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. Last Updated: 07/27/2016

Kukes Pushes Turnaround at Tyumen Oil Co.




RYAZAN, Central Russia -- Even as their wages were devalued, their weekly milk deliveries stopped and their free vacations halted, workers at the Ryazan oil refinery last week listened to their president with grudging respect.


At a meeting in the Ryazan Town Hall, Tyumen Oil Co. President Simon Kukes delivered the good news and the bad. The company was losing $15 million a month. One-fifth of the 50,000 work force had been laid off. And Tyumen's refinery and oil fields needed millions of dollars in investment.


But the good news provided a measure of hope. Tyumen had just signed a $126 million loan from the German Westdeutsche Landesbank, becoming one of the first Russian companies to receive a foreign credit since the financial crisis hit.


There was more. Tyumen had reduced wage arrears from five months to one month. And the refinery was christening a 15 million-ruble piece of equipment that would boost output of profitable "light" oil products.


The loan will be added to the firm's working capital, to help bridge the period of unprofitable production. Tyumen could not indicate when it would return to profitability but it said it continued slashing losses.


"We received a credit when no other Russian company could," Kukes told the workers after a ribbon-cutting ceremony at the refinery.


"Even as the rest of the country is laying people off, we are building something."


When he told workers the refinery's gasoline had just been named one of the 100 best products in Russia, the audience applauded with genuine pride.


Kukes is working hard to pull Russia's sixth biggest oil company from the morass of inefficiency and infighting that has plagued it for years. After a long and painful power struggle, Tyumen this spring finally regained control over its main oil producer, Nizhnevartovskneftegaz, where previous management had racked up huge debts and allowed production to founder.


Tyumen's reorganization began in July 1997 when Novy Kholding, a company representing Russia's Alfa Bank and U.S.-Russian joint venture Renova, bought a 50.2 percent stake in the company.


The investor installed Kukes at the helm in April, where he proceeded to slash production costs, dramatically boost refining capacity and launch an aggressive retail expansion plan.


Analysts say Tyumen is still a far cry from Russian blue-chip oil company LUKoil, but they are impressed by the company's turnaround so far.


"They've seen the problems created by the old guys and they've said we're not going to do it that way, we're going to do things properly," said Stephen O'Sullivan, co-head of research at United Financial Group.


Tyumen's cost-cutting measures and strong growth plans helped it win the $126 million loan, which is backed by oil exports, Kukes said. And they could help Novy Kholding convince a foreign strategic partner to take an equity stake in Tyumen. The shareholder is looking to sell from 5 percent to 20 percent of the company by the end of 1999 and has hired JP Morgan to assist in the search.


How much ownership Novy Kholding intends to take in Tyumen remains in question. The investor has not yet leapt to buy the Russian government's remaining 49.8 percent stake in the company, although the shares have twice been offered for sale. No plans for a third sale have been announced.


Tyumen's restructuring plans hinge on winning a $550 million credit in December from the U.S. Eximbank, cash the company says is crucial to finance the initial stages of reconstruction at its refinery and its massive but overexploited Samotlor oil field in Western Siberia.


Kukes seems to embody just the right mix of qualities to tackle the job. As a former executive with Amoco who worked for 16 years in the United States, Kukes moves easily in the world of Western bankers and oil executives.


As a native Russian, Kukes relates well to his employees and surveys the domestic market with the eye of an insider.


The bankers he answers to seem pleased by his performance.


"Mr. Kukes is a top professional, and I think he will completely sort out all the problems there both financially and in terms of management," said Pyotr Aven, president of Alfa Bank. "They are attracting Western funding despite the serious crisis here, and all of this is Mr. Kukes' doing. They are building a new system, and they have a clear development strategy."


Employees seem to respect him, too, which is no small feat at a time when Moscow oil barons are considered the scourge of many small oil towns.


While grumbling about his wages, one worker at the Ryazan refinery said he thought Kukes was an honest manager who had done "excellent" work at the refinery, where output has risen from 150,000 metric tons per month in March to 700,000 tons in October. The progress is remarkable, but the refinery is still operating at only half capacity.


The shiny new equipment added last week is just the beginning of the reconstruction planned for Ryazan. Tyumen is readying a major overhaul of the rusting factory and is counting on the Eximbank loan to finance the first, $200 million stage of reconstruction, which will boost production of profitable gasoline and lower output of worthless fuel oil.


Raising gasoline production is crucial if Tyumen is to fulfill its goal of becoming the dominant gas retailer in Central Russia. Kukes would like to see 100 percent of the company's oil sold in the two most profitable ways: either exported as crude or refined and sold through domestic gas stations.


"Retail is one of the most profitable forms of trade - by March or April we will bring to zero our wholesale trade" of oil products, Kukes said.


To build its retail network in the least expensive way, Tyumen plans to open 100 new franchised stations by the end of the year, raising its total to 400. Franchisees build or renovate stations at their own expense and agree to buy gasoline exclusively from Tyumen.


Understanding the importance of a strong brand name, Tyumen on Saturday launched its first television advertising campaign - starring Kukes - to plug the "quality and reliability" of its fuel. The 30-second ads feature shiny oil tankers and the blue-and-white gasoline stations bearing the moniker TNK, for Tyumenskaya Neftyanaya Kompania.


Tyumen looks to be on a roll when it comes to refining and retailing. Production is a different story. This spring the holding company ousted troublesome management from Nizhnevartovskneftegaz by buying up an additional 48 percent in the subsidiary, raising its ownership to 99 percent.


Gaining control of its oil producer has helped Tyumen begin integrating its assets. The parent has renewed shipments of Nizhnevartovsk crude to the Ryazan refinery, which the renegade oil producing subsidiary had halted years ago.


Still, the mess at Nizhnevartovsk is severe. The company's vast Samotlor oil deposit in 1985 produced a staggering 140 million metric tons of oil, representing half of the Soviet Union's total production. Last year it produced only 20.9 million tons and is now one of the nation's most decimated deposits.


Only 10 percent of every barrel of liquid extracted from the field is oil. The rest is water, a sign that the field has been literally flooded in an attempt to force oil to the surface. There is still plenty of oil left in Samotlor, but getting it out will require billions of dollars in new technology. To improve Samotlor's production, Tyumen last month hired U.S. drilling services. If Tyumen gets the Eximbank credit, $350 million will be invested in Samotlor next year, Kukes said. That will be the most cash the deposit will have seen in years, but it will only be enough to maintain production, according to one oil analyst who asked not to be identified.


"There's only one negative about Tyumen: Samotlor. But that's a big negative," the analyst said.


Perhaps only under a production-sharing agreement would Samotlor be profitable to develop, the analyst added. PSAs are government guarantees giving companies tax breaks for particularly expensive development projects. Samotlor is one of more than 100 projects awaiting a PSA award from federal legislators.


Tyumen isn't entirely limited to Samotlor. The holding company's second oil production subsidiary, Tyumenneftegaz, produces an insignificant level of crude oil today but has licenses to many rich, unexplored fields. Tyumen also would like to acquire new oil fields, Kukes said.


But opening new deposits costs money, and that's something increasingly hard to come by these days.


Not one to wait around for credits, Kukes last month visited Chase Manhattan, Goldman Sachs and Morgan Stanley representatives in London in an effort to drum up some cash, the Tyumen president told his employees in Ryazan.


"They were very nice to me, they gave me coffee, but they said that in the next six months, it's not feasible to give a credit to Russia."


===


Tyumen Oil Co.


Oil Producing Subsidiaries: Nizhnevartovskneftegaz, Tyumenneftegaz


Refinery: Ryazan Oil Refinery


Ownership: 50.2 percent held by Novy Kholding (Alfa Bank and Renova); 49.8 percent held by the Russian Federation.


Production:


1996: 21.5 million tons


1997: 20.9 million tons


Refining:


1996: 3.1 million tons


1997: 4.5 million tons


Source: Tyumen Oil Co.