A Little Oil Firm Playing a Big Game

Imperial EnergyBritish Ambassador Tony Brenton, left, and Imperial CEO Peter Levine visiting the Tomsk region earlier this month.
TOMSK -- In a time of fast-encroaching state control over the oil sector, Imperial Energy is a rare bird. Founded in 2004 by a flamboyant English lawyer, the London-listed firm has seen a lot in its short history.

From murky startup negotiations with regional authorities in Tomsk through tussles with federal environmental officials that sent its share price fluctuating wildly, the experience of this small firm exemplifies what it means to navigate the mazes of corruption that permeate President Vladimir Putin's Russia.

"We are very happy to operate in Russia," Imperial founder and chairman Peter Levine said during a recent trip organized by the company to its main fields in western Siberia. "We don't make any complaints about the environment we have to operate in," he said. "We just get on with the job and work here -- we have great faith in the system."

Levine, who is of Russian descent and speaks the language fluently, has proven to know how to use that system to great effect as he makes his way through what remains of Russia's "Wild East."

At 51, he speaks with the bravado and flair of a courtroom lawyer, launching into seemingly crafted monologues at a moment's notice. His briefcase swims with $100 bills, and he bantered easily with four fur-clad Siberian beauties who descended upon an isolated helipad outside Tomsk before taking up their posts as flight attendants in waiting helicopters.

His finely tailored suits stand in stark contrast to the flashy pinstripes and gold rings that are still the favored look of those in power beyond the stylized streets of Moscow. Yet it is with those very people that Levine has fostered deep links to make his firm one of the region's most successful.

Levine is reluctant to explain what prompted him to found Imperial Energy in 2004 -- a time when the Kremlin's campaign to bring down Yukos, then the country's largest private oil firm, was in full swing.

Foreign investors were weary of the country's business climate, fearing that the Yukos campaign was the opening shot in a wider policy of renationalization.

Yet Levine, a corporate lawyer who entered business in 1998 when he was appointed chairman of Severfield-Rowen, a British steel construction firm, thought the time was right.

"I met Peter, we spoke. I asked him some basic questions. He gave me the correct answers, and then started getting licenses," said Tomsk Deputy Governor Vladimir Yemeshev, declining to elaborate.

Imperial Energy built itself up initially through acquisitions -- buying assets from Sibinterneft and Allianceneftegaz from Tomsk native Alexander Korchik, who was general director of the company until the appointment of new chief Christopher Hopkinson in January.

Someone only described as Korchik's partner and identified in company documents as L.I. Sheshko handled Imperial's negotiations with Tomsk regional authorities.

Imperial Energy now owns 47.5 percent of Sibinterneft, and Levine declined to say who owns the rest. "It's certain local individuals, we don't go into that," Levine said in a telephone interview last week.

"Imperial Energy has no links with anyone else," Yemeshev said, when asked whether officials in the Tomsk regional administration held stakes in the company. "[Levine] is a proper lawyer and a good negotiator," he added.

Those negotiating skills were called upon earlier this year, when Imperial Energy entered a drawn-out battle with Oleg Mitvol, the deputy head of the Natural Resources Ministry's environmental agency.

Imperial was growing fast. Though still failing to turn a profit, its share price had risen by nearly 800 percent in the eight months since it first listed on the London Stock Exchange's AIM market in April 2005, making it one of the best new issues in Europe that year.

Yet it only caught the attention of authorities this year, on the eve of the start of oil production from two of its main fields, Snezhnoye and Maiskoye, after sinking nearly 20 billion rubles ($810 million) into the project through 2007.

The trigger was the release in March of an independent audit by DeGolyer and MacNaughton, which nearly doubled the size of the company's reserves to 800 million barrels.

Imperial's shares jumped 121 percent in two months on the news, only to drop by 30 percent in one day on April 18, when Mitvol threatened to revoke the company's main license for drilling "ridiculously small volumes" while sitting on such supposedly huge reserves. The reserves, Mitvol claimed, were overstated.

Viktor Ilyukhin, a Communist State Duma deputy, told The Moscow Times at the time that he helped initiate the inquiry into Imperial's reserves. "People from the Tomsk regional administration came to me and I saw some problems, so I asked Mitvol and the prosecutor's office to look into it," Ilyukhin said.

When contacted Monday for this article, Ilyukhin said he could not remember the incident.

"At these early stages, valuation depends not on actual business performance or financial results, but on reserves confirmations or denials," said Steven Dashevsky, an analyst at Aton brokerage who has long championed the firm's prospects.

Levine, he said, "attracted the attention of people who wanted a piece of the pie."

Mitvol, a former associate of businessman Boris Berezovsky turned outspoken state environmental official, is best known for his campaign against Shell at Sakhalin-2 last year. After wild threats of license revocations for purported environmental damage at the site, Mitvol's campaign appeared to succeed last December when Shell and its Japanese partners sold a majority stake in the project to Gazprom.

When Mitvol launched his campaign against Imperial Energy, many observers speculated that it was a state-driven attempt to muscle in on the company. Yet as the fight dragged on, and Imperial's shares flopped up and down on the heels of competing statements from Mitvol and the company, it became clear that a wider game was at play.

In July, Imperial appealed to the Financial Services Authority, the British government's markets watchdog, to investigate "certain matters affecting its share trading and share price."

Mitvol, in a telephone interview, denied that he had sought to capitalize on the success of his campaign against Sakhalin-2 to reap financial gain from the Imperial affair. He declined to comment further on the company.

Levine has his own explanations for why the spotlight shined so suddenly on his company this year. "How about the word 'jealousy'?" he said.

"For a small company with 800 million barrels of reserves, they went from floating under the radar to arriving very quickly on the stage, and that brought it into the line of fire," said Adrian Wood, an energy analyst at UBS in London.

"It has been a bad year for independent foreign companies in Russia. They were, in a sense, seen as prospecting with the country's minerals and resources wealth," Wood said.

The interest shown by authorities in small independent oil explorers this year has not been confined to Imperial, as a string of British- and U.S.-based firms have faced license revocations and queries, plus other checkups from officials.

The case of Imperial shows that the Kremlin's rules of the game pertaining to large-scale projects in the strategic oil sector have made their mark on even the minnows in the industry, prompting a wide-scale internalization of the fact that the Kremlin holds sway over all.

Lying close to the border with Kazakhstan, Tomsk is one of Russia's main oil producing regions. It is home to fields owned by Gazprom Neft, Rosneft and Surgutneftegaz, but also to about 25 small-sized oil companies. And its administration is peopled with former oilmen who know the lay of the land and where the sweet spots lie.

Imperial's fortunes lifted in October, when it began shipping oil through state pipeline monopoly Transneft, and boosted production to 8,500 barrels per day.

Then, in early November, Imperial announced that it had received an unsolicited offer from a financial investor to buy 25 percent of the firm at a discount. The company announced the next day that Gazprombank stood behind the bid.

One source close to the situation said Imperial and Gazprombank had negotiated the bid together, with the purpose of staving off the attack from Mitvol.

Levine said the statement was "absolutely not true." Gazprombank declined repeated requests for comment on its bid for a stake in Imperial, or on its relationship with the company.

Levine owns 10 percent of Imperial's shares, while his family, friends and associates own another 2 percent to 5 percent and the rest of the shares are free float.

Imperial's shares were listed on the main LSE market in May.

Levine said he maintained close ties to individuals at Gazprombank, but declined to elaborate. Gazprombank owned no shares in Imperial, Levine said.

Imperial declined the bid, but "we are working with Gazprombank to identify the possibility of possible cooperation," Levine said.

The Gazprombank bid signaled a new era in the company's history. After three short years, having yet to turn a recorded profit while having enriched its shareholders immensely, Imperial Energy appears ready to take a state-run partner.

"The fact that Imperial was even considering that approach shows they would like the backing of someone like Gazprom," said Wood, of UBS.

Having capitalized on the relative chaos of the region -- a large majority of Imperial's 400 employees once worked for Yukos at Tomskneft, which was sold in a bankruptcy auction this year to Rosneft -- Levine appears to understand that the state is supreme in today's Russia.

"As Imperial grows into a substantial player, it would be natural, appropriate and correct to cooperate and associate with likewise substantial and serious players in the marketplace," Levine said. He said he expected some sort of deal in the coming year.

Levine has even managed to garner political support for his cause, enlisting the help of British Ambassador Tony Brenton.

"This is a serious British oil company doing serious work in Russia," Brenton said on the Imperial-organized trip to Tomsk earlier this month. "It's a very good example of the U.K. and Russia coming together, and I thought it was important to show British government support."

As for his dealings with Mitvol, Levine said he had put them behind him.

"It's a closed subject," Levine said. "We've made our views clear as to what was valid of what was said. We want to look forward."

And look forward they can. The Natural Resources Ministry earlier this month decided to extend six of the company's exploration licenses. The company has reached its production target of 10,000 barrels of oil per day, and hopes to increase this to 25,000 bpd by the end of 2008 and 35,000 bpd by the end of 2009.

Yet analysts agreed that they did not expect Imperial Energy to remain independent for much longer, and Levine seems fine with that.

The system that Levine has faith in -- the rules of the game -- says there is still much money to be made, as long as the connections are right both to enter the market and stave off unwanted attacks.

The ultimate rule, it seems, is that the state rules.