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. Last Updated: 07/27/2016

THE ANALYST: Oil and Gas Industry Filled With Wheelings, Dealings

Russia's oil and gas industry so far this year is averaging about one new alliance per week. Deals over the first quarter were made in such rapid succession that the disposition of forces has become somewhat inscrutable. Significantly, as much cooperation is arising among Russian oil companies themselves as are bilateral agreements with international partners. It required years, but leading oil corporations are finally learning how to do business with one another, both within and across borders.

One long-awaited partnership was finally sealed last week, when LUKoil and Central Fuel Co. paired up in what could very well be the most lucrative deal of the year. Central Fuel is Moscow Mayor Yury Luzhkov's ambitious program to conquer (at least) a 30 percent share of the multibillion-dollar petrol and oil products market in the capital, compliments of President Boris Yeltsin, who signed a decree giving Moscow 100 percent ownership of the new entity. All the same, Luzhkov wasn't satisfied; what's the use of a refinery and a network of filling stations without a subsidiary pumping the crude out of the ground?

At first, he wanted outright control and therefore targeted Tyumen Oil, which was still state-owned at the time, but was rebuffed by former Prime Minister Viktor Chernomyrdin (sounds strange, doesn't it?). Since all other attractive oil producers were already privatized, Luzhkov was forced to cut a deal.

He only had to look outside his office door: LUKoil, which already owned 19 percent of Mosnefteprodukt, was already standing in line. LUKoil had already been given a mandate by the mayor to build 50 filling stations in Moscow, and had long dreamed of taking an active part in the city's $5 billion retail gas market. It already supplies 40 percent of Moscow's crude, and would be only happy to pipe more in, especially since it produces some three times more crude than it can refine. And with margins on crude exports sinking drastically, LUKoil's push is destined to gravitate toward the pump -- right where the cash is, and always will be. And increasing its Central Russian market share -- now 4 percent -- is one of LUKoil's primary goals. Central Fuel, in return, will use LUKoil to build up its own reserve base by jointly exploring Russia's vast hinterland.

As a side note, now that LUKoil has a slice of Moscow, Nizhny Novgorod is less critical. For years the company has been in a fever to take control over Norsi-Oil, a virtual replica of Central Fuel, founded upon Norsi Refinery and a handful of regional distribution companies and once managed by acting Prime Minister Sergei Kiriyenko. But Norsi Refinery is swamped in debt, and over the months, it has lost its attractiveness. Still, it is one of the nation's largest refineries, and to share the investment risk, LUKoil signed an agreement with "refineryless" Tatneft, another major domestic alliance forged earlier this year. Tatneft has also been itching to move into Nizhny Novgorod, and, together with LUKoil, can buy Norsi-Oil if and when the latter is privatized this year.

Russia's largest oil company, Yuksi, finally found its foreign partner just days ago. France's Elf Aquitaine has stated its desire to buy 5 percent of Yuksi for $528 million, which gives the merger of Yukos and Sibneft a market value of $10.5 billion. This strategic venture crowns months of work by Yuksi president Mikhail Khodorkovsky to create an alliance that could develop in stride with LUKoil/Arco and Sidanko/British Petroleum. Boris Berezovsky aptly assisted his new partner by loosening up his comments in the press and quitting the ridiculous practice of denying his business interests, which could only harm him ultimately in the eyes of foreign investors, who prefer openness to obstinacy.

In the meantime, Tyumen Oil wrote the prologue of its French romance by signing a letter of intent with Total, according to which the two sides will study opportunities for strategic cooperation in crude production and exploration. This was a deal long overdue: Tyumen Oil needs a foreign partner like an orphan needs a home. The company is in such sorry shape, and is trying to put the pieces together at such a late phase in the race, that its prospects seem somewhat jinxed. But any Tyumen-Oil/Total alignment may have trouble getting off the ground, considering that Alfa Group owns only 50.1 percent of Tyumen Oil's stock. It has no equity to sell a strategic partner. Also, company management is pinning its hopes on future production-sharing agreements, the tax benefits of which would make the difference in the company's costly production cycle. But this isn't stopping Alfa. Last month, Tyumen Oil president Alexander Furman signed a strategic cooperation agreement with Bashkortostan on deliveries of crude to the region's refineries, which are in eternal thirst for crude.

Yet another deal. If this keeps up, the industry will be unrecognizable by the end of the year.

Gary Peach is editor of the weekly journal Capital Markets Russia.