Publication: Eurasia Daily Monitor Volume: 4 Issue: 90

Russia’s state-run Rosneft energy company has snagged key Yukos assets in Siberia, enabling the company to overtake the privately owned Lukoil in terms of oil production capacity and become Russia’s largest oil company. The move has also increased the government’s clout in the country’s oil and gas sector.

Rosneft placed the winning bid of 175.7 billion rubles ($6.8 billion) at an auction on May 3 for oil producer Tomskneft and other assets of bankrupt oil company Yukos. Rosneft acquired a 100% stake in Tomskneft, 70.78% interest in the East Siberian Oil and Gas company (VSNK), 100% of the Angarsk Petrochemical company, 100% of the Achinsk refinery, and other production and refining units, including 100% in the Angarsk Polymer Plant, Irkutsknefteproduct, Khakasnefteproduct, Tomsknefteproduct, and some other units. Most of these assets are based in Eastern Siberia.

There were only two bidders in the auction: Neft-Aktiv, a wholly owned subsidiary of Rosneft, and Unitex, a company connected by Russian media reports to gas giant Gazprom. The auction ended at 5.6% above the starting price of $6.4 billion, yet the winning bid was seen as a relatively low price for Tomskneft and East Siberian assets.

Rosneft pledged fast integration of the acquired assets, aiming to improve the efficiency of their operations, according to the company’s statement. “The acquired East Siberian assets came as a new step in the development of Rosneft,” Rosneft spokesman Vladimir Voyeboda was quoted as saying in the statement (Interfax, RIA-Novosti, May 3).

East Siberian expansion has been Rosneft’s priority, as the company tries to raise its crude production there. Rosneft has pledged to increase its oil output in Eastern Siberia up to 30 million tons by 2014 in order to secure sufficient volumes for the Eastern Siberia-Pacific oil pipeline, which is designed to export Russian crude to the Asia Pacific.

Therefore, VSNK appears to be a strategically important acquisition for Rosneft, because VSNK holds licenses to develop the Yurubchen-Tokhomsk and Agaleyevsky oil and gas deposits in Eastern Siberia. Yurubchen-Tokhomsk is estimated to contain 75 million tons of oil and 128 billion cubic meters of gas reserves, while Agaleyevsky’s reserves are estimated at 128 million tons and 409 billion cubic meters.

Yet in terms of actual production and refining capacities, Tomskneft and the eastern refineries appear to be even more important. Tomskneft pumps some 11.6 million tons of oil and 1.6 billion cubic meters of gas a year. Angarsk Petrochemicals and Achinsk have refining capacities of 14 million tons of oil per year.

The acquisition of Tomskneft is expected to make Rosneft Russia’s leading oil producer, surpassing the privately held Lukoil by some 3 million tons a year. In 2006, Lukoil pumped 90.4 million tons of oil, while Rosneft’s production trailed at 81.7 million tons (Interfax, May 3).

Despite Rosneft’s purchase of major eastern refineries, Lukoil is set to remain Russia’s top oil refiner. In 2006, Lukoil refined 39.5 million tons of oil, while Rosneft’s refining output amounted to 11 million tons. However, the Angarsk Petrochemical company will allow Rosneft to increase exports of oil products to China.

The auction also served to highlight the ongoing trend of the government’s increased role in the country’s oil and gas sector. In the first quarter of 2007, the Russian government controlled 37% of the country’s oil output via the state-run companies Rosneft, Gazprom, Tatneft, and Bashneft. Due to Rosneft’s acquisition of Tomskneft, now some 40% of Russian crude will be pumped by state-controlled firms.

In the meantime, Rosneft expansion plans also involve the country’s continental shelf. On the eve of the Yukos auction, Rosneft CEO Sergei Bogdanchikov suggested raising Russia’s off-shore oil production by five times over eight years. By 2015, Russian continental shelf deposits should yield up to 80-85 million tons of oil a year, Bogdanchikov told a meeting in Murmansk on May 2. The task would require building about 100 ships and oil rigs at a total cost of some $8 billion, he added (Interfax, May 2).

Russian President Vladimir Putin supported Bogdanchikov’s suggestions and promised more incentives, including possible tax breaks for off-shore oil and gas projects. He also told participants at the Murmansk meeting that Russian oil shipments through Arctic seas should reach 40 million tons of oil a year by 2015 (Interfax, May 2). In other words, Russia is already planning new shipping routes even before major oil deposits in Eastern Siberia are developed.