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. Last Updated: 07/27/2016

Top Oil Firms Cry Foul Over Auction

In a show of solidarity, the nation's biggest oil companies teamed up Tuesday to blast the recent auction of the northern Gamburtsev Val oil fields to Severnaya Neft as a rigged sale.

Top executives from LUKoil, Surgutneftegaz and Sibneft said they have filed suit in Arkhangelsk on the grounds that their firms had each offered higher bids than the winner.

They also accused the Nenets autonomous district, which held the tender, of playing favorites.

"The winner had been decided from the beginning," said LUKoil vice president Leonid Fedun.

Severnaya Neft, which is owned by a group of off-shore companies, has invested millions of dollars into Nenets' infrastructure.

Nenets over the weekend named Severnaya Neft as the winner of the auction to develop Gamburtsev's three oil fields, Khysareiskoye, Cherpayusskoye and Hyadeiyuskoye. Severnaya Neft made of bid of $900 million and offered a tiebreaking bonus of $7 million.

During the tender, the bonus is taken into account if the development offers among all the contenders are comparable. The minimum amount set by the government was $5 million.

Click here to read our special report on the Oil and Gas Industry.The losing bidders said Tuesday that their companies had offered bonuses of $100 million to $140 million, or 20 times more than that offered by Severnaya Neft for the license.

To prove their positions, the three oil majors — with the support of Yukos and Rosneft — sent on Tuesday copies of their offers to Economic Development and Trade Minister German Gref and Finance Minister Alexei Kudrin.

"As a result of these measures taken by [Natural Resources Minister Boris] Yatskevich and [Nenets Governor Vladimir] Butov, the federal budget will be $40 million short. An additional $60 million of revenue won't be transferred to the Nenets autonomous district. In short, every Nenets resident will go without $3,000," said a copy of the letter that was handed out to reporters.

Severnaya Neft vigorously defended its win Tuesday, calling the backlash a "purely emotional" reaction.

"Our offer for development is substantially better," said Severnaya Neft spokeswoman Yelena Prorokova. "It's better because we are already there. Because we have already invested $100 million in the infrastructure of the region.

"We can start next year. Others can't."

Surgutneftegaz vice president Vyacheslav Nikiforov said his company had bid $1 billion to develop the fields over 20 years.

"Our plan included building a pipeline system that would connect to Transneft," Nikiforov said.

Once Severnaya Neft gets hold of the license for the field, actual drilling could start in 2002 and extraction as early as 2004, Severnaya Neft general director Alexander Samusev said. The final documentation hasn't been signed by the regional and federal officials, thus, even though Severnaya Neft won the tender, it hasn't yet obtained the license.

And if it doesn't get the license, the company is prepared to lodge a challenge in the courts, Samusev said.

"We have fulfilled all the conditions of the contest and can lay claim to our victory," he was quoted by Interfax as saying.

This isn't the first time a contest for development rights in the Nenets region has turned sour. In 1997, local government officials annulled a tender in which Exxon was the winner. The production agreement was revoked because Exxon's Russian partners balked at the arrangement, saying that the global oil major had too much power.

Dmitry Druzhin with the brokerage Prospect, was hesitant to take sides in Tuesday's dispute, saying it seemed that the losers of the tender were just showing bad sportsmanship.

"If there was indeed a violation, it is now up to the courts to decide," he said. "It's a fact that Severnaya Neft is dominant in the region. What we'll see now is a battle between LUKoil and Severnaya Neft for ultimate control of the territory."

However, Valery Nesterov, an oil and gas analyst at the Troika Dialog brokerage, said that oil industry lawsuits have a reputation of being thrown from one court to another without anything ever getting solved.

"And even if the government at some level does intervene, their actions would be a symptom of Russia's poor investment climate," Nesterov said. "If this had been a fair auction, it would have meant that small business has the gumption to compete with the majors. In all likelihood, though, it wasn't a fair auction."

He said that TotalFinaElf had agreed to partner with Rosneft for the tender, but it abruptly withdrew in a sign that the French company thought its own participation was futile from the beginning.

Pointing to the depth and breadth of the majors' experience, Nesterov added that it was unlikely that Severnaya Neft could offer anything better in terms of financing and technology.

Severnaya Neft head Samusev said his company will finance most of the project from its own pockets. About $140 million will come from loans and the rest will be raised in profits made from oil extraction. Of the loans, Sberbank will supply $70 million and foreign investors will provide the remainder.

Oil executives at the news conference said Tuesday that it didn't matter whose plan was better, as long as the tender was fair.

"The entire tender process should be more transparent," LUKoil's Fedun said. "We want to know exactly how they won."