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. Last Updated: 07/27/2016

Little Oil Company Fights Big Arctic War

USINSK, Komi Republic — About 200 kilometers north of the Arctic Circle is a petroleum war zone where Severnaya Neft is determined to leave its mark.

Severnaya Neft isn't a LUKoil, a Yukos or another typical vertically integrated oil company that acquired its assets through the privatization schemes of the 1990s. The company insists that it also isn't like many of the small oil producers, leftovers from the industry's consolidation that look set to wither or be bought up.

"This company is in a unique position between these two layers," said Severnaya Neft general director Alexander Samusev, whose hair — white, slightly long and swooshed back — is reminiscent of that of a mad scientist's. His mathematical training, which he now uses to run investment models, only enhances the effect.

Since its inception in 1994, Severnaya Neft has quietly concentrated its operations in the Komi republic's area of the Timan-Pechora region. Timan-Pechora's oil and gas reserves have attracted the likes of international energy company TotalFinaElf and LUKoil, which has plans to invest $4.7 billion in the region's development.

Severnaya Neft was forced into the limelight a couple months ago when it won a tender to develop the Val Gamburtsev oil fields. Oil majors eager to add the fields with an estimated 470 million barrels of recoverable reserves to their assets cried foul. LUKoil, Surgutneftegaz and Sibneft, among others, had offered tender bonuses upward of $100 million, while Severnaya Neft bid just $7 million.

However, this isn't the whole story. Severnaya Neft had many advantages in the tender. For one, it already had built a drilling infrastructure in the region; a similar feat by one of the majors would have cost millions of dollars. Also, according to a memo by the Natural Resources Ministry, Severnaya Neft was the only participating company whose plan fulfilled all the requirements of the tender.

"We went through all the documents line by line to make sure everything was solid from a legislative point of view," Samusev said.

And how did the general director react to news of the oil majors' wrath and the resulting legal action?

"When I heard about LUKoil's lawsuit, I didn't even give it a second thought," Samusev said. "By now, I know what to expect from those people, and it just becomes part of my workday. I was more disappointed by Surgutneftegaz. I've been acquainted with [Surgutneftegaz general director Vladimir] Bogdanov for many years, and I thought we had feelings of mutual respect for each other."

While Samusev's words bespeak self-confidence, his gestures tell another story. When the uproar over Val Gamburtsev was reaching a peak, Samusev chain-smoked his way through a news conference.

Samusev said that after joining Severnaya Neft's board in 1999 and examining the company's balance sheet, he wasn't sure Severnaya Neft was going to make it. Among other things, the company had a bitter history with LUKoil.

LUKoil, Russia's No. 1 oil company, had bought the region's energy company KomiTEK earlier in 1999. Komineft, a subsidiary of KomiTEK, held 25 percent of Severnaya Neft. This stake was diluted — illegally, LUKoil claims — with a new share issue. Since then, LUKoil has been fighting a series of unsuccessful battles over its holding.

"We only see Severnaya Neft management in court," said LUKoil spokesman Dmitry Dolgov, referring to the terse relations between the two companies. The Russian press calls the dispute an outright war.

Another specter that haunts Severnaya Neft is its nontransparent ownership. Officially, Severnaya Neft is owned by a group of faceless offshore investment companies. One of the few main shareholders who has identified himself is Andrei Vavilov, a former first deputy finance minister whose reputation has been tarnished by a series of scandals. Vavilov has been accused of using government funds to put together deals for oligarchs in the late 1990s, a time when the federal budget was short of cash.

It is difficult to determine whether the tug-of-war for oil is a personal vendetta between Vavilov and LUKoil president Vagit Alekperov — as alleged in the media — or a struggle for economic dominance in Timan-Pechora.

If dominance is the goal, then Severnaya Neft is fighting an uphill battle, Samusev and his colleagues readily admit. Severnaya Neft is still only an extraction company, although it has already expanded further downstream with the construction of mini-refineries that will be able to produce diesel fuel. It also has already begun to incorporate activities that were earlier outsourced, such as crude oil storage and testing.

Samusev realizes that his company's greatest liability is its "monoproduct." If the price of oil suddenly falls, the company won't have any additional revenues coming from refining or distribution.

This may soon change. Severnaya Neft is hammering out an agreement with the Orel regional administration to build a refinery that would have a capacity of 2 million to 3 million tons of oil a year. This would be the first refinery to be built in the country since the fall of the Soviet Union.

"This is a new oil company that started with absolutely nothing," said Andrei Iskov, a lead oil field supervisor with Severnaya Neft, standing against the backdrop of the Baganskoye field, a swamp swirling in shades of brown, white and blue, 50 kilometers from Usinsk.

The problems faced by small oil producers are numerous. Imported equipment is prohibitively expensive. Domestically produced machines and monitors are unreliable. Roads are costly and difficult to build, and most sink into the swamp in a matter of months.

The list of challenges seems endless, but Iskov remains optimistic.

"We began with this one oil field and grew from here," he said.