Oil Industry 1999-2000
Russia is one of the world's leading oil producers, with 13% of total world reserves. The country produces 7 million barrels of oil per day (about 29 million t per month), of which about 4.3 million barrels are exported. By this indicator, Russia occupies second or third place in the world. Oil producers account for nearly 10% of the country's total industrial output volume, and since their product is highly competitive, the drop in production has been considerably less than in other Russian industries. In recent years, the increase in production has been due to the sizeable jump in world oil prices.
Industry profits were 15 billion rubles in 1998 and 120 billion rubles in 1999. The situation later became even more favorable: according to the State Statistics Committee, total profits in the oil sector last year were more than 200 billion rubles.
By Ministry of Energy estimates, in 2001, oil production in Russia will amount to 325 million tons. However, according to oil company estimates, oil production in Russia this year will increase to 335-340 million t (the Ministry of Energy had calculated that this level of production would be achieved within ten years). Even if world oil prices continue to fall (international analysts have been suggesting this more and more often since the September 11 terrorist attacks), demand for oil will not fall sharply. Therefore, the industry will remain the main supplier of funds to the Russian economy, both in the form of taxes and as orders for equipment from allied industries.
One very obvious personnel paradox appeared in the oil industry: state officials happily left the service to head private companies, and conversely, managers of the new companies left for government once they had gained experience as work in the industry no longer matched their caliber. However, in spite of this interpenetration, relations between oilmen and the state were never serene. The state was forever demanding more from the largest generator of budget funds than it was able to give, namely, taxes, investments in related industries, and fuel for agriculture and the Far North…However, contrary to earlier predictions of the imminent collapse of the oil industry in the next few years, the industry has continued to develop and increase production.
The oil industry was under dual state control by the Russian Ministry of Fuel and Energy and the USSR Ministry of the Oil and Gas Industry. At the end of the year, only one regulatory body, the Ministry of Energy, remained.
In April, Yugorsky Bank was registered in Nizhnevartovsk, one of the centers of Russian oil production. Oleg Kantor became its president. A bright but short-lived future awaited the bank. Initially, it was oriented toward serving Siberian oil-producing companies. Yugorsky Bank's heyday was in 1993, when it was 17th on the list of largest Russian banks in amount of assets. In June 1995, Oleg Kantor was stabbed to death in his dacha near Moscow.
In November, the Langepas-Urai-Kogalymneft concern was registered under the Ministry of Fuel and Energy. Vagit Alekperov, the First Deputy Minister of the USSR Oil and Gas Industry, was named president of the concern. Hardly anyone still remembers the corporation's full name, because the name was shortened almost immediately to LUKOIL (invented by company vice-president Ravil' Maganov, which brought him a bonus of 300 rubles).
The Ministry of Fuel and Energy set up two other oil concerns, Surgutneftegaz and YUKOS. At the beginning of the year, Mikhail Khodorkovsky, head of the MENATEP interbank association, became Deputy Minister of Fuel and Energy. However, it was said at the Ministry, that the name Khodorkovsky was not on the list of Ministry personnel, although he had his own office in the Council of Ministers.
The first project to develop the Sakhalin offshore fields started. The MMM concern, which united the Japanese company Mitsui and the American companies McDermott and Marathon, won a tender for the right to develop the Piltun-Astokh and Lunsk oil fields. Within a year, it was renamed Sakhalin-2.
In April, a number of enterprises in Irkutsk Region, the Varyeganneftegaz oil and gas production association, and the Irkutsk Regional Property Fund set up the closed joint-stock company (ZAO) Rusia Petroleum to explore and develop the Kovykta and Verkhnechonskoye fields.
In May, Viktor Chernomyrdin, head of the Gazprom concern, became head of the Ministry of Fuel and Energy, but not for long as he became Prime-Minister in December. In mid-1992, Deputy Minister Aleksandr Samusev announced that work had begun on preparing the draft of a presidential decree on turning oil industry enterprises into joint-stock companies. The decree was adopted in November. In accordance with the decree, the first oil companies in which private investors could own up to 49% of the shares were LUKOIL, YUKOS and Surgutneftegaz.
Immediately after the New Year, Yury Shafranik was appointed head of the Ministry of Fuel and Energy; until 1990, he had been the general director of Langepasneftegaz, which became part of the LUKOIL association.
In April, the open joint-stock companies (OAO) LUKOIL, YUKOS, and Surgutneftegaz were formed by government resolution. Forty-five percent of the charter capital in each company went to the state. The companies were headed by Vagit Alekperov, Sergei Muravlenko, and Vladimir Bogdanov, who were the heads of the original concerns. The remaining oil-producing enterprises were combined into the state enterprise Rosneft, with Aleksandr Putilov as president.
However, by the end of the year, 30 oil-production associations whose shares had been transferred to Rosneft began to actively insist on being separated into independent companies. The main incentive for them was the example of "independent" YUKOS, LUKOIL, and Surgutneftegaz, which were able to export oil without going through the state as a middleman.
In May, the government announced plans to create new holdings on the basis of Rosneft's assets: the Siberian-Far Eastern Oil Company (SIDANCO), the Eastern Oil Company (VNK), and the Russo-Belarussian state company Slavneft. Today only Slavneft remains in its original form. It managed to retain all the assets that formed it in 1994, i.e., Megionneftegaz, Yaroslavnefteorgsintez (YaNOS), and the Yaroslavl and Mozyr oil refineries. Anatoly Kuzmin, the general director of Megionneftegaz, initiated the creation of Slavneft. Three months later, he and his driver were shot in their company car.
SIDANCO should have immediately become second or third in production volume in Russia among the established companies, since the largest remaining unprivatized production associations, namely, Varyeganneftegaz, Chernogorneft, Purneftegaz, and the smaller Kondpetroleum and Udmurtneft associations had been allotted to it from Rosneft. The authorities planned to make SIDANCO a model oil company, in which the state would get a controlling block of shares over three years and the portion of stocks sold to foreign investors would be no more than 15%. The plans fell through, because none of these requirements were met, and in 1999, bankruptcy proceedings were instituted against SIDANCO.
The government signed a resolution on the creation of the Orenburg Oil Company (ONAKO). The Premier personally oversaw ONAKO's creation. By special resolution, the company was exempted from most federal taxes (it was rumored that the company was Chernomyrdin's "alternate airfield" in case he was fired). The NORSI petroleum refinery (formerly called Nizhegorodnefteorgsintez) could not get out of its credit hole and was declared insolvent. This last unprivatized oil refinery not dependent on large oil companies had not been able to settle accounts with its debtors.
In 1994, the law-enforcement agencies first began to talk seriously about the systematic shootings of oilmen carried out by criminal structures. The murder of Anatoly Kuzmin was the first. Within two months, YUKOS vice-president Vladimir Zenkin was shot in the entrance of his apartment block. In May, unknown criminals stabbed AO Neftebur director Oleg Litvinov to death. In September, commercial director of the company Samara's Oil (Neft Samary) Yury Shabanov was killed. YUKOS vice-president Viktor Tarkhov, who took Vladimir Zenkin's place, was luckier: when his company jeep blew up in Novokuibyshevsk (Samara region), he was not in it.
In January, SIDANCO experienced its first trouble. On Viktor Chernomyrdin's order, Purneftegaz was returned to Rosneft. As a result, the state company lost about a quarter of its oil production volume and a significant portion of its resource base.
In April, President Boris Yeltsin signed the decree "On Priority Measures for Improving Oil Company Operations." Oil companies were allowed to conduct secondary issues in exchange for shares in subsidiaries, including shares assigned to federal property. Although the possibility of annexing other production companies was not mentioned, within the next three months, YUKOS used the decree to add AO Samaraneftegaz to its structure and LUKOIL acquired AO Permneft.
Then, the Ministry of Fuel and Energy created the Southern Oil Company (YuNKO) to rebuild the oil business in Grozny. Ziya Bazhaev was appointed president of the new company.
In May, the membership of the Sakhalin-1 consortium for developing the Chayvo, Odoptu, and Arkutun-Dagi fields of the Sakhalin shelf was finally designated. The members were Sodeco (Japan), Exxon (US), Rosneft, and Sakhalinmorneftegaz, which was part of Rosneft.
In August, the Tyumen Oil Company (TNK) was founded. It included Tyumenneftegaz, Nizhnevartovskneftegaz, and the Ryazan oil refinery.
At the end of August, Boris Yeltsin signed the decree "On the Formation of the Siberian Oil Company" (Sibneft), although the procedure for founding a company was usually bound by a government resolution. Rumor credited the founder of AO All-Russian Automobile Alliance (AVVA) and AO LogoVAZ, Boris Berezovsky, for the appearance of the presidential command. Noyabrskneftegaz and the Omsk oil refinery became part of Sibneft (it was previously assumed that Noyabrskneftegaz would become part of either SIDANCO or TNK).
The most important events in the oil industry occurred at the end of the year. They had their own prehistory. At the end of March, Vladimir Potanin, the president of ONEKSIM Bank, offered the government a deal on behalf of a banking consortium (Imperial Bank, Capital City Savings Banks (SBS), MENATEP, Alfa Bank, and others): the major banks were prepared to grant the government credit in exchange for the right to manage the state blocks of shares. Industry was at the peak of a default crisis and the government was extremely short of money. A number of oil companies alone owed the state budget 7.536 trillion rubles, which would have been enough to eliminate the arrears in pension payments and in the salaries of servicemen, Ministry of the Interior and FSB employees, miners, etc.
The offer was accepted. The authorities devised a unique way of transferring state share blocks to trust management-loan-for-shares, or pledge, auctions (today, the actual value of the share packages put out for auction is at least ten times higher than the pledge value). In November, an auction for 40.16% of Surgutneftegaz was won for 1.4 trillion rubles by the Surgutneftegaz pension fund (the company, which owed 1 trillion rubles to the budget, found the money straight away); in December, SIDANCO's controlling block of shares was taken by ONEKSIM Bank for $130 million; AOZT Laguna acquired 78% of YUKOS' shares for $159 million and transferred them to MENATEP; and 51% of Sibneft's shares went to a group of applicants from SBS-bank and AOZT Oil Finance Company, who offered $100.3 million in credit. Boris Berezovsky and the then-unknown Moscow oil trader Roman Abramovich were behind this last deal.
LUKOIL escaped the pledge auctions: only 5% of its shares were sold at them. Instead, the company promised to pay tax arrears of 1 trillion rubles by October 1. It paid off its budget debts by putting bonds up for sale, which were later exchanged for government-owned LUKOIL shares.
In February, YUKOS obtained its subsidiaries' approval of documents that did not change their status but put them under the complete control of the parent company.
In June, Roman Abramovich became a member of the board of directors of the Sibneft company Noyabrskneftegaz and head of Sibneft's representative office in Moscow. Yury Shafranik, who had left the post of Minister of Fuel and Energy, became chairman of the board of Tyumen Oil Company.
A money auction for 34% of SIDANCO's shares was held in September. The company Interros Oil, on behalf of ONEKSIM Bank, and the company Alfa-Eko competed for shares. Interros Oil won with an offer of 326.1 billion rubles for the block of shares (Alfa-Eko's offer was 325.5 billion rubles). SIDANCO's commercial vice-president, Ziya Bazhaev, was appointed first vice-president of the company.
The Sins company belonging to Boris Berezovsky was the winner at an investment tender for 19% of Sibneft's shares conducted by the Russian Fund for Federal Property (RFFP). In October, Roman Abramovich's company, Refine Oil, won a tender for 15% of Sibneft's shares and promised to invest $35.31 million in the company.
In February, the Central Fuel Company (CFC) was set up. The government instructed the State Committee for the Management of State Property to transfer controlling blocks of shares of AO Moscow Oil Refinery and AO Mosnefteprodukt (38% each) to the Moscow government to form the company.
In March, the new president of NORSI Oil, Sergei Kirienko, announced the start of a program to repay the refinery's debts. The project never got going, because, shortly after, Kirienko became First Deputy Minister of Fuel and Energy and then head of the Ministry.
In April, Ziya Bazhaev was named president of SIDANCO, with 99% of the shareholders voting in favor.
In May, the Oil Financial Company (Badri Patarkatsishvili was chairman of the board of directors) put up 51% of Sibneft's shares up for sale at a starting price of $101 million. The Oil Financial Company was declared the winner of the tender with an offer of $110 million. The company's founders were subsidiary and affiliated companies of SBS-Agro Bank.
In July, an auction for 40% of TNK's shares was conducted. The winner was the New Holding Company representing the interests of Alfa Group and Renova, with an offer of what was then a gigantic sum of money for the share package: $810 million..
In August, the fate of Purneftegaz was finally decided, and the three-year struggle between SIDANCO and Rosneft for a controlling block of shares in the company ended in Rosneft's favor. With the signing of an amicable settlement on Purneftegaz, the last barrier to privatization of Rosneft disappeared. The sale of the company was planned for the first half of 1998.
In September, the first mutually exclusive meetings of AO Nizhnevartovskneftegaz shareholders in the history of the industry were held in Moscow and Nizhnevartovsk. (This practice has become widespread in recent years. Both meetings proclaim themselves to be absolutely legal, having assembled a quorum to elect their general directors and board members and to bring actions against one another in the courts for a resolution.) The meeting in Moscow was held by shareholders who supported TNK and its defenders, Alfa Group and Renova. Participants in the shareholders' meeting in Nizhnevartovsk backed Viktor Paly.
In November, ONEKSIM Bank, the British company BP, and SIDANCO signed an agreement on a strategic partnership. BP acquired 10% of SIDANCO's charter capital from the bank for $571 million.
In December, YUKOS acquired 44% of the shares of VNK out of the 50% of the oil company's shares put out for sale at a special money auction. The new acquisition, combined with the 9% of VNK's shares that YUKOS already had, amounted to a controlling block, and YUKOS moved up to second place in Russia in production volumes. Mikhail Khodorkovsky announced that YUKOS planned to take part in the privatization of Rosneft jointly with Sibneft.
The Court of Arbitration of Khanty-Mansi Autonomous Region brought in outside management at Nizhnevartovskneftegaz. TNK vice-president Fedor Marichev was appointed outside administrator. The company had won the dispute with Viktor Paly.
At the end of the Christmas holidays (that is after January 8 in Russia), YUKOS and Sibneft signed a memorandum on a merger to form a new company, YuKSI. The plan was that YuKSI would become the owner of the world's largest proven oil reserves and would hold first place in Russian oil company rankings. According to the memorandum, 60% of YuKSI's shares would go to YUKOS shareholders and 40% to Sibneft shareholders. Mikhail Khodorkovsky would head the company.
At the beginning of March, world prices of Russian Urals-brand oil fell to a nine-year record low of $11 a barrel. Boris Yeltsin appointed the head of the Ministry of Fuel and Energy, Sergei Kirienko, acting Prime Minister in place of Viktor Chernomyrdin. Within a month, the State Duma confirmed Kirienko as Premier on the third round.
BP declared its refusal to participate in a tender for the sale of Rosneft (the starting price was expected to be $2.5 billion). The alliance of Shell, Gazprom, and LUKOIL, which had been specially created to acquire Rosneft, expressed its doubts about the need for this purchase.
Ziya Bazhaev left SIDANCO and set up the Alliance Group in April, Its main activity was crisis management at oil-producing and oil-refining enterprises.
At the end of May, YUKOS and Sibneft issued a joint statement announcing that negotiations on their merger into the YuKSI holding had been broken off. Much later, the company's founders admitted that YuKSI had been created to acquire Rosneft. Since Mikhail Khodorkovsky and Boris Berezovsky had lost interest in the state company (at the current low oil prices, the state company was clearly overpriced), they also lost interest in creating YuKSI.
A day later, Sergei Kirienko announced that the tender for the sale of Rosneft had flopped: not a single bid for it had been submitted. The Premier signed a decree dismissing Rosneft's president Yury Bespalov and chairman of the board Aleksandr Putilov.
At the beginning of August, Slavneft's board of directors decided to terminate the powers of its president Anatoly Fomin before his time was due. This was the first time the state had dealt so harshly with the head of a large state company that had not paid its taxes (the company's federal budget debts had reached 337.2 million denominated rubles). Vasily Duma, the manager of the oil industry reform department of the Ministry of Fuel and Energy, was named acting president of Slavneft. It was rumored that YUKOS was interested in Slavneft, one of the last unprivatized Russian oil companies, and that Vasily Duma was "Mikhail Khodorkovsky's man." At YUKOS itself, rumors of friendship between Khodorkovsky and Duma were dismissed as "ridiculous."
Immediately after Russia defaulted on its debts on August 17, oil companies announced programs for cutting costs. YUKOS was first, announcing that from now on, its production and refining divisions would be managed as separate companies: production was turned over to YuKOS-EP (Exploration & Production), and refining and sales, to YuKOS-RM (Refining & Marketing).
The new Minister of Fuel and Energy, Sergei Generalov, announced at an international conference on energy in Cape Town that the government was considering the possibility of merging Rosneft, Slavneft, and ONAKO into a single state company, which would rank fourth in Russia in oil production volumes.
World prices for Russian oil fell to less than $10 a barrel, their lowest level in the last ten years.
In January, Vice-Premier Vladimir Bulgak held a meeting on consolidating oil companies. A decision was made to combine the state blocks of shares of Rosneft, Slavneft, and ONAKO into the Gosneft holding. It was also proposed that TNK join the new structure (at the time, the state owned 49% of the company's shares). The decision met with very strong opposition from LUKOIL and YUKOS, which had their own designs on the state companies. Vagit Alekperov made the government an offer to join Slavneft and ONAKO to his company (for 6% of LUKOIL's shares), and Mikhail Khodorkovsky wanted to get Rosneft and ONAKO. TNK also came out with a "unification" proposal: it wanted Slavneft to be added to its assets.
In March, BP withdrew from the largest international oil project in Russia, the development of the Priobsk field in Western Siberia, in effect bestowing on YUKOS, its Russian partner in Priob field, all of its investments in the project. YUKOS became the sole owner of the field.
In April, BP brought SIDANCO under operational control. The British company owned (and still owns) only 10% of SIDANCO's shares; however, it occupied almost all the places on the company's board of directors. "Foreign aid" did not help SIDAKO. In May, the Court of Arbitration of the Moscow region installed outside management at the oil company. This decision was unique for two reasons: first, such a large company had never been bankrupted in Russia; and second, without exception, all of SIDANCO's creditors opposed the bankruptcy, but the court decided things in its own way.
In June, the new Minister of Fuel and Energy, Viktor Kalyuzhny, again spoke of the need to unite Rosneft, Slavneft, and ONAKO.
TNK entered the fray with BP for the bankrupt Chernogorneft, a subsidiary of SIDANCO. The first deputy chairman of TNK's governing board, German Khan (previously a member of SIDANCO's board of directors), declared that "TNK is prepared to take part in an auction as a buyer of Chernogorneft." Afterwards, problems with the American Eximbank began at TNK. The bank postponed indefinitely the opening of a $300-million line of credit for the Ryazan oil refinery and a decision to begin crediting (for $200 million) the rehabilitation of Samotlor.
Oil production began at the Piltun-Astokh field. Sakhalin-2 was the first oil and gas project in Russia to start operations under a production-sharing agreement.
In September, Viktor Kalyuzhny conducted an extraordinary meeting of Transneft shareholders, at which he voted on their behalf for the dismissal of Transneft's president, Dmitry Savelyev, and the appointment of LUKOIL vice-president Semen Vainshtok to the post. Savelyev declared that he had no intentions of vacating his post. The next day, Transneft's office was surrounded by OMON (riot squad) and Savelyev was forced to leave.
In October, LUKOIL for the first time halted deliveries of oil to Lithuania, its response to the Sejm's (the Lithuanian parliament) decision to sell 51% of the shares of Mazeikiu Nafta, which included the Mazeikiu oil refinery, the only such refinery in the Baltic region, to the American company Williams International Company. From the time LUKOIL was founded, Vagit Alekperov had regarded this refinery as his patrimony, despite the fact that it was located in a foreign country and that LUKOIL had never had a share in the enterprise.
Yury Luzhkov signed an order under which 100% of the shares of the Central Fuel Company (CFC) were handed over as payment for the Moscow government's share (25%) in the charter capital of the Moscow Oil Company (MNK). In November, Yury Shafranik, the chairman of CFC's governing board, was dismissed from his post along with company's entire governing board. All management functions were transferred to MNK by a decision of the shareholders.
LUKOIL completed the annexation of the KomiTEK oil company and began a merger of its many daughter and "granddaughter" enterprises. Specifically, it became the owner of a controlling block of Komineft shares; Komineft in turn owned 25% of the shares of Northern Oil. In spite of its small share, LUKOIL held a meeting of Northern Oil's board of directors, at which it suspended the authority of general director Aleksandr Samusev. Shortly after, Samusev held his own "alternative meeting" of the board, which reversed LUKOIL's decision. This was far from the last conflict between LUKOIL and Northern Oil: to this day, the largest Russian oil company has not been able to win even one serious case against this small company (in 1999, Northern Oil produced 740 000 tons of oil).
On November 26, an auction was held in Nizhnevartovsk, at which TNK bought Chernogorneft's property for $176 million.
The New Priorities Company was the winner at an auction for the sale of the state-owned 49.8% of TNK's shares. New Priorities was affiliated with Alfa Group and Renova.
At the very end of December, the largest scandal in the oil industry came to an end when the shareholders of SIDANCO and TNK signed an agreement to settle the dispute over Chernogorneft. TNK agreed to return Chernogorneft to SIDANCO in return for a blocking parcel of the company's shares. The discrediting campaign against TNK in the West also ended, so that the company was able to obtain credit from Eximbank for reconstruction of the Ryazan oil refinery and rehabilitation of Samotlor.
In January, a meeting of Slavneft shareholders terminated the powers of president Vasily Duma ahead of schedule and appointed Mikhail Gutseriev, a former vice-premier of the State Duma for the LDPR faction, to the post. YUKOS acquired 16% of the shares of Orenburgneft, ONAKO's main oil-producing company.
On March 9, the president of AO Alliance Group, Ziya Bazhaev, died in a plane crash. His brother Musa became president of the company.
In April, Semen Kukes announced that TNK had 12.8% of Slavneft's shares and stocks in Slavneft's subsidiaries-Megionneftegaz and YaHOC. This announcement caused a major scandal. At a meeting of shareholders of Slavneft and its subsidiaries held in the summer, TNK representatives did not get any seats on their boards of directors. Afterwards, Mikhail Gutseriev announced that Slavneft was starting "Operation Retribution," which would end with the disappearance of TNK. The conflict between the companies ended suddenly in the fall.
In July, the authorities set about "equidistancing" the oligarchs. They started with LUKOIL: the Federal Tax Police Service (FTPS) advised that it was initiating a criminal case against the company's management. The Tax Police claimed that they had uncovered evidence that "large amounts of money had been sheltered from taxation." The amount was not officially named; however, in private conversations, the officers maintained that it was at least $500 million (this figure was later reduced to 760 million rubles). At FTPS, they elaborated that the criminal case had been initiated against Vagit Alekperov and chief accountant Lyubov Khoba. Less than a month later, the Moscow Court of Arbitration rejected all claims against the company and the cases were closed.
In August, the Tax Police took over the offices of Sibneft. The company's management promptly announced that a "routine check" had taken place. Sibneft did not file a suit against the Tax Police, although their action led to an instant $101-million decrease in the company's capitalization.
In September, the Russian Fund for Federal Property summed up the results of an investment tender for the sale of the state-owned block of shares in ONAKO (85%). The winner was Evro-TEK, owned by TNK shareholders, which offered $1.08 billion for ONAKO. The next day, Sibneft announced that it had bought 40% of the shares of Orenburgneft, from YUKOS. TNK found itself in a difficult position: at that time, relations between Sibneft and TNK were strained. YUKOS had acquired 19.9% of the shares of the East Siberian Oil Company (VSNK), adding to the 50% it had already gained.
In December, after a series of delays and court hearings in the US, LUKOIL concluded a deal to acquire the American company Getty Petroleum Marketing (GPM), with its 1300 gas stations, for $71 million.
The creditors of Varyeganneftegaz (VNG), a SIDANCO company, decided to sell the business. VNG's property was valued at $91 million. The main contender for the property was the Alliance Group, which already controlled about 25% of the company's shares. No tender was ever held, and in December a scandal broke out around VNG.
VNG's outside administrator, Anton Lychagin, disappeared. SIDANCO's shareholders sent the law-enforcement agencies a statement from Lychagin, in which he claimed that the management of Alliance Groups had offered him $2 million in exchange for giving up the administration of VNG, threatening him with reprisal if he refused. Lychagin was found the next day, and the Federal Court of Arbitration of the West Siberian Region ruled that bankruptcy proceedings against VNG were ended. However, the Alliance Group distributed a press release indicating that "it intended to appeal the Regional Court's decision in the Superior Court of Arbitration."
by Petr Sapozhnikov
For oil companies, 2001 promises to become one of the most peaceful years in the whole period of their existence: the state has scarcely bothered oilmen with its claims, almost all legal proceedings with minority shareholders are finished, no new scandals have arisen, and the old ones have ended happily. There is only one dispute going on over the Val Gamburtseva fields. And the large oil companies appear to have taken part in this one out of habit so as not to lose their skills.
TNK Gets SIDANCO from Chernogorneft
This year, the question of ownership of Chernogorneft became a point of contention between the shareholders of the Tyumen Oil Company (TNK) and SIDANCO. However, the dispute ended totally unexpectedly: to everybody's satisfaction, TNK simply bought up 84% of SIDANCO's shares. Interros received $650 million for 44% of its shares in SIDANCO, and like TNK, increased its shareholdings in Rusia Petroleum to a blocking parcel. Another SIDANCO shareholder, the Kantupan Fund, received almost the same amount from TNK for 40% of SIDANCO's shares. On the insistence of BP, Chernogorneft's property was returned to SIDANCO. BP in turn retained the status of operator at SIDANCO and Rusia Petroleum.
Thus, TNK is set to become the third-largest oil company in Russia by production volume, overtaking Surgutneftegaz and approaching YUKOS. The total production volume of TNK's divisions, the oil company ONAKO acquired by TNK last year, and SIDANCO will reach 50 million tons (Surgutneftegaz produced 40 million tons in 2000). However, TNK will not be able to enjoy complete control over its acquired property for some time to come. As BP's director of external relations in Russia Peter Henshaw has noted, in spite of the fact that TNK now has the most substantial block of SIDANCO shares, BP with its 10% will remain the operator of the oil company for another three years.
The Prosecutor's Office Releases Sibneft
Two criminal cases initiated by the Prosecutor General's Office on charges of fraud committed by top managers at Sibneft ended at once. The cases were connected with oil exports to neighboring countries. Investigators who had only recently spoken of multibillion thefts at the company admitted that there were no formal elements of a crime.
These cases had started with loud declarations by representatives of the public relations center of the Prosecutor General's Office about the discovery of multibillion thefts at Sibneft and nonpayment of taxes. Prosecutor General Vladimir Ustinov promised to oversee the investigation personally. The first case was related to the oil export to Kirgiziya. According to information from law-enforcement agencies, the raw materials had not left Russia, but the company had received 12 million rubles from an unwarranted VAT (Value Added Tax) refund. The second case concerned oil exports to Belarus, Moldova, and Ukraine. Sibneft had allegedly received unwarranted exemptions on VAT and payment deductions for transport of raw materials by deliberately inflating delivery volumes.
This story did not cause any particular concern at Sibneft, whose managers had nearly all been to the Prosecutor General's Office for questioning. "There's nothing to say. Sibneft has never delivered oil to Belarus, Moldova, or Ukraine," they said. "Tax officials have already examined the Kyrgyz deals and have found nothing criminal. It is not clear why the Prosecutor General's office started the investigation anyway", they said.
The Prosecutor General's Office also ended an investigation of ZAO NFK, the organizer of a tender for the sale of Sibneft. No evidence of fraud was discovered there either.
However, after the termination of the cases, rumors appeared that the Prosecutor General's Office had left the company alone only because Sibneft's management and the presidential administration had reached an agreement. Sibneft's managers had supposedly conceded to the financial claims brought against them and paid several tens of millions of dollars to the budget. They found the funds for this quite easily: at a meeting of Sibneft's board of directors on August 16, they decided to pay share dividends of $612 million.
The Ministry of Natural Resources Tackles Val Gamburtseva
However, the Russian oil industry does not know how to live without conflict. The scandals between large companies that tried to rob each other of as much oil property as possible had only just died down when new investigations began. In the absence of enemies in their heavyweight class, larger companies assailed Northern Oil, a company that produces less than 1 million tons of oil per year (by comparison, LUKOIL's yearly production is about 65 million tons). Their claims have some basis: Northern Oil won a tender for the Val Gamburtseva fields for a ridiculous sum that was nearly 20 times less than the one offered by the large players.
A large part of the oil and gas resources went to operators without any kind of tender after the government decided in 1992 to issue licenses to oil companies, which were being created at the time, for the fields shown on their balance sheets. All the best fields were allocated in this way. As a result, Russian oil and gas companies today have enough reserves for 30-40 years. This figure seems fantastic if you consider that the leading Western companies have guaranteed resources for only 10-15 years and they paid the full market price of $5-8 a barrel for each barrel of oil reserves. Russian companies acquired reserves for extremely low prices. For example, when LUKOIL absorbed KomiTEK, it paid $0.17 a barrel for the reserves; and TNK laid out $0.15 a barrel for Chernogorneft's reserves.
However, they will not allow newcomers to play by these rules. A tender for the right to develop the Val Gamburtseva oil and gas fields (Northern Oil paid $0.11 a barrel) was accompanied by noisy scandals and legal recourse. The unusually heated passions in the industry were caused by the fact that there are almost no free economically attractive fields left in Russia. What remains in the state's "reserve bag" is notably inferior in quality to the allocated resources.
As a result, Vitaly Artyukhov, head of the Ministry of Natural Resources, signed a resolution on the early termination of Northern Oil's right to use the resources of the Val Gamburtseva fields. The grounds for this were obviously contrived: it was said that Northern Oil had not adhered to licensing agreements in the region and had not allocated money for socioeconomic development of the territory (it was supposed to pay the Nenets Autonomous region $20 million, but was unable to do so through the fault of the regional administration). Interestingly enough, the Ministry did not insist on taking back licenses from other companies known to have broken licensing agreements in the region (such as LUKOIL's company Arkhangelskgeologodobycha).
The head of the Nenets Autonomous Region, Vladimir Butov, should have signed the document; however, he declared that he had no intention of doing so, since even without Northern Oil, there were plenty of other violators of licensing agreements who needed to be "educated." The Ministry of Natural Resources insisted on having its way and ordered the company to surrender its license for Val Gamburtseva. As justification, the Ministry referred to a court ruling in the city of Timashevsk (Krasnodar region), which had declared the auction for the fields illegal. The conflict has not yet been solved. Northern Oil asserted that it had already invested more than $14 million to develop Val Gamburtseva and would continue working.
With time, the example of Northern Oil was followed by other small oil companies with close ties to the authorities of the new oil-producing regions, for example, Krasnodar region and Yakutia. However, this was not possible everywhere. In Evenkiya, the governor was the former development director at YuKOS-RM, Boris Zolotarev, not to mention the governor of Chukotka, Roman Abramovich, whose company Sibneft was given the status of the most favorable business partner of the region!
Surgutneftegaz Might Buy Sibneft
There is still one more way oilmen can increase production in Russia-by taking over other production companies. Analysts believe that Surgutneftegaz, which has accumulated internal funds of $4.5 billion in its accounts, will very likely take this route. They claim that most of this money is in Surgutneftegaz Bank and yields only 3-4% annually. Of course, the company could spend it on developing its own fields, which has been its traditional investment policy; but they could also use it to acquire outside assets.
The need to put these accumulated funds into circulation could explain Surgutneftegaz's participation in auctions for the Val Gamburtseva and Talakanskoe fields. However, auctions of this sort are trifles for Surgutneftegaz, since the actual cost of these fields is no more than 10% of its accumulated funds.
That explains rumors that Surgutneftegaz was going to buy Sibneft. Such a purchase is fully within Surgutneftegaz's powers as it would not even need a loan to acquire a similar-sized company. However, it is not clear how reliable these rumors are or whether there are any Sibneft shareholders who would agree to the sale of a block of shares that would allow complete control over the company.
Sibneft's first vice-president, Aleksandr Korsik, once said that "the company's main shareholders control 88% of its shares." Up to 1999, the term "main shareholders" with respect to Sibneft was usually decoded as "companies controlled by Boris Berezovsky and Roman Abramovich." At Sibneft, they maintained that Boris Berezovsky had no shares whatsoever. Berezovsky himself stated that he remained one of Sibneft's two principal co-owners and that no one had conducted any negotiations with him for the sale of the company.
Russian Oilmen Expand to the World Markets
Since all sizable fields in Russia were allocated long ago, projects outside Russia are becoming more and more interesting to the major oil companies. In the last two years, Surgutneftegaz has not been the only one to amass respectable profits. Oil companies are now quite capable of investing them in foreign projects that promise a much faster payback than development of the remaining unallocated Russian fields.
A number of projects that seemed quite feasible may now be frozen for an indefinite period following the terrorist attacks in New York and Washington. Russian oilmen have recently staked out areas for themselves in countries that do not enjoy great favor with the United States, particularly Iraq and Sudan. Slavneft head Mikhail Gutseriev, former vice-speaker in the State Duma, was the most active in this endeavor, being personally acquainted with the leaders of many third-world countries. Now the prospects for cooperation with countries that the US suspects of aiding and abetting terrorism have become dim. So, it turns out that America's declared war against "worldwide evil" will probably be directed against a number of oil-producing states (in doing so, US is not afraid that the promised bombing campaigns could lead to an increase in already excessive world oil prices).
However, a safer road to cooperation in international projects still remains. In summer, YUKOS and the American company Marathon Oil signed a memorandum on mutual understanding and creation of a strategic alliance. This does not necessarily mean that Marathon will return to Russia (the company withdrew from the Sakhalin-2 consortium in 2000). A joint group for assessing possible investments will be organized within the framework of the alliance, but its office will be located in London.
So far, YUKOS and Marathon have not released any details of future cooperation. In a joint press release, the companies merely cited vague statements from the company heads. Mikhail Khodorkovsky, the head of YUKOS, stated, "we will establish mutually beneficial relations with Marathon, which, after the appropriate agreement has been signed, will promote successful development of the business of both companies." Marathon's president, Clarence Kazalot, declared that "we are talking about the cooperation of companies whose technical and international experience are mutually complementary."
According to Kazalot, Marathon may invest in energy projects in Russia as a result of the joint activity. However, the strategic alliance has more than likely been concluded in order to organize joint business outside Russia.
by Petr Sapozhnikov
The oil industry is becoming increasingly less conflict-prone. The oilmen no longer have anything to divide up, since all property worthy of interest has been divided, while redistribution began in the Russian oil industry a few years earlier than in other industries. Today, the only thing the "oil generals" have to do is increase production. And await privatization of the remaining unallocated state oil property and the division of Gazprom. In fact, it is for gas assets that a serious fight could break out among oil company owners.
In a recent interview with Kommersant, Semen Kukes, president of the Tyumen Oil Company (TNK), predicted that within the next few years, oil companies would start setting up consortia for joint operations on undeveloped fields. Development of these fields will require expenditures that are beyond the capacity of any individual company. Furthermore, larger groups of five or six companies will be created to develop difficult-to-recover oil reserves, along the lines of the Western consortia that are operating, e.g., on the Sakhalin or Caspian shelves.
The YUKOS-Sibneft joint project now underway in Chukotka may become a prototype of these associations. Companies have announced the start of geological exploration of the shelves of the Chukotka and East Siberian seas close to the Chukotka autonomous region. In the next few months, the companies will set up a joint venture on equal footing, which will be involved in processing the initial geological data and later in seismic exploration and exploratory drilling.
Despite the fact that the oil and gas reserves on Chukotka amount to more than 3 billion tons of equivalent fuel, no one has yet undertaken serious exploration there. Development of the fields is extremely difficult because of the complex geological and meteorological conditions. All that is known is that the resources of the most promising areas, i.e., the Anadyr and Khatyrka basins, may contain up to 1.5 billion tons of oil and gas.
Geologists surmise that the structure of the Chukotka Shelf fields should roughly repeat the structure of the Alaska Shelf. Thus, in future, if YUKOS and Sibneft decide to set up a "full-fledged" consortium, they may have to attract a foreign oil company with experience in developing the offshore fields of the American Far North.
Consortia will also be necessary to develop difficult-to-recover oil reserves on the continent in regions where there is no production infrastructure. Oilmen intend to divide up the remaining unallocated resources within the next few years. These resources consist of 550 fields, but in reality, few of them will be developed. Last year, a group of researchers lead by Deputy Minister of Energy Valery Garipov compiled the first forecasts of production development up to 2015 for the unallocated fund of reserves and came to an unfavorable conclusion.
It is clear that development of only 86 of the 556 fields makes economic sense. In some cases, there is no effective technology for recovering the oil (this particularly concerns the Bazhenovskaya Formation of the Salymskoe field, which is unlikely to be developed within the next few years). The total probable reserves of these 86 promising fields amount to just 247.5 million tons. In 2015, production from them will be no more than 13.3 million tons, or 4% of last year's Russian production volume. However, fields that are expected to be found in the period up to 2015 should yield almost as much.
Still, if you scrape the bottom of the barrel, something valuable may turn up. "By a whole series of indicators, I consider the fields of the Yamalo-Nenets autonomous region to be the most promising among unallocated fields," Garipov maintains. "These resources are the most economically attractive, since they have been adequately explored and are located in a region with a developed pipeline system. The internal rate of return of these fields calculated by the Ministry of Economic Development's method reaches 15-20% for a 20-year development period."
Oil companies are becoming increasingly interested in working in a related industry, i.e., gas production. YUKOS has signed another joint operating agreement with the Itera gas company. The agreement has a preliminary character, being a declaration of intentions to "carry out joint development of a number of promising Siberian gas fields." The parties have specified neither the particular regions where they will carry out joint projects nor the starting dates for projects nor the form of each company's participation in them. The president of OOO Itera Holding, Valery Otchertsov, would only comment that the companies needed money to start development: "Within the next seven to ten years, Itera plans to increase its annual production volume to 80 billion cubic meters, which will require capital investments on the order of $1.5 billion." To which the president of YuKOS-EP, Yury Beilin, replied that the money would be found: "In the context of developing joint projects, YUKOS is prepared to invest funds in effective new directions to increase production."
The agreement between YUKOS and Itera was concluded with a long-term outlook. For several years, oilmen have dreamed of the day when Gazprom will lose its monopoly on natural gas production. Russian oil companies have not had enough of the "gas component" for a long time, because Gazprom does not allow anyone else to transport natural gas; thus, oil companies have to stop projects that result in the production of a lot of "non-oil" raw materials. Oil companies and Gazprom long ago bought up homogeneous fields containing only oil (even together with wellhead gas, which is flared) or natural gas; thus, in future, all producers will have to develop mixed oil and gas or oil and gas condensate fields. In this situation, the creation of the YuKOS-Itera tandem seems only logical.
Furthermore, if Gazprom is split into production and transport companies, a fight for the Russian gas industry will start among the oilmen. As world practice shows, integrated oil and gas companies are more stable than their specialized counterparts. Pricing on the oil and gas markets is different. The rise or fall of gas prices always lags behind oil prices. Thus major international companies always have the opportunity to smooth out the consequences of a fall in the oil market: over the next several months, the price of the gas they produce remains relatively high. In addition, the amplitude of fluctuations in oil prices is always less than for gas prices (since the end of 1998, oil prices have doubled, but natural gas prices have increased five times).
It is not that oilmen will start hunting for share packages of existing gas companies or fight with the shareholders and oust them from the joint stock companies once Gazprom is divided (assuming Gazprom's restructuring goes that far). This will probably not happen. The new gas companies themselves will start looking for ways of uniting with oil companies. Those who offer each other the most favorable terms will win. Today, only Surgutneftegaz and YUKOS have real experience in gas production. The union with Itera will allow YUKOS to obtain useful information on how to form similar associations.
Gazprom has already started preparing future joint work with oil companies. Gazprom, its subsidiary ZAO Rosshelf, and the state company Rosneft have signed an agreement on the creation of a consortium to develop the Prirazlomnoe oil field on production-sharing terms. Rosneft has 50% of the shares in the consortium and will compensate Gazprom and Rosshelf $150 million for losses they sustained.
The agreement was signed literally the day after Gazprom's former partner in the Prirazlomnoe project, the German company Wintershall, announced a one-year freeze on its investments in the project. Wintershall's press secretary, Meier Binder, assured Kommersant that the company had "simply not been able to recruit the necessary number of workers, and it will resume work on the project within a year." Nevertheless, there are few doubts that the Germans will leave the Pechora Sea project for good.
Under the new agreement, the parties will set up a consortium in which 50% of the capital will go to Gazprom and Rosshelf and 50% to Rosneft. The companies agreed that 100% of the investment expenses in the Prirazlomnoe project would be in the form of contributions to equity capital. Other investors in the project may appear in future; if so, the partners are prepared to consider the possibility of decreasing their own share in their favor.
Still, the creation of oil and gas companies is a matter for the far distant future. It would most likely be preceded by a sale of shares of state oil companies, e.g., Slavneft and NORSI Oil. The sale of 19.8% of Slavneft's shares is planned for 2002 (Rosneft will not be privatized before 2003).
Certain oil companies have already determined whether or not to take part in one or another auction. For example, LUKOIL has officially announced that it will not bid for Slavneft shares; according to vice-president Leonid Fedun, LUKOIL is more interested in NORSI Oil (the auction will be held on October 19). The most likely competitors for the Slavneft shares are TNK and structures close to Slaveneft president Mikhail Gutseriev.
All the Article in Russian as of Oct. 23, 2001