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. Last Updated: 07/27/2016

Peace Breaks Out in Stormy Oil Sector




As the year draws to a close, peace appears to be breaking out in Russia's stormy oil sector.


Having spent much of the past 12 months fighting a series of battles with Western investors, two Russian oil majors - Tyumen Oil Company, or TNK, and Yukos - struck agreements over the past two weeks.


And while both deals smack heavily of a pragmatism driven by booming world oil prices, little else can be read into the fact that the two deals happened so close together, analysts said Monday.


"The fact that the two events occurred at one time is a pure coincidence," said Viktor Mishnyakov, oil and gas analyst with NIKoil brokerage.


Although news broke later about Yukos' deal with international tycoon Kenneth Dart, that agreement was apparently brokered earlier than TNK's settlement with BP Amoco. Yukos agreed to buy off Dart - who owned stakes in three of the oil company's production subsidiaries - for a reported $120 million.


Meanwhile, TNK - after wresting bankrupt production unit Chernogorneft away from its parent holding, Sidanko, for a mere $176 million or so - agreed to hand the company back in return for a 25 percent plus one share blocking stake in Sidanko.


That deal will also raise BP Amoco's voting power in Sidanko to a 25 percent plus one share blocking stake, although the international oil giant's actual stake will remain at the 10 percent it bought back in 1997 for $571 million. Although BP Amoco has since written down that investment to $371 million, that still means it paid considerably more for its share in Sidanko than TNK.


But while it is easy to see what TNK gained from peace with BP Amoco - Prime Minister Vladimir Putin's signature on the Samotlor production sharing agreement and help in expediting some $500 million worth of loan guarantees from U.S. Ex-Im Bank - it is not so clear what Yukos gains from its deal with Dart.


"Tyumen Oil will directly benefit from a peaceful settlement, but Yukos' move smacks of idealism," said Mishnyakov at NIKoil.


"Yukos intended to finalize consolidation of the company by mid-2000," said Andrei Krasnov, a Yukos spokesman. "After a deal with Dart was finalized, this target became more realistic."


He refused to comment on why Yukos had not settled earlier.


TNK was heavily influenced by the federal government, which had been worried about spoiling Russia's relationship with such an influential global player, analysts said.


In addition to the Ex-Im bank loans - which the Clinton administration has suspended "in the national interest" - Russia is hoping to get BP Amoco's help in the geopolitical chess match taking place over the Caspian Sea's oil reserves.


Earlier this month, an agreement on the construction of the Baku-Ceyhan pipeline to bypass Russia was signed in Turkey, pointedly excluding Moscow from the project. Russia's preferred route for Azerbaijan's possiblymassive oil reserves is the existing Baku-Novorossisk pipeline.


Financing for the Azeri and Georgian sections of the Baku-Ceyhan connection is to be provided in large part by the Azerbaijani International Operating Company, or AIOC, which is led by BP-Amoco.


However, the final feasibility study has yet to be completed and Russian officials are hoping BP-Amoco will change its mind.


"In the final analysis AIOC, not government officials, will decide on the final pipeline route," Transneft Board Chairman Vladimir Stanev said in an interview with Vedomosti earlier this month.


Meanwhile Yukos' decision to finally end its "war" with Dart has been seen as a more straightforward PR move, one that lacks a direct and immediate reward.


"Yukos did move to restore its shaken image," said Nesterov at UCB. "It finally looks set to become an ordinary oil company."


Dart had led a campaign by minority investors - waged in the courts and through the press - that protested against alleged violations of shareholders rights by Yukos company management and majority shareholders.


The oil major fought back on both fronts, claiming that Dart was a vulture investor wanting only to obstruct Yukos' plan to streamline an unwieldy corporate structure.


Sibneft reached a compromise with Dart in spring of 1999 and later moved to launch a first level ADR program. It also opened up its board to outside shareholders, who now hold a third of the board seats.


"There is a growing realization that corporate growth will be hampered if companies are not able to make borrowings," said Dmitry Avdeyev, oil and gas analyst with United Financial Group.


Earlier this month the Fuel and Energy Ministry approved a program for the development of Russia's oil industry, which foresees growth of extraction volumes to 360 million to 370 million tons a year by 2005, up more than 20 percent from current levels.


The program will need annual investments to the tune of $8 billion - double current levels.


At the same time, Russian oil companies' own investments are a far cry from required capital expenditures. Local companies not only failed to repatriate export proceeds but also failed to funnel internationally borrowed funds in core business.


"In 1997 through early 1998 oil companies borrowed more than was invested in the industry," said Leonid Mirzoyan, oil and gas analyst with Regent European Securities.


While current extraction levels could be funded from current revenues, any growth in output would require massive investment.