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					OIL & GAS: 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 YamalEurope gas pipeline) should allow
Russia to at least maintain its positions on the EU energy market.

History: 2000-2004

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

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

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 80100 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
Mikhail Gutseriev

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.

                                             Rem Vyakhirev

                                            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.

Ralif Safin

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.
                                             Andrey Vavilov

                                          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.

Mikhail Khodorkovsky

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

                                           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

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

                                          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

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.

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