RUSSIA’S OIL COMPLEX IS BEING DIVIDED UP AGAIN

By Sergei Kolchin

When Russia’s oil pie was first divided, the question of a “piece” for the state was somehow secondary. The oil transport network (Transneft) remained in the state’s hands, and state-owned Rosneft retained control of certain levers, though Rosneft was constantly shrinking in size (first there was the unexpected emergence of Sibneft, then there were attempts to strip Rosneft of its main oil-producing branch–Purneftegaz). The state also retained ownership of Slavneft, because of its transnational status, and Onako, which was granted experimental favorable operating terms with the blessing of Viktor Chernomyrdin. In the late 1990s the state realized that, having shared out ownership, it was difficult to demand the former discipline in “word of honor” supplies, though there was no significant decrease in the number of candidates for such supplies–the army, agriculture, communal services, cut-off regions. As a result, the idea of “Gosneft” emerged, albeit based on the debris of the former oil complex. The Gosneft idea enjoyed particular prominence during Yevgeny Primakov’s government, but it is still relevant today. The nub of the matter is that there is a battle going on between those who support indirect but relatively weighty state influence on oil companies (via access to the transportation system, taxes, sale of licenses and so on) and those who advocate creating Gosneft. The declarations of the latter are not always selfless: State companies promise a fair number of lucrative administrative jobs. The latest (though clearly not the last) figure to come out in favor of Gosneft is former Fuel and Energy Minister Viktor Kalyuzhny. He was given assurances that a final decision on Gosneft would be taken by June. Noting that this topic was giving rise to “too much talk, which it was time to put a stop to,” Mikhail Kasyanov asked the Fuel and Energy Ministry to prepare by June a report on the grounds for setting up Gosneft. It now seems that the situation is to change, although the new minister has yet to comment on this delicate issue.

The main opponent of the Gosneft supporters is the privatization department Mingosimushchestvo (state property ministry), which naturally has its own agenda (the Russian federal property fund is also part of this). Prior to the reorganization of the government and the new appointments, the former head of Mingosimushchestvo Igor Shuvalov declared–discussing the sale of what is left of the state-owned oil industry–“we are obliged to sell, we simply must sell these stakes.” As a result, in early May it was officially announced that the state intended (as indicated by the cabinet’s approval of a privatization program) to sell this year 25 percent of Rosneft, 4.5 percent of LukOIL, 20 percent of Slavneft and 85 percent of Onako. The majority holding in Norsi-Oil will probably also be sold. On the first four deals the government intends to earn 27-30 billion rubles, an estimate which seems quite realistic. This is a better time to sell than 1998, when world oil prices tumbled.

The trend towards “Privatneft” will probably prevail, though it is too soon to draw definite conclusions.

While the state is still drawing up its plans to privatize the state oil companies, the private companies are already quietly beginning their program of “creeping privatization.” It is known that Tyumen Oil Company (TNK) has acquired a large share in Megionneftegaz (Slavneft), though to begin with this did not elicit much reaction. But at the end of May the presidents of TNK, Semyon Kukes, and Slavneft, Mikhail Gutseriev, held press conferences on the same day accusing each other of being unconstructive. A TNK representative stated: “The management of Slavneft simply does not want to work with us.” It is not clear how many shares in Slavneft subsidiaries TNK already actually owns. For its part, Slavneft also announced that it had bought up a 10 percent share in one of TNK’s major subsidiaries. There is certainly more intrigue still to come here.

The purchase by Yukos of shares in Orenburgneft immediately provoked a storm in the oil community. Onako risks losing its production branch. Local authorities are sounding the alarm, and the company’s management is in a state of agitation. Anticipating opposition, Yukos boss Mikhail Khodorkovsky announced that under certain circumstances he would be willing to pay up to US$400 million for an 85 percent share in Onako. At the same time Yukos does not want to participate in an investment competition, because the extra investment required after purchase is too great (regional needs, social guarantees and so on). In an attempt to please investors, Yukos has even carried out a complete reshuffle of its board of directors. Just three current company managers and two former managers have been elected to the new board.

The Onako situation is complicated for Yukos by the plans of its rival LukOIL to participate in the privatization of all remaining state-owned companies. LukOIL’s position may be further strengthened by the election of Azat Shamsuratov as head of Onako (he used to run Uraineftegaz). This appointment was made recently.

LukOIL is more interested in Onako’s Orsk oil refinery, where the company could process oil from the Karachaganak deposits in Kazakhstan. At the same time, things are not running too smoothly for LukOIL with regard to its new acquisitions in the “small-scale privatization” process. Having secured ownership of KomiTEK, where half the extraction was carried out by joint ventures, LukOIL was unable to secure automatic control of these JVs.

The clearest example of this is the Severnaya Neft case, where the subsidiary has the support of an experienced financier, Andrei Vavilov (a former deputy finance minister). At the end of last year, the owners of the JV eroded LukOIL’s stake by issuing additional shares. Five little-known firms became the main proprietors, backed by Vavilov. At the end of April the shareholders elected him chairman of the board of directors of Severnaya Neft. Now LukOIL either has to negotiate with the Russian Kenneth Dart, or take steps to isolate its rival (via access to the pipeline, price policies and so on). But it should be noted that the Komi Oil Company has already appeared in Komi republic, founded by a number of structures which also want to participate in developing the region’s oil resources. Things are going slightly better for LukOIL with regard to privatization outside Russia. The company has made it to the second round in the competition for a 70 percent share in the Czech oil refinery in Paramo. The Russian company still has three rivals, but their chances are assessed as lower than LukOIL’s.

LukOIL’s possible acquisitions appear to include the Nizhny Novgorod oil refining company Norsi-Oil. This company has been declared bankrupt and the procedure for its sale is being amended. “We foresaw the onset of bankruptcy and looked for a partner which might ease the effects of external management. We have come to an agreement with LukOIL,” admitted the president of Norsi-Oil Vadim Vorobev. LukOIL itself is as yet being very cautious in discussing the possible assimilation of Norsi.

Also characteristic of LukOIL is its desire to insure itself against possible government encroachment. The company’s shareholders have elevated the status of its president by introducing a series of amendments to the company charter. The term of the presidency has been increased from two to five years, and any decision to replace the president is now taken not by the board of directors but by a 75 percent vote at a general shareholder meeting. It is not just Russian oil companies which have taken part in privatizations abroad–particularly of Ukrainian oil refineries–but also the well-known Alliance group, owned by the Bazhaev brothers, which has gained control of the Kherson oil refinery in partnership with Kazakhoil.

At the other end of the post-Soviet space–the East–mention should be made of the decision of the board of directors of AO Russia Petroleum to issue additional shares to the value of 25 million dollars. Presumably this issue will be distributed by limited subscription among the company’s shareholders. A serious battle has blown up around the promising Kovyltinsky field–where Russia Petroleum is based–involving TNK, Gazprom, Yukos and Surgutneftegaz (the field used to be in Sidanko’s zone of activity).

Perhaps the most interesting element in this battle between the state and private sectors in Russia’s oil industry is the fact that the private companies have penetrated into Transneft–the holy of holies of Russia’s state-owned oil industry.

The holders of Transneft’s preference shares (25 percent of share capital) want to get two of their candidates onto the board of directors. Their main aim is to achieve greater participation in the division of Transneft’s multimillion- dollar income. These new candidates were an idea of Benevent’s, which holds approximately 11 percent of Transneft’s privileged shares, while another 10 percent belong to Benevent’s sister company the National Reinsurance Society. As noted above, the privileged shareholders are interested not so much in how Transneft is managed as in its income. Apart from this, these shareholders evidently hope to gain access through the board to information they want about the company.

To conclude our privatization survey, we should note the state’s sale of Zarubezhneftegazstroi. International Financial Holding has acquired the 31 percent state share for 7.1 million dollars. The company has a number of promising projects in the CIS and the Near and Middle East.

To summarize our analysis of recent events, we should note that the tendency towards privatization is gaining the upper hand, albeit with little pomp. The statist stance of the president and his cabinet is more evident in other spheres where it does not entail financial losses. One may safely conjecture that this tendency will be maintained while oil prices are relatively favorable, although this does not rule out the possibility of strengthening state influence in the oil sector by using instruments other than ownership.

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.