Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Luzhkov the Oil Baron Seeks Stake in Tyumen

Yury Luzhkov needs cash. The Moscow mayor's ambitious plans to rebuild the capital require a deluge of financial resources, and if he is to make his dream come true and bring the Olympic Games to the city in 2008 -- his crowning glory -- he is going to have to tap an ostensibly bottomless financial well. Siberian oil may just be the well he's looking for.

Moscow's "campaign for crude" began in January, when President Boris Yeltsin signed a decree transferring federal stakes in the Moscow Oil Refinery and Mosnefteprodukt, an oil distribution company, to the city of Moscow. On the basis of these controlling stakes, a new company was formed: Central Fuel Co, or CFC.

For LUKOIL, as well as other Russian oil majors, Yeltsin's decree came as an unexpected blow because the company had bought 20 percent of Mosnefteprodukt in the hope of taking over a major share in the lucrative retail market for gasoline, diesel and other oil products in Moscow. Generally speaking, there isn't an oil company in the country that wouldn't like to fill up all those BMWs and Mercedes zooming around Moscow's avenues.

But CFC, if it is to succeed, will need a constant flow of crude. To provide this, Luzhkov recently wrote a letter to Prime Minister Viktor Chernomyrdin asking for a controlling stake in Tyumen Oil Company to be transferred from the federal government to the city of Moscow.

Luzhkov could easily satisfy Central Fuel's raw material demands by signing an agreement with LUKOIL or Yukos -- or with both of them. But that isn't his style. Luzhkov is a control nut: Before agreeing to help rescue and restructure any company, he will insist on complete control first. He did it with ZiL, he did it with Moskvich and, if he gets his way, he'll do it with Tyumen Oil.

Tyumen Oil, 1,200 kilometers east of Moscow in western Siberia, is a basket case among Russia's group of vertically integrated oil companies. Nizhnevartovskneftegaz, the main extraction unit, has amassed $250 million in debts, a sum roughly equivalent to 70 percent of the company's total revenues last year. The town itself, Nizhnevartovsk, exemplifies misery. Tyumen Oil's only refinery, 200 kilometers southeast of Moscow in Ryazan, is poorly equipped and badly managed. As of January it had 1 trillion rubles ($175 million) in debt, an incredible burden for a refinery with low throughput. Worse still, an external audit uncovered outright embezzlement by refinery management.

Still, Tyumen Oil produced approximately 22 million tons of crude last year, and it refined only 30 percent of that. So it has the capacity to supply Central Fuel. Better yet, if Luzhkov could pull this deal off, he would essentially be rounding up Ryazan Refinery, Central Fuel's main competitor on the Moscow market, a bonus which makes Tyumen's crude all the sweeter. The deal, were it to receive Chernomyrdin's blessing, would most likely take the form of outside management for a period of three years and not an outright merger.

Naturally, plans this grandiose will run into resistance. Once he heard of Luzhkov's intentions, the governor of Tyumen Oblast, Leonid Ronetsky, proposed transferring the controlling lot of shares in Tyumen Oil to the regional government. Ronetsky is one tough customer. The region he governs is Russia's Texas and Alaska wrapped together, and provides a lion's share of the nation's oil and natural gas wealth.

With this in mind, Luzhkov has already taken measures to head off the competition by inviting Yury Shafranik, chairman of the board of Tyumen Oil and a former fuel and energy minister, to run Central Fuel. Not only did Shafranik accept, but he managed to keep his post at Tyumen Oil as well. Shafranik's ambition is to create a financial industrial group under Rosinvestneft that may now control not only the oil-rich fields nearby Nizhnevartovsk, but the Moscow refining and retail fuel markets.

Gary Peach is the editor of Capital Markets Russia, a weekly newsletter on Russia's financial markets.