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. Last Updated: 07/27/2016

A Guide to the Oil Majors

One group that has never doubted the importance of oil in this country is the so-called oligarchs, who fought tooth and nail to gain control of major oil assets in the early to mid-1990s. Gregory Feifer and Igor Semenenko take a look at where the companies they bought and built up are today.

LUKoil



Azeri-born Vagit Alekperov runs the country's No.1 oil major LUKoil. A part owner of the company, Alekperov was first deputy oil minister in 1990. It was in that position that he came up with a privatization plan to consolidate the cream of the state's production and refining assets into a single entity called Sovneft, a vision that died with the collapse of the Soviet Union.

Instead, when President Boris Yeltsin signed a decree in 1992 creating three oil companies — LUKoil, Surgutneftegaz and Yukos — the ambitious Alekperov used his old connections to become installed at the head of the largest one, LUKoil. The company now has a market capitalization of $5.6 billion and is waging an aggressive campaign to push various projects, including ones in the Caspian Sea and northern Russia.

The company is now estimated to be 20 percent controlled by company managers and employees, Business Week reported. The government holds some 15 percent — though it has said it will convert a 4 percent to 4.5 percent stake into American Depository Receipts before the end of this year. The remainder of the company is more or less a free float.

Management has been able to essentially retain control of the company.

LUKoil took over No. 12 oil producer KomiTEK last year and pushed ahead with plans to consolidate the company's scattered holdings. But a number of minor companies that figured into LUKoil's plans found themselves fighting takeovers.

One such company is Northern Oil, located in Northwest Russia and run by former Finance Minister Andrei Vavilov and other managers. They have protested LUKoil's attempts to grab Northern Oil through KomiTEK, whose production subsidiary, Komineft, owned 25 percent of Northern Oil until a share dilution carried out last year.

LUKoil's aggressive strategy makes it a favorite with a number of investors.

LUKoil is expected to turn a net profit this year of $2 billion to $2.5 billion, up from $1.3 billion in 1999, the Financial Times reported.

The company is exploring a field it struck in the Caspian Sea last March containing an estimated 2.2 billion barrels of oil, hoping it contains reserves of oil that would give it a large stake in the region. LUKoil is also taking over refineries in Eastern Europe and boosting production in Russia.

To help realize its plans, LUKoil is searching for a Western partner that can finance some of the company's undertakings. LUKoil also wants its shares listed on the New York Stock Exchange, Business Week reported. But that will require opening the company's finances and ownership structure — which remains murky — to greater scrutiny.

Surgutneftegaz



At the opposite end of the spectrum is Surgutneftegaz. It is credited by some analysts with being the country's best-run oil major, making Surgutneftegaz stock popular among foreign investors.

Its chief executive is mild-mannered Vladimir Bogdanov, who has overseen a stringent policy mix combining cost-cutting measures with heavy investment in development.

"Surgutneftegaz is the poster-child for the sector," says Steven Dashevsky, oil and gas analyst at Aton brokerage. "It never stopped investing in production, even in 1998. That's paying off."

The company invested $250 million into production last year, compared, for example, to Sibneft's $20 million.

Surgutneftegaz saw 9 percent production growth in the first five months of this year, double the country's average, Dashevsky adds. "Surgutneftegaz has done a lot of work investing in its fields. It has also put significant capital investment into such things as new technology and training."

But some analysts question Surgutneftegaz's exalted status among Russia's oil majors.

"It's more simple than other companies, so it's easier to understand," says Ivan Mazalov, an oil and gas analyst at Troika Dialog brokerage. "But LUKoil is more visionary."

Dmitry Avdeyev at United Financial Group agrees.

"Opinions about Surgutneftegaz are subjective," he says.

"Its fundamentals are attractive and it has a large cash flow. But from the view of market capital, LUKoil's stock is seen as more premium," he adds. "Investors like its strategy better."

Surgutneftegaz has also managed to strain relations with its investors in the past, chiefly in 1996, when the company outraged shareholders by diluting shares to increase control over its AO Surneftegaz subsidiary. The company then bought a large number of its new shares at a price deemed at 30 percent below market levels.

Plans for a further emission being carried out this year also contributed to shareholder worries.

But the company's bottom line keeps investors interested. Production came to 37.6 million tons last year, a rise of rise 6.7 percent over 1998's level, the Financial Times reported. Surgutneftegaz earned a net profit of $1.18 billion last year and expects to earn $2.07 billion this year, UFG wrote in a recent industry report.

Surgutneftegaz's most pressing problem is that its Western Siberian reserves are close to depletion, meaning the company will need to develop new fields to continue its production rates.

Company spokesman Alexei Sukhodoyev says the company is focusing its strategy on increasing reserves to meet rising production levels. "Figures for this year so far show we might be able to extract 39 million tons [a year]."

Yukos



After a couple of grim years, No. 2 oil major Yukos is starting to feel its way forward.

Menatep Bank owner Mikhail Khodorkovsky snapped up 78 percent of Yukos for $300 million during two loans-for-shares auctions in 1995.

Khodorkovsky's oil empire grew with his acquisition of a controlling interest in Eastern Oil Co., or VNK, in 1997 for around $800 million. He has thus shelled out $1.1 billion to gain control of a company with 1999 revenues of $2.1 billion.

Yukos got into difficulties after the 1998 crisis. Some 30 percent of its shares had been pledged as collateral against loans taken out by the now-moribund Menatep Bank. While at one stage there was talk that Khodorkovsky could lose control of Yukos because of the scheme, he has managed to both retain control and successfully navigate the company through several difficult problems.

The company is now well-positioned, having consolidated control at several once-frisky subsidiaries and brought to an end a damaging public row with international investor Kenneth Dart.

Dart — an independent billionaire who has specialized in high-risk investments from Latin American debt to Russian oil production companies — protested long and loud when Yukos moved early last year to consolidate its control over Yuganskneftegaz, Samaraneftegaz and Tomskneft. The consolidation plan involved share emissions at all three companies that Dart said would have unfairly diluted his stakes and those of other minority investors.

Following several bitterly denounced shareholder meetings for the subsidiaries, Dart quietly reached an undisclosed settlement last December with Yukos.

Since that settlement, Yukos has been working to improve investor relations. Khodorkovsky last month announced that the company had altered its charter to limit capital to the company's already issued shares. A Yukos statement put the number at 2.24 billion ordinary shares, and added that an extraordinary majority of 75 percent plus one share would be needed to approve any further share issues.

Khodorkovsky said the company would dole out 3 billion rubles to shareholders in dividends after not having paid dividends last year.

Analysts say the company's payout to shareholders and decision to cancel further share emissions reflected a desire to be seen as more friendly to investors.

Yukos posted a net profit of 6.2 billion rubles ($220 million) last year — according to Russian accounting standards — up from a loss of 2.3 billion rubles in 1998. The company says it will boost production this year to between 46.6 million tons and 50 million tons, up from 44.5 million tons last year. Yukos has also announced plans to produce 1999 accounts in July according to GAAP accounting standards — the standard U.S. system for preparing corporate accounts — and to release quarterly GAAP results in 2001.

Khodorkovsky said this month that the company is faring so well it does not need strategic investors. He added that the company does want to find partners to develop specific oil fields.

In the mid-term future, Yukos says it will focus on reorganization. "Unlike Surgutneftegaz, we're not consolidated," Khodorkovsky said during a recent news conference. "But we hope to be by the end of next year." The company is also aggressively pushing into the service sector, a venture for which Khodorkovsky said the company is also searching for investors.

Sidanko



Another high-profile banking oligarch, Vladimir Potanin, took over Sidanko oil company in 1995. He had earlier worked in the Soviet Foreign Trade Ministry, where he racked up influential contacts.

Analysts say Potanin's International Finance paid $370 million for a 51 percent stake in Sidanko in 1995. Potanin had reportedly been looking for a quick profit by reselling the company. After a failed attempt to sell 25 percent to Alfa Group in 1996, he succeeded in selling a 10 percent stake to British Petroleum for $571 million.

That did not mean smooth sailing, however. Instead of running the company himself, Potanin appointed Chechen oilman Zia Bazhayev to oversee Sidanko's daily operations. Bazhayev, who oversaw the company until March 1998, proceeded to run the company so far into debt that it was declared bankrupt last year.

Meanwhile, up-and-coming Tyumen Oil Co., or TNK, snapped up Sidanko subsidiaries Kondpetroleum and Chernogorneft. TNK's jockeying caused outrage on the part of BP Amoco.

Sidanko has slipped from national attention as Potanin seems to have focused his interest on his other holdings, including Norilsk Nickel. But Stephen O'Sullivan, director of research at United Financial Group, says the company is still viable, even without holdings such as Chernogorneft. "I don't see any reason why TNK won't give Chernogorneft back to Sidanko," O'Sullivan says. "Chernogorneft is hugely overvalued, but the assets will go to Sidanko."

Last January, a Moscow arbitration court released Sidanko from bankruptcy, approving a plan to restructure the company's debts of $431 million. The company's immediate obligation is to pay off its creditors according to the January settlement, says Dennis Davydov, head of Sidanko's press office.

The company will also focus its attention on its shareholders' plan providing for Chernogorneft's return. Further down the road, the company plans to develop its Verkh-Tarskoye oil field in the Novosibirsk region, now operated now by Sidanko and subsidiary Udmaurtneft.

TNK



Tyumen Oil Co., usually referred to as TNK, developed into an oil major late in the game.

Novy Holding, a joint venture between Alfa Bank, U.S. firm Access Industries and Access' Russian affiliate Renova, bought a 40 percent stake in TNK from the government in July 1997 for $810 million.

Novy Holding also controls Novy Petroleum, which has a further 10.1 percent stake in TNK.

That was before a further auction of 49.806 percent of TNK last December, bought for around $200 million by New Priorities, a parity venture between TNK Renova and Alfa Group.

Led by president Simon Kukes — a Russian-born former Amoco executive — TNK has focused its strategy on the massive Western Siberian Samotlor oil field, launching a new refinery in Nizhnevartovsk last year. TNK subsidiary Nizhnevartovskneftegaz shares the Samotlor field with Chernogorneft, hence TNK's eagerness to wrest the latter away from Sidanko.

But the company has said it also plans to launch projects to increase production from its other Western Siberian fields — Permyakovskoye, Khokhryakhovskoye and Koshilskoye.

TNK also plans to modernize its Ryazan refinery to increase output and boost its distribution and marketing network, in part by building 70 new gasoline stations in Russia.

The oil company is also aggressively maneuvering for a stake in Irkutsk's Kovykta gas field now controlled by the Rusia Petroleum consortium. TNK bought 6 percent of Rusia earlier this year and is now negotiating for an additional share emission.

The Natural Resources Ministry gave TNK licenses to develop adjacent fields last month.

Backed by Alfa Group — whose leaders Mikhail Fridman and Pyotr Aven have done an excellent job of sticking tight to the corridors of power — TNK has not lacked for political influence. Then-Fuel and Energy Minister Viktor Kalyuzhny was a strong voice on their side in the tussle with BP Amoco over Sidanko's assets. And even assuming it does restore Chernogorneft to Sidanko, TNK has won concessions that may allow it to retain access to much of Chernogorneft's crude. In 1999, Chernogorneft produced 6.3 million metric tons from its estimated reserves of 287 million metric tons.

Meanwhile, TNK retains control of Kondpetroleum, which it bought away from Sidanko last year in a similar bankruptcy auction to the one at which it acquired Chernogorneft. Kondpetroleum, with reserves of 823.8 million metric tons, produced 2.5 million metric tons of crude last year.

While companies such as BP Amoco initially reacted against TNK's strategy, recent signs — such as BP Amoco's statement that it is willing to work with TNK in Irkutsk — are showing otherwise. "Better the devil you know than the devil you don't," UFG's O'Sullivan says.

Sibneft



The ownership of oil major Sibneft is murky on paper, but the firm is widely reported as being controlled by influential Kremlin insider Boris Berezovsky and his prot?g? Roman Abramovich. Berezovsky was reportedly behind the creation of Sibneft — regarded as one of the country's best-managed oil enterprises — in September 1995. Three months later, Berezovsky-controlled Finance Oil Co., or FNK, acquired a controlling stake from the state for $110 million plus investments. FNK was said to be 95-percent controlled by Alkion Securities, in turn 100-percent owned by SBS-Agro Bank.

Alexander Korzhakov, former chief of the presidential bodyguard service under then-President Boris Yeltsin, wrote in his 1997 memoirs that Berezovsky had asked the administration to give him Sibneft to help finance his newly acquired media outlet, ORT television, officially majority state-owned. Various reports in Russian and foreign media have said Abramovich stands behind a number of front enterprises that hold up to 91 percent of Sibneft.

Despite the murky nature of its ownership structure, Sibneft was the first oil major to publish accounts according to GAAP standards. It posted final profits of $63.87 million for the first half of 1999, and says figures for the rest of 1999 looked set to increase.

Sibneft's production unit, Noyabrskneftegaz, is located in Western Siberia, with most of its wells in the Yamalo-Nenetsky autonomous region. But the company's pride and joy is its Omsk refinery, the country's leading producer of high-octane gasoline, which processed 12.5 million tons of crude last year. Sibneft exported 16 million tons of crude last year.

Sibneft's production has been declining since privatization, which the company claims is due to shutting down old and inefficient wells.

But the company wants to change that in the mid-term future. "In the past, much of our focus has been on improving recovery," said a Sibneft official who declined to be named. "We are now entering a new stage in which we will focus on developing fields already in our portfolio."

Sibneft is also developing upstream production. The company announced that it would invest $2 million this year to set up a new field development center.

Tatneft

The Tatarstan oil company was the Soviet Union's most prized oil asset until the beginning of the 1970s, when exploration began to open up the massive Western Siberian oil fields. Tatneft pumped out more than 100 million metric tons of crude in 1970, but extracted just 23 million tons last year. It is hoping to keep output at the same level in 2000, but depleted reserves will make that tough.

Unlike other oil majors, which have always had a diversified revenue base, Tatneft's business is all about crude. When the company was privatized in 1994, it had no refining capacity or sales network. Last year it decided to address such problems, moving to expand its operations both upstream and downstream.

It spent $27.5 million to purchase a network of 57 gasoline stations and says it will acquire 100 more this year. Tatneft also plowed $63.1 million into construction of its new Nizhnekamsk refinery, which will have the capacity to process 7 million tons of crude a year.

Construction at Nizhnekamskoil is partially funded by a loan worth $115 million backed by credit guarantees from U.S. Eximbank.

The total cost of the project was estimated by the U.S.-based ABB Lummus Global Inc. at $1.1 billion, leading some analysts to conclude that such massive expenditures will be too great a strain on the company's resources.

Tatneft already had debts of some $900 million, which it accumulated before the financial crisis. Some of those loans were effectively taken out on behalf of the Tatarstan administration — which holds a 30.58 percent stake in Tatneft that includes a golden share. Tatneft's debts topped $1 billion last year, but it managed to repay part of the arrears thanks to soaring world oil prices.

Its managers have said they hope to cut a deal this summer. However, Tatneft may not need any restructuring agreement should oil prices continue to hover around $30 per barrel, analysts say.

Separately, Tatneft grabbed this month a 48 percent stake in tire producer Nizhnekamskshina and together with affiliated companies now wields a controlling stake in it.

"In the end, Tatneft will have a production chain from extraction of crude to manufacture of gasoline and even tires," said a Tatneft official who declined to be identified.