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. Last Updated: 07/27/2016

One Giant Leap for Yukos as Gas Goes Online

For MTThe strategic gas compressor station commissioned by Yukos in Luginetskoye, western Siberia.
LUGINETSKOYE, Tomsk Region -- Yukos finally commissioned a strategic gas compressor station in this West Siberian outpost Tuesday, a key step in its quest to become a major player on the domestic gas market.

"Oil is good; it's from where we started," Yukos CEO Mikhail Khodorkovsky said during the opening ceremony. "But for the company to continue to be successful, we need to produce gas."

The completion of the station's construction, which began in 1997 and cost $200 million, is a milestone for the Tomsk region, but its significance fades in comparison to the secretive deal Yukos, Russia's second-largest oil company, struck with gas monopoly Gazprom last November and only recently made public.

Although details of the deal are being withheld, at least this much is known: Gazprom has agreed to let Yukos pump natural gas straight into the nationwide pipeline system it controls. Until now, oil companies that extracted gas but could not clean or condense it were forced to sell it to Sibur, a Gazprom subsidiary that owns a majority of Russia's gas refineries.

Thanks largely to the new station and its deal with Gazprom, Khodorkovsky said Yukos plans to boost its annual gas production more than six times to 15 billion cubic meters by 2005, and even more if government liberalization plans for the heavily regulated domestic market take hold.

Officials at Vostokgazprom, a Tomsk-based company affiliated with Gazprom, said they welcome Yukos' move.

"There is more than enough demand to go around," said Vostokgazprom vice president Nikolai Kirillov.

Gazprom, however, stopped short of giving Yukos the freedom to market its own gas and sell directly to local consumers such as electricity producer Tomskenergo, which is gradually shifting from coal- to gas-based electricity generation.

This intransigence on the part of Gazprom underscores the company's vulnerability in the face of conflicting demands coming down on all sides. Gazprom subsidizes domestic prices, which hover in the range of $14 to $17 per thousand cubic meters, with exports to Western Europe, which are four to five times more expensive.

The government has embarked on a program to raise domestic tariffs, but in the meantime, Gazprom has been forced to scale back its exploration and development plans.

At the same time, the government has asked Gazprom to participate in the "gasification" of eastern Siberia, where most homes are heated by either coal or electricity.

Yukos' offer to sell its associated gas, which is a byproduct of oil extraction, is in some ways a blessing, because the purchase of cheap gas for the internal market allows Gazprom to sell more abroad.

Yukos' entry into the region may also be a curse because it further erodes Gazprom's status as a monopoly producer, said Valery Nesterov, an oil and gas analyst with the Troika Dialog brokerage.

"Gazprom is scared that Yukos could have offered a lower price," Nesterov said, explaining why Gazprom refused to let Yukos sell to customers directly.

Yukos officials were tight-lipped about the details of their gas contract, refusing to reveal the price and duration of the deal.

Yury Beilin, president of Yukos' exploration and production arm, declined to discuss the compressor station's profitability, but said Yukos' resulting ability to produce more oil from the Luginetskoye oil and gas condensate field makes the project worth it.

Once it is up and running at full capacity, the station will process up to 1.5 bcm of gas per year. Without it, this gas would have been burned on-site, releasing 85,000 tons of greenhouse gases.

The actual decision to build the station was made by Tomskneft in 1994, before Yukos bought its parent company, Eastern Oil, in a series of privatization tenders.

Construction began in 1997 but was subsequently put on hold because Gazprom refused to give Yukos pipeline access.

Yukos built a 200-kilometer link from the compressor station to the nationwide pipeline system but declined to disclose its cost.

"At first, we wanted to supply gas directly to Tomskenergo," Beilin said. "Gazprom replied to our request by offering us better terms if we sold to Vostokgazprom instead."

If Gazprom had taken longer to react, Yukos could have asked the Anti-Monopoly Ministry to intervene, he added.

Russia has about 20 independent gas producers, including major oil companies Rosneft, Tyumen Oil Co. and LUKoil, Nesterov said. While LUKoil looks more promising as a gas producer because of its potentially huge reserves in the Caspian Sea, Yukos has been more aggressive.

Despite its contract with Yukos, Gazprom does not seem to be playing favorites, said one oil industry official who wished to remain anonymous.

"We hope that Gazprom will treat all companies equally as more and more begin clamoring for pipeline access," he said.

Dressed in jeans and a denim jacket to protect him from the ferocity of Siberian mosquitoes, Khodorkovsky said Yukos would continue to fight for liberalization of the market.

"This fight is finding more support among the government, and even among Gazprom managers themselves," he said.

 Gazprom CEO Alexei Miller and Rosneft president Sergei Bogdanchikov signed an agreement outlining their intentions to join forces in developing the Kurmangazy field, located in the Caspian offshore, Rosneft said Wednesday.

Russia and Kazakhstan have agreed to create a joint venture to develop the field, and Deputy Prime Minister Viktor Khristenko on Wednesday recommended that Rosneft represent Russia's interests. Prime Minister Mikhail Kasyanov still has to approve it.

According to the agreement, Rosneft and Gazprom would split Russia's half of the joint venture between themselves.