Luzhkov, Abramovich Duke It Out Over Oil

VedomostiThe refinery has been beset with two opposing boards and two general directors.
A telephone call between Moscow Mayor Yury Luzhkov and oil magnate Roman Abramovich in early August has done little to subdue the passions swirling around the Moscow Oil Refinery.

Since the infamous call prompted by supply cuts, the Moscow refinery, which supplies 55 percent of Moscow's oil products, has been beset with two opposing boards of directors and two general directors. This year alone, five shareholders meetings have been scheduled, though one did not take place because the majority owner did not show up. Another is scheduled for Nov. 18.

And all this fuss for an oil refinery whose equipment and technology are so old that it would not be allowed to operate in the West.

The Central Fuel Co., which is 100 percent owned by the Moscow city government, holds 50.66 percent of the refinery's voting shares. Sibneft, the country's fifth-largest oil producer, owns 37 percent to 38 percent, and another oil major, Tatneft, has 8 percent.

The city government's shares are managed by the Moscow Oil Co., whose president is Shalva Chigirinsky, a real estate developer who entered the oil business in the late 1990s.

Sibneft, in which Abramovich is the core shareholder, and Tatneft are on one team. Luzhkov and Chigirinsky are on the other.

A main point of contention between the two camps is a Sept. 27 shareholders' meeting that may or may not have been legal, depending on whom you ask.

Central Fuel representatives did not come to the meeting because the Moscow Arbitration Court had ruled it illegal, said Nikolai Frolov, a spokesman for Moscow Oil.

A bailiff from the court was at the shareholders' meeting to hand the order to a representative from Gregory Trading, a company affiliated with Sibneft that had asked that the Sept. 27 meeting be convened.

Gregory Trading said it did not receive the order because its representatives voted on the agenda points via correspondence. In any case, Sibneft and Abramovich's asset management company Millhouse got six representatives on the board. Tatneft, which had signed a partnership agreement three days before the meeting, voted in three. Central Fuel had none.

In addition, Sibneft says it was able to convert its privileged shares, which did not include voting rights, into voting shares. In doing so, Sibneft, together with Tatneft, obtained a 55 percent majority of voting shares, while Central Fuel was left with 38 percent.

Even though the new board of directors voted in their own general director, he has not been allowed onto the grounds of the Moscow refinery.

"Comparing the efficiency of the Moscow refinery with its peers nationwide, such as our own Omsk refinery, we feel there is room for improvement," Sibneft president Eugene Shvidler said last week. "It was Sibneft that encouraged the refinery to sign long-term supply contracts with its partners, which will help to ensure the stability, transparency and profitability of operations."

Shvidler also noted that Moscow refinery management was selling polypropylene at below market prices to Inteko, a construction company reportedly owned by Yelena Baturinaya, Luzhkov's wife.

According to an Inteko representative, however, the company does not buy polypropylene.

Sibneft is taking such drastic measures to protect its right as minority shareholder in the refinery, said Sibneft spokesman Alexei Firsov. When it bought its stake from LUKoil, the company knew it was not just buying into a typical refinery, it was buying into a strategically unique organization with a tormented past.

On Jan. 22, 1997, then-President Boris Yeltsin signed a decree transferring 38 percent of the Mosnefteprodukt oil product distributor and 38 percent of the refinery from the federal government to the city of Moscow. These were to become the core assets of the newly formed Central Fuel, which was created to stabilize the capital's gasoline market.

Central Fuel was criticized from the very beginning. Russia's oil industry had just undergone rapid transformation as a handful of oligarchs pieced together vertically integrated oil companies and then acquired controlling stakes through rigged auctions.

Many doubted the refinery could survive financially without its own guaranteed supply of crude oil. Without its own production capacity, the refinery is forced either to buy crude on Russia's poorly developed spot market or through supply contracts.

LUKoil, the country's largest oil producer, was the refinery's first suitor, and in March 1998 it signed off on a partnership agreement with Central Fuel. Another pact was signed a month later. The signing ceremony was attended by Luzhkov, LUKoil CEO Vagit Alekperov and Tatar President Mintimer Shaimiyev. As part of the deal, Tatneft and LUKoil were to each acquire a 13 percent stake in Central Fuel.

The partnership with LUKoil ran into problems when Central Fuel's management realized that LUKoil's goal was to gain control of the refinery. Luzhkov placed his bets with another partner and in June 1999 signed a decree merging Central Fuel into the newly created Moscow Oil. At the time, it was reported that construction firm S+T Group, owned by Chigirinsky, was to participate. The April 1998 deal fell apart.

LUKoil management, meanwhile, decided it would give up fighting for the Moscow gasoline market, concentrating on the Volga region instead. At a privatization auction marked by weak competition, LUKoil acquired 85 percent of Norsi Oil, with a 35,000 barrel per day refinery, for $26 million in October 2001.

Industry observers suspected that LUKoil had struck some kind of deal with Sibneft, the only other viable contender for Norsi. These suspicions were confirmed a few months later, when LUKoil announced it had sold its Moscow refinery stake to Sibneft.

Although Sibneft received the right to supply the refinery with crude when it bought LUKoil's stake, Chigirinsky and Luzhkov were already planning something bigger.

Two years in the making, the Moscow Oil and Gas Co. would combine Central Fuel's downstream assets with the upstream production of Sibir Energy, controlled by Chigirinsky and listed on the London Stock Exchange.

Ironically, Sibneft is Sibir Energy's partner in its western Siberian production venture. It is the crude oil from these fields that is to supply the Moscow refinery in the coming years.

Sibneft, however, does not think Sibir Energy has any business meddling in the refinery's affairs. Firsov of Sibneft said the Moscow Oil and Gas Co. is "an empty company" and a "figment of Luzhkov's imagination."

Sibir Energy president Henry Cameron said the new company would be registered by the end of this month.

As for the battle between Abramovich and Luzhkov, "for now we are just observers," Cameron said. "As future shareholders in the refinery, however, we are interested in the outcome."