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. Last Updated: 07/27/2016

Fresh Volleys Fired in Oil Fields War

MTSamusev called the decision to revoke the oil license illegal.
An all-out battle over crude intensified this week as oil companies Severnaya Neft and LUKoil fought the Natural Resources Ministry to hang onto fields won in government tenders.

Severnaya Neft, which won the three Val Gamburtseva fields just above the Arctic Circle, threw down the gauntlet Tuesday, angrily announcing that it had lost all confidence in Natural Resources Minister Vitaly Artyukhov. The ministry revoked its license to the Val Gamburtseva fields last week.

Then Wednesday, LUKoil president Vagit Alekperov met with Artyukhov to try to convince the minister to back away from a threat to revoke licenses to several Timan-Pechora fields because of slow development.

The field scandals and a series of other bureaucratic jams are threatening to hamper the development of Russia's oil industry and any potential expansion in production, oil experts said. The most lucrative fields were distributed to the oil majors during controversial privatization auctions in the 1990s, and few properties are now left. This leaves companies fighting tooth and nail for ground with substantial reserves that remain to be auctioned.

The scandals also show that, in the eyes of the ministry, not all oil companies are created equal, experts said. On the heels of the March tender for Val Gamburtseva, Sakhaneftegaz, a regional company backed by No. 2 Yukos, won the license to develop the Talakanskoye oil field in the Sakha Republic. The company couldn't come up with the funds but retained the license. Last month, a Chinese petroleum company offered to participate, and the details are still being hammered out.

At a news conference Tuesday, Severnaya Neft president Alexander Samusev said that Artyukhov had overstepped his boundaries by revoking Severnaya Neft's licenses. Also located in the Timan-Pechora region, the modest Val Gamburtseva reserves are estimated to be worth $6 billion over 30 years of development.

"He first said that the tender was conducted illegally and then formed committees after the fact," Samusev said. "We're taking this to the prime minister."

Artyukhov could not be reached for comment this week. Officials at the Natural Resources Ministry press service hung up on repeated telephone requests.

According to news reports, Artyukhov revoked the license because Severnaya Neft failed to pay $10 million to the regional administration for socio-economic aid. Severnaya Neft spokeswoman Yelena Prorokova maintains the company can't transfer funds until the administration earmarks them. This decision is expected to be made in the coming months.

Samusev said he has unsuccessfully attempted to find common ground with Artyukhov and would not abide with his decision since Nenets Governor Vladimir Butov, who runs the region where the fields are located, must sign the revocation before it goes into effect.

"I called Artyukhov and offered to meet with him," Samusev said. "He offered some alternatives, all of them based on us voluntarily giving up the license."

According to industry sources, Butov has yet to give his stamp of approval to Artyukhov's decision.

Soon after Severnaya Neft was awarded the licenses, losing contenders LUKoil, Surgutneftegaz, Yukos and others publicly cried foul and filed a joint lawsuit contesting the results.

Dmitry Avdeyev, oil analyst at United Financial Group, said it is not a matter of whether the mid-sized oil producer deserved to win -- the system was at fault. "It's obvious that the government would've benefited more from the hundred million-dollar bonuses offered by the majors than the $7 million Severnaya Neft gave," Avdeyev said, referring to the direct payments offered in the tender.

The current status of the license is about as unequivocal as Russia's court system, meaning that permission to pump oil from the fields lies in the legal netherworld between Russia's mass of regional courts, the ministry and the administration of the Nenets Autonomous Region.

News reports suggest that Artyukhov is trying to portray himself as a righter of all licensing wrongs, but his past record is far from stellar. Novaya Gazeta recently alleged that Artyukhov embezzled at least $17 million in his previous position as head of the Federal Road Fund.

Avdeyev from UFG said the system of awarding licensing is still far from perfect, even with the new minister on board. "It's had its share of mishaps in past months," he said.

While Severnaya Neft fights for Val Gamburtseva, LUKoil is engaged in a tussle for its own Timan-Pechora fields. An angered Alekperov emerged Wednesday from his meeting with Artyukhov. "I was forced to listen to unpleasant remarks," said Alekperov. "But we are hoping for an objective assessment of our activities and the progress of our projects in the Nenets region."

Artyukhov has scheduled a meeting for Friday to discuss LUKoil's progress on the licensed tracts.