THE BATTLE FOR RUSSIA’S OIL CONTINUES

By Sergei Kolchin

Recent economic events in Russia have been viewed mainly from the perspective of paying off Russia’s debts to the West, and where to secure the funds to do so. There are two main sources of finance to cancel the debt: Extra budget revenue from exports (mainly of oil and gas, traditionally the main method of replenishing the state budget), and possible income from privatization, where the fuel and energy complex is again a defining factor. Negotiations between the government and parliament have centered on these two subjects. The prospects are relatively favorable for the first option (the chairman of the Duma budget committee, Aleksandr Zhukov, estimates that additional treasury income will exceed planned levels; he estimates that the average price for a barrel of oil in 2001 will be US$24, which exceeds the original budget projections), but the second option faces considerable opposition from legislators (particularly the Left in the Duma).

In early February the minister for property relations, Farid Gazizulin, published his department’s privatization plans, which include selling shares in Lukoil and the oil refiners Norsi-Oil, and the possible sale of Slavneft. The state does not have many highly liquid assets left after the privatization deals of the 1990s. In addition to Slavneft, the state still has control of Rosneft, whose fate has yet to be decided. Meanwhile, the state’s share in Lukoil and Gazprom is its “gold reserve,” for all the instability in the stock market.

As far as the prospects for world oil prices are concerned, there is no consensus. International Energy Agency specialists put the demand for oil at 1.5 million barrels per day. They still predict high prices for oil, albeit lower than in 2000. OPEC wants a price corridor of between US$22 and US$28 per barrel, and to this end is deliberately lowering oil production quotas. The Agency thinks OPEC’s policy is selfish: “They are going for long-term risk for the sake of short-term gain.”

As for the government’s privatization plans, they are designed mainly for Russian investors. Up to now, only Gazprom shares have found a buyer outside Russia. Attempts to sell large blocks of shares in Russian oil companies to foreign buyers in 1998 ended in complete failure. It is true that the oil market at the time was unfavorable, and the need to sell off oil assets quickly was largely forced on the government (they had to plug the gaping holes in the budget at any price). But even now, with more favorable conditions for the oil companies, it is unlikely that foreign investors will be lining up to buy what remains of the state’s share in Russian oil.

The example of Slavneft–which they tried to sell off in 1998–is illustrative. In the first place, because it is a joint Russian-Belarusan company, there are a number of uncertainties about its actual composition, and differing readings in the legislation of the two countries. It will be almost impossible to sell to foreign investors a conglomerate with such a hazy profile and internal structure (even though the company’s production figures look pretty good, and it is pursuing an energetic policy to expand its assets). Second, the results of an investigation into the company by Russia’s Audit Chamber are a liability in the run-up to the sale of Slavneft. The audit took almost two years, and on January 26 the board of the Audit Chamber announced some of the conclusions of the investigation. The overall standard of management within the company was deemed inadequate. The auditors’ criticisms centered on violations committed while setting up subsidiary companies in closed administrative-territorial zones, the understatement of taxable income, concealment of information from shareholders, an unjustifiable number of middlemen feeding off the company and siphoning off profit “on the side”, and so on. It appears that the inefficient management of Slavneft, which is 74 percent state-owned, is in many ways the product of the company’s status as a public company. Nevertheless, one of the recommendations of the board was not to rush the privatization of Slavneft. Interestingly, reports suggest that the auditors’ report initially contained the recommendation to sell of part of the company’s shares in privatization auctions. However, the Audit Chamber then reversed its decision. Before the company’s shares are sold off, board members have been advised to put their house in order. Another recommendation was to curb the powers of Slavneft’s president and to incorporate into its charter the provision that managers will be accountable for damage caused to the company by their actions.

The auditors are of the opinion that it was a lack of accountability on the part of the management that led to the above-mentioned violations. Slavneft bosses, however, believe the criticisms are unfounded. “All profit is used solely for the acquisition of further assets. Our shareholders can only gain from increasing the capitalization of the company,” says Slavneft vice president Andrei Shtorkh. Nevertheless, the Audit Chamber’s conclusions are unlikely to improve the company’s prospects for a profitable sale.

While the state is still only contemplating the next round in the redistribution of property in the oil sector, the oil companies themselves are working intensively towards this. This is clearly illustrated by recent events, which continue to center around the highly active Tyumen Oil Company (TNK). Specifically, large sales companies in Sverdlovsk Oblast have become a source of serious competition between two of Russia’s oil companies–TNK and Sibneft. Sibneft has long considered this region to be under its control: It owns 44 percent of the gasoline market in the oblast. In late 2000 the company acquired a controlling interest in Sverdlovsknefteprodukt and the Yekaterinburg Oil Products Company. The deal has yet to be approved by the antimonopoly committee, but Sibneft already has virtual control of these sales. However, the regional authorities were less than pleased by this expansion. To prevent a monopolization of the local oil products market, they brought in Sibneft’s rival, TNK. The Sverdlovsk Oblast administration recently passed a decree on the creation of the “Urals Oil Company,” which will be 51-percent owned by TNK. As payment for its share in the new company, the administration is transferring to it a controlling interest in Uralnefteprodukt, which in turn owns a large share in Sverdlovsknefteprodukt and the Yekaterinburg Oil Products Company. If the deal goes ahead, TNK will become a highly influential partner for Sibneft. The companies will have to come to an agreement on the joint management of the assets. It is possible that the interests of these two holdings in Sverdlovsk oblast will become the subject of a global agreement between them (remembering their rivalry in Orenburg Oblast and Krasnoyarsk Krai).

A second area of intense competition between Russian oil companies–again involving TNK–is the battle for the Kovyktin oilfield. TNK’s expansion at the expense of Sidanko has been observed before, but it has mainly involved Sidanko’s subsidiaries, Kondpetroleum and Chernogorneft. It now seems that it is the turn of Sidanko’s jewel–the highly promising Kovyktin field in eastern Russia (Irkutsk Oblast).

As a result, Sidanko faces a new offensive from TNK, prompted by what happened to RUSIA Petroleum shares (the Kovyktin oilfield), even though Sidanko itself will evidently have to cede the rights to develop this project to its parent holding Interros. The conflict is related to the acquisition by Interros of more than 10 percent of shares in RUSIA Petroleum which previously belonged to Irkutskenergo. TNK believes that the deal involved gross violations of competition rules (TNK offered US$6 million more than Interros for the stock). Interros considers that the deal fully conforms to current legislation. It seems that the battle for supremacy in this highly promising project in eastern Russia will hot up, as TNK has no plans to back down.

TNK is not only engaged in active competition with its Russian colleagues. As a result of its efforts, Russian oil companies, which have long been protesting against the transit of Kazakh oil, have apparently got their way. As a result of the lobbying efforts of TNK, an arrangement by which Kazakhstan exported 1.5-2 million tons of oil through Russia has ceased to operate. The Orsk oil refinery, which TNK acquired together with Onako, was a party to this arrangement. For the refinery, this was the cheapest way of operating, because a direct pipeline connects it with northern Kazakhstan. In exchange for the supply of Kazakh oil to the refinery, Onako would export from Russian ports oil which was then attributed to Kazakhstan. The new owners of the company did not like this arrangement, and the Russian government agreed with their conclusions, canceling the privileges enjoyed by Kazakhstan’s Aktobenmunaigaz. Under the new terms, the Kazakh company will supply up to 2.6 million tons of oil to the Orsk refinery, in exchange for which TNK will ship the same volume of oil from its own resources to Russian refineries. There are no longer any export guarantees for Kazakhstan. TNK president Semyon Kukes declared, “We are prepared to help Aktobenmunaigaz sell the oil it receives in exchange, but on a market basis.” In other words, instead of simple state guarantees for its exports, Kazakhstan must now come to an agreement with its partner company.

An example of rivalry “with an international flavor” between Russian oil companies is the situation in Lithuania, where Yukos is ready to compete with Lukoil. When Lukoil’s negotiations with Lithuania over the Mazeikiai oil refinery ran aground, Yukos revived its own contacts with Mazeikiai Nafta on the subject of long-term oil supplies to the oil refinery. Yukos had already been trying to find an opening into Lithuania last year. The company is prepared to work with the Lithuanians on terms which they find more acceptable than Lukoil’s.

Turning to relations between the government and the oil companies, we should note a resolution issued by the government commission on protective measures in foreign trade. It has decided to reduce export duty on oil from 48 to 22 euros per ton. Over the last two months, the average price of exported oil has been US$24.3 per barrel. In line with the scale of duties, the adjusted rate should indeed be US$22 per ton. According to Lukoil president Vagit Alekperov, “export duty should depend on world prices, and should be variable”. The decision does not guarantee that there will be no new charges for the oil companies, however. First Deputy Finance Minister Sergei Shatalov says that “when it is necessary to pay off the foreign debt, the government will of course begin using extra sources of revenue.” To be fair, we should add that the variable tax scale that Russia adopted while world oil prices were high was not applied strictly.

In the conflict between the oil companies and Transneft, the federal authorities sided with the former. This refers to the new contract on the transportation of oil, whereby the transport monopoly hoped to get advance payment in full for its services. The antimonopoly ministry, the energy ministry and the Federal Energy Commission were all critical of Transneft’s proposals. However, the final decision on this issue will be taken by Vice Premier Viktor Khristenko.

Such matters are not always resolved to the oil companies’ advantage, however. For example, a conflict has arisen between Yukos and the state property ministry Mingosimushchestvo. The ministry plans to sue the company for the return of the assets of the Eastern Oil Company, suggesting as an alternative that it pays 100 million dollars for the assets which, Mingosimushchestvo believes, Yukos walked away with.

Moving on to dealings with foreign partners, three recent events are worthy of note: Soposo is deserting Arkhangelskgeoldobycha (AGD), as evidenced by the transfer of the register of shareholders from Panorama to Nikoil. As a result of some share dealing, Russia’s Lukoil has acquired a stake of over 15 percent in AGD from America’s Soposo.

Another new acquisition for Lukoil, according to press reports, is the Austrian Avanti Group, which owns a chain of filling stations in Europe. The firm has announced the sale of a 51-percent stake to Lukoil. The filling stations concerned are in Eastern and Central Europe.

Meanwhile, Rosneft has closed out a massive deal in the SRP [production-sharing agreement] project, assigning part of its share in the Sakhalin-1 project to the Indian company OVL. As a result, the state company’s budget will swell by over US$300 million. The terms for the sale of Rosneft’s share in the project were so advantageous that its partners in the project, Exxon and Sodeco, who had first refusal on buying the shares, threw in the towel.

In the realms of in-house restructuring, Rosneft has concluded the transfer of some of the assets of AO Sakhalinmorneftegaz to the parent company. Specifically, Rosneft has acquired oil and gas wells, a booster station and the office buildings of Sakhalinmorneftegaz.

Yukos is in the process of consolidating the shares of its subsidiaries into higher value securities. Meetings for Yuganskneftegaz, Samaraneftegaz and Tomskneft shareholders were due to be held in early March. The main objective was to convert the existing shares of the subsidiaries into a small number of company securities with a higher value. After Yukos exchanges the subsidiaries’ shares for its own, the individual shareholders in each of the three companies will be left with about 5 percent of the shares. These will be bought up from their owners. This operation may be viewed as the logical continuation of the process of consolidation within the company.

To summarize the changes that have taken place, it may be said that the battle for the redistribution of property and income in respect of Russian oil is still going on.

Dr. Sergei Kolchin heads the sector of economic statistics and comparative international analysis of the Russia Academy of Sciences’ Institute of International Economic and Political Studies in Moscow.