The Oil and Gas Industry 2000-2004
Since 2000, oil production in Russia has been increasing at truly Stakhanovite rates. Western oil giants have not even dreamt of such growth rates. YUKOS and Sibneft have increased production by 14-19% annually. The only large company that has been able to surpass them is Slavneft, which last year pumped out 24% more oil than in 2002. It is worth noting that by that time Slavneft had ceased to be a state company and “Stakhanovites” from Sibneft had taken over its production activities. As a result, oil production in Russia increased from 323.5 million tons in 2000 to 421.4 million tons in 2003. This year, according to oil company forecasts, it will be 426-453 million tons.
Exports have increased at the same accelerated rates. This year, 240 million tons of oil will be exported through Transneft's pipelines, whereas the maximum export volume from the USSR was 134 million tons per year at a production rate of 600 million tons. Last year, government officials proudly announced that Russia had become the world's largest oil and fuel exporter, overtaking even Saudi Arabia.
However, gas production volumes dropped in Russia in the first two years of Vladimir Putin's presidency: Gazprom produced 523.1 billion m3 of gas on the results of 2000 and 512 billion m3 on the results of 2001 (the share of the remaining companies was 61 billion m3 and 69 billion m3, respectively). It appeared as though Russia was on the verge of disaster: there was a danger of nonfulfilment of contracts with the EU, some of which had been signed by the USSR. But no disaster occurred. Gazprom produced 521.9 billion m3 in 2002 and 540.3 billion m3 in 2003, exceeding the starting figure (the remaining companies added 60 billion m3 to this). This year, Gazprom officials expect to increase production to 542 billion m3, and new projects (such as development of the shelf of the northern seas, the Northern European gas pipeline, and completion of construction of the Yamal–Europe gas pipeline) should allow Russia to at least maintain its positions on the EU energy market.
The oil and gas industry has become the overall leader in the Russian economy in the past four years. Direct participation in its development is the reason for industry's financial prosperity.
The History of Slavneft
The attacks on the state company Slavneft, a respectable piece of state-owned oil property that the government had promised to put up for sale, began in 2001. Tyumen Oil Company (TNK) began the first massive buy-up of Slavneft shares and subsidiaries. TNK co-owner Viktor Vekselberg reiterated that Slavneft's main production subdivision, Megionneftegaz, would fit ideally into TNK's process flowsheet. Mikhail Gutseriev, who was head of Slavneft at the time and had his own plans to buy the company through BIN Bank, which he had set up, accepted battle with a passion. He announced that he would buy TNK lock, stock, and barrel and set up centers in Nizhnevartovsk (where most of TNK's production capacity was based) to buy up shares in the company's subsidiaries.
However, it was not TNK but Sibneft that succeeded in breaking up Slavneft and privatizing it. In spring and summer 2002, it forced the previous managers out of the state company and put its own managers in place. The Slavneft building on Pyatnitskaya Street changed hands several times like a war trophy. First, structures belonging to Gutseriev, along with Mezhprombank, which was friendly with them at the time, and the police seized it. Then it was taken over by senior Sibneft managers with security guards and once again the police. Sibneft won – it ousted Mikhail Gutseriev and brought its own people to Slavneft (Yury Sukhanov, who is now the company's president, is Sibneft's former vice-president for commerce).
What happened later was a question of method. In fall 2002, the Russian Fund for Federal Property (RFFI) put up 74.95% of Slavneft's shares for sale at a starting price of $1.7 billion. The auction was held on December 18, and after a four-minute pretence of open bidding, the winner was ZAO Investoil, which was representing the interests of Sibneft and TNK equally: the company offered $160 million over the starting price for Slavneft. But since then, the tender winners have clearly been unable to divide the purchased property equally – there are too many multipurpose assets.
The History of Gazprom
The Russian gas industry has been awaiting two events for the past four years – reform of the pricing system and the large-scale entry of oil companies onto the gas market. Neither one has happened. But you can understand that the government, which controls Gazprom, had more pressing problems to solve at the time, and solved them quite successfully. The actions of Aleksey Miller's team at Gazprom, which had already replaced Rem Vyakhirev's team by summer 2001, can be divided into three parts. First, there was a resolution of the problem of corporate governance; second, the recovery of Gazprom assets lost under the previous management; and third, a change in the company's foreign policy orientation.
For a long time, it was believed that debt was Gazprom's main internal problem. It is still impossible to say whether that this problem has finally been solved, but it is obvious today that the burden on Gazprom was exaggerated. Today, Gazprom has recovered its status as the country's potentially largest borrower. At the same time, the reorganization of corporate governance is not all that obvious to the market. It is based on measures such as reform of the company's budgets and changes in internal norms.
However, the recovery of assets was highly publicized and caused a real upheaval on the market. Some of Gazprom's major victories included the recovery of Zapsibgazprom assets and the effective exclusion of Itera from the business in the CIS.
Gazprom started the game in the foreign gas market with extremely high stakes – the struggle for Central Asia. Between 2001 and 2003, the company succeeded in signing long-term contracts for delivery of large volumes of gas from Uzbekistan, and starting in 2004, from Turkmenistan.
Gazprom achieved one more victory in 2003. Since that time, gas has been sold on the Russian market (60% of production) at zero profitability. These operations had been loss-making planned transactions since the beginning of the 1990s.
However, the issue of gas market and pricing reform remains a task of the second presidential term.
The History of TNK and BP
The owners of TNK began talking about plans to merge the company's assets with BP's Russian assets as early as mid-2000. However, at that time, there was talk only of TNK and BP setting up a joint venture that would include the assets of OAO Chernogorneft. In 1999, TNK had masterfully taken this production company away from SIDANKO Oil Company, which just happened to be controlled by BP managers. There was a worldwide scandal when BP launched a high-power campaign to discredit TNK and its owners, the AAR consortium, which included Alfa Group, Access Industries, and Renova. The American Ex-Im Bank, influential American senators, and even then US Secretary of State Madeleine Albright took part in the campaign.
An agreement was reached only in early 2003. On June 26, BP officials and TNK shareholders signed all the documents for a merger of the companies' assets in Russia and Ukraine. The event was surrounded with pomp: Russian President Vladimir Putin and British Prime Minister Tony Blair were present at the signing. Notably, TNK president Semen Kukes did not have a place in the merged company – he had turned down the honorary position of advisor to the president of TNK-BP, Robert Dudley, and went to work for YUKOS.
Today, BP and AAR each own 50% of the assets of TNK-BP, which produced about 60 million tons of oil last year. AAR's contribution to the new company in percentage of shares is as follows: TNK, 97%; ONAKO Oil Company, 93%; SIDANKO, 57%; Slavneft, 50%; Rusia Petroleum, 29%; Rospan International, 44%; and a 50% stake in the Sakhalin-6 project. BP for its part brought in 25% of the shares of SIDANKO, 30% of the shares of Rusia Petroleum, and 76% of the shares of Petrol Complex (a Moscow chain of BP gas stations). As compensation for the difference in asset values, BP paid AAR $3.95 billion in cash and committed to transferring its shares for $3.75 billion. The securities will be transferred in three yearly tranches of $1.25 billion each in 2005, 2006, and 2007.
TNK-BP was set up as a model company that was supposed to demonstrate to the world financial community that it really could invest billions of dollars in Russia. This explains Putin and Blair's participation in the final stage of the negotiations. However, according to Vlast's information, a dispute between the executives remaining from TNK and the British management has been brewing for a long time. The Russians think the British are too slow-moving, and the British think the Russians are little more than “highway robbers” who do not want to conduct business in a civilized manner. By all accounts, the differences have already reached the point where the Russian owners of TNK-BP have started negotiations for advance payment of the $3.75 billion still owing by BP.
The History of YUKOS and Sibneft
The merger of YUKOS and Sibneft announced in April 2003 was initially viewed as a political, rather than a business deal. Relations between the two companies had always been complicated. In 1998, they attempted to unite into the YUKSI holding, but within five months they announced the end of their joint existence. The merger of YUKOS and Sibneft last year would have resulted in the appearance of a structure that would have been far more than a private production company, no matter what country it was located in. Its reserves would have amounted to 19.4 billion barrels of oil and gas equivalent, surpassing ExxonMobil (12 billion barrels) in this indicator. It would have been the world's fourth-largest producer: in 2003, YUKOS and Sibneft pumped out 2.3 million barrels per day (115 million tons of oil per year).
But what followed after the announcement of the merger showed that the political component of the process was far from the private interests of the owners, and the “private traders” (at least those at YUKOS) had almost nothing to do with it. On July 2, 2003, the Prosecutor General's office arrested Platon Lebedev, head of Group MENATEP, which owns 41% of YUKOS's shares, and then YUKOS head Mikhail Khodorkovsky on October 25. The Ministry of Taxation accused the company of nonpayment of $3.5 billion in taxes.
The split-up of the companies that began late last year is proceeding very slowly. In February 2004, they announced that their shareholders had reached an agreement in principle on partition (YUKOS currently owns 92% of Sibneft's shares), but no real steps in this direction have been made. There is the impression that the shareholders and management of YUKOS are not interested in a split. Mikhail Brudno, one of the company's owners, who is hiding out in Israel, corroborated this assumption with Vlast: “All of the companies' owners were interested in the merger, so it went ahead quickly. No split is underway, although Sibneft is doing everything possible to spur it on. So there is someone who doesn't need it.”
The History of Production Sharing Agreements
Early this year, the American companies ExxonMobil and ChevronTexaco forfeited the right to develop three blocks of the Sakhalin-3 oil and gas fields. Despite the fact that last year President Putin alluded to a speedy resolution of all problems connected with this project, the committee for implementing production sharing agreements (PSA) annulled the results of a competition for the right to develop it on January 29, 2004. It is not inconceivable that Sakhalin-3 may be included in a comprehensive program to develop the oil and gas fields of Eastern Siberia and the Far East, which will be coordinated by Gazprom instead of Rosneft and Surgutneftegaz. It is interesting that at the same meeting the committee gave approval in general to a PSA project for the Prirazlomnoe oilfield (Arctic shelf of the Pechora Sea). The license holder is ZAO Sevmorneftegaz, formed by Gazprom and Rosneft on a parity basis.
The French company Total has also had no luck with PSA. Russia is refusing to approve the investor's costs for developing the Kharyaginskoe oil field (Nenets Autonomous Area) for 2001-2002. The French maintain that they spent nearly $146 million in 2001 and more than $178 million in 2002. Total has even appealed to the Stockholm Court of Arbitration, but the sitting in this case will not take place until next year.
Royal Dutch Shell did not wait for a PSA to develop the Salymskaya group of oilfields (Khanty-Mansi Autonomous Area), the license holder for which is Salym Petroleum Development and a joint venture between Shell and Evikhon. Shell decided to develop the field on terms of the national tax regulations – it will spend $200 million both this year and next on Salym.
To all appearances, the days of PSA in Russia are numbered. There remains a slight possibility of obtaining an agreement only by fulfilling two conditions: the project must be offshore, and the candidate company must be on friendly terms with Rosneft. Moreover, Rosneft will demand that its partners pay all exploration and drilling costs. As an example, this year it made such a demand on BP for fields in the Sakhalin-5 section – according to Vlast's information, this company's outlays should amount to $5 billion.
The History of the Baltic Pipeline System
In December 2001, in Primorsk (Leningrad Region) Vladimir Putin opened the first phase of the Baltic Pipeline System (BPS) – the largest export project in Russia in the entire post-Soviet period. This route was established so that oil exports to ports in Northwestern Europe would go through Russian ports rather than terminals in the Baltic countries (especially the Lithuanian port of Ventspils). The capacity of the first phase of the BPS was 12 million tons of oil per year; and after it reached 18 million tons, Transneft stopped exporting through Ventspils altogether. At present, 42 million tons of oil per year are being pumped through the BPS, and Transneft president Semen Vainshtok estimates that its capacity will increase to 60 million tons in 2006.
However, throughput capacity of Russian domestic pipelines is not keeping pace with the increase in export availability of the BTS. Transneft constantly uses this position in disputes with oil companies that are demanding to send part of the oil through Ventspils. The company needs to spend $143 million on widening the bottlenecks in its Russian system, and it would like the owners of the Ventspils oil terminal to provide the funds.
The BPS is also Transneft's main trump card in the dispute with a consortium of major oil companies that are pushing a project to build a pipeline from Western Siberia to Murmansk. This project appeared in 2002 and proposed the establishment of a new export route with a throughput capacity of 120 million tons of oil per year. Transneft believes it will be too expensive ($12 billion) and that it makes more sense to build a pipeline eastwards.
However, there is one problem here – where exactly will the eastern pipeline go? Transneft is proposing the Taishet-Nakhodka route. The company claims it can be built in four years at a cost of $10.75 billion. Japan is promising to provide most of this amount ($6 billion) in the form of low-interest loans. Japan's interest in the project is not accidental. The point is that there is an alternative route from Angarsk to the Chinese city of Daqing. YUKOS has been promoting this project since 1999, but Transneft has successfully blackballed it. The problem is, this pipeline is included in an intergovernmental agreement between Russia and China.
In order to calm the Chinese, Russia has promised that the pipeline to Nakhodka will include a branch line to Daqing. However, it is unlikely that this compromise option will ever be implemented. Despite constant increases in oil production in Russia, oil companies will not be able to pump the 80–100 million tons of oil eastwards that are needed to load both Far Eastern routes in four years. And a breach of international agreements will hardly improve relations between Russia and China.
The History of Development of the West
In recent years, Russian companies have been actively buying up refining and transportation facilities in Central and Eastern European countries. The largest oil refineries in neighboring Ukraine are shared among LUKOIL, TNK, and Tatneft; LUKOIL owns the Burgas oil refinery in Bulgaria and the Petrotel plant in Romania, while YUKOS owns 49% of the shares of the Slovakian pipeline company Transpetrol. The share of Russian oil capital in refineries in neighboring countries will probably increase in the future.
Russian companies are also interested in Western gas station chains. At the end of 2000, LUKOIL acquired the American company Getty Petroleum Marketing, which includes 1291 service stations in 13 Atlantic coast states, for about $60 billion (most of these operate as franchises). The company also owns ten petroleum storage depots. Nearly 4% of the gasoline sold in the United States is marketed under the Getty brand name, and the company is among the five largest traders.
LUKOIL made a similar acquisition in January of this year – the company announced the purchase of 795 service stations in New Jersey and Pennsylvania from ConocoPhilips for $265.75 million. Today, LUKOIL services more than 2000 American gas stations, and annual fuel sales are around 12 billion liters. In the near future, LUKOIL will start repainting the acquired service stations (they operate under the Mobil logo) in its own colors.
YUKOS managed to implement another project that LUKOIL hatched in the mid-1990s, i.e., the acquisition of a controlling block of shares in the Lithuanian company Mazekiu Nafta (MN), which includes the Mazeikiai oil refinery, the only oil refinery in the Baltic countries. In June 2002, YUKOS became the owner of 53.7% of MN s shares and gained the status of operator of the company.
We note that not all Eastern European refiners have agreed to control by Russian oil companies. For example, the Poles did not allow LUKOIL to privatize the Gdansk oil refinery.
Nevertheless, what is taking place shows that Russian oil companies are quite healthy despite all the problems within the country, and have not only retained the potential to develop into transnational companies in the past four years, but have also advanced quite far along this track. The speed of this advancement will directly depend on oil prices and the future course of relations between the industry and the government.
People Who Have Left the Scene
The departure of Mikhail Gutseriev was probably the most obviously arranged event in the oil and gas sector in the last four years. There were more serious dismissals, but no one could surpass the Caucasian-tinged Latin American passions around the head of Slavneft in May 2002. It is hard to say what played the key role in Gutseriev's dismissal – first, he stood in the way of Sibneft, which needed to get control over the company just before its privatization; second, he was involved in an intricate game between oligarchs Sergei Pugachev and Roman Abramovich; and third, he actively campaigned against the Kremlin in the elections in Ingushetia. But despite his obvious contempt for all political conventions, Gutseriev has not left the oil industry. He remains convinced that sooner or later his company Russneft will take the place of the Slavneft he lost.
The question of whether Rem Vyakhirev would continue to head the largest company in Russia's fuel and energy complex was probably the main industry issue at the start of President Putin's first term in office. Since 1993, the gas sector had barely troubled the Russian government, not counting the occasional squabbles of Gazprom and RAO UES of Russia (RAO EES Rossii). Moreover, stability of the gas industry, personified by Vyakhirev, was very valuable – to this day, gas exports are one of the foundations of Russian statehood. Nevertheless, Vyakhirev surrendered surprisingly easily – the change of power took only a few weeks in May 2001. It was a while before it became clear how close Gazprom had come to the line beyond which loomed total bankruptcy of both the company and the industry as a whole: for the first two years, Vyakhirev's replacements devoted themselves almost entirely to eliminating the detrimental effects of Soviet stability.
Until the end of 2002, Ralif Safin was first vice president of LUKOIL responsible for foreign economic projects. No one really anticipated his departure from the company, but it happened. Safin preferred politics to LUKOIL and the oil business, although he has not been overly successful. He became a member of the Federation Council for the Altai Republic (Mountainous Altai) and ran for president of Bashkiria. There was talk that he had gone into politics in order to make Bashneft his oil company. But after losing the elections, Safin did not return to the oil business. However, he still maintains close business relations with LUKOIL and his return to the company cannot be ruled out, although this is hard to believe: Safin seems much more natural in the role of man of the world and second-rate politician than in the role of hired manager.
There were no rumors about why former deputy finance minister Andrey Vavilov and his business colleagues acquired the small oil company Northern Oil (Severnaya neft) before Vladimir Putin came to power – they had been buying and buying. Vavilov's exit from the oil business surprised many people. After investing several million dollars in the insignificant company, the partners sold it to state-owned Rosneft for $600 million in 2003. In between the two deals, Severnaya neft managed to quarrel with literally every Russian oil company, take the promising Val Gamburtseva field out from under their noses, and straighten out the business such that even large international players became interested in the company. This was without a doubt the finest exit from the business in the past four years.
No one really believed that Mikhail Khodorkovsky, YUKOS's largest owner and president of the company's board, would resign and announce his final departure from the oil industry. But it happened – in October 2003, Khodorkovsky announced from Matrosskaya Tishina Prison that he did not have the right to jeopardize his company as a result of his personal political conflict with the government. One of the most attractive positions in the Russian fuel and energy complex became a pawn in the political conflict, although of such a scale that against its background the oil business looks like a detail.
People Who Have Arrived on the Scene
Aleksey Miller is one of the few major figures in the oil and gas business whom Vladimir Putin has personally recommended for his position. Despite the fact that until May 2001, he worked directly on one of the key state oil and gas projects – the Baltic Pipeline System – he had to earn his reputation in the general business environment at Gazprom itself. And he has succeeded in this: Miller's team was able to deal with Rem Vyakhirev's legacy and do much that its predecessors never thought of, from expanding into Central Asia to solving Gazprom's debt problems and increasing gas production in Russia.
Robert Dudley was theoretically in the Russian oil industry: as head of BP's CIS, Caspian, and African division he was also responsible for the company's Russian operations. But with the establishment of TNK-BP in March 2003, he became the first foreigner to head a Russian oil company. And although he still has to share actual management of the company with Viktor Vekselberg, everyone realizes that, strange as it may sound, Sir Robert is a full-fledged colleague of the Russian oil oligarchs.
Viktor Vekselberg came to the oil business quite unexpectedly when he sold part of his stake in TNK to BP. At first it was assumed that the TNK-BP alliance was set up precisely so that TNK's Russian owners – Viktor Vekselberg, Mikhail Fridman from Alfa Group, and Leonard Blavatnik from Access – would gradually leave the oil industry. But whereas Fridman and Blavatnik acted according to this scenario, Vekselberg paradoxically became a public figure of TNK-BP and its actual co-manager.
Semen Kukes accomplished something almost impossible – he didn't arrive in the oil business but returned to it and returned after qualitatively changing his status. At TNK, Kukes occupied the position of hired senior executive of a de facto private company, but at YUKOS after Mikhail Khodorkovsky's departure in autumn 2003, he gradually mastered the job of hired senior executive of a public company, that is, a company where all shareholders have more or less equal rights. And although this was not actually so in the case of YUKOS, Kukes has had a certain amount of success in his new job: at least he was able to teach Russian society how to separate the principal shareholders and management, who are playing fundamentally different games at YUKOS.
All the Article in Russian as of May 17, 2004