liquids. We supply to Chinese market about 22 million tonnes annually. In order to support our long term activities we need to understand what fields should be chosen as priorities.

SS: May I ask you about sanctions? You have been directly targeted by the US State Department, what is your reaction to that?

IS: The sanctions have been discussed a lot and I would like us to abstain from this discussion because the more we talk about the sanctions, the more important they seem. I am trying to put myself in the shoes of those people who introduce sanctions and I believe that there should be some purpose of the sanctions and some justification of them. And I cannot understand the purpose of the sanctions whatsoever. Especially myself personally I cannot understand what purpose they are pursuing, because I am not involved in the political decisions. I am not a person or element that matters - from the standpoint of obtaining advantages.

Secondly, I cannot understand any justification or basis for taking the sanctions. I don't think that my active cooperation with the American companies that is aimed at ensuring mutual profit could be a basis for sanctions.

I think this sad situation was described quite well by the French politician Charles Maurice de Talleyrand. As far as I remember, what he said is everything that is excessive doesn't have significance. I think serious people should not take any serious decisions under pressure. Therefore this decision that target me don't make any sense to me.

However, I respect such people who take such decisions because our task is to keep working and we will try to demonstrate our efficiency in our activities, including the work of American companies. In my opinion, this is the only option of good response to this type of actions.

SS: Do you fear that your cooperation with American companies will be threatened by a next round of sanctions, which has been talked about it will affect technology and the energy sector and it would hurt your relationships with your American partners?

When I started answering your question on sanctions I said it would be better for us not to discuss this issue. Now you are trying to develop this topic. By doing this, you are trying to give more significance to the sanctions.

I will repeat myself and I will say that we will continue working to demonstrate our efficiency in our joint work that would be mutually beneficial to both Russian and American companies. However if new decisions are taken about sanctions we will continue working at implementing our projects ourselves but we will leave the option open for the American partners to come back when it is possible.

SS: I have a final question, and it is not about sanctions, it is about Igor Sechin, I read a lot about you, I have read a lot about you in the Western press, some of them complimentary, some of them talking about your power, some of them talking about your past and the influence you have. In your words, who is Igor Sechin?

IS: Igor Sechin is the person who you currently can see in front of you. I think that as a result of our conversation, each of us will form an opinion of the person whom he has talked to. If we meet often in the future, at some point there will be trust and maybe even friendship between us. Don't listen to anyone, just try to form your own opinion and live your own life. Thank You

SS: Thank you very much indeed Sir, I am forming my own opinion and it was nice to meet you and hear your own words this morning.

**Get up and speak - sit back down again**

IS: Talking about the value of cooperation with Western companies, I would like to give you one example…which shows the deep level of interdependence between our companies.

Recently we have signed a deal with the North Atlantic Drilling Company. This is a serious company that has the required fleet of drilling platforms and it will be working on our offshore projects. I would like to show you the market response to this agreement. Shares in North Atlantic Drilling increased 40%. This is a good example of the way we should be working.

SS: Then I will ask you another question. Oil companies and business can operate independently of politics. Is that one of your key messages then Sir?

IS: Due to the specific nature of hydrocarbon consumption, there is a special relationship between the producers and the customers. And it would make a lot of sense not to apply any political sanctions in the power sector, because it will do damage to everyone.

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