Russian Oil Industry
The modern Russian oil industry first began to take shape in 1992 with the creation of the first vertically-integrated companies - LUKoil, Surgutneftegaz, YUKOS and Rosneft, with the latter remaining a state-own company. In 1994, another set of production and refining enterprises were distributed among a new group of companies - Slavneft, SIDANCO, Eastern Oil Company (VNK) and ONACO. Two more were set up the following year - Tyumen Oil Company (TNK) and Sibneft.
|Company||Oil extraction, thous. tons||Notes|
|YUKSI||65,000||--||YUKOS and Sibneft|
|LUKOIL||53,000||63,371||Including KomiTek, LUKOIL-Perm, RITEK, LUKOIL-AIK|
|YUKOS||--||44,719||Including East Oil Company|
|Tyumen oil company||24,500||36,872||Including Chernogorneft (TNK-Nizhnevartovsk), Kondpetroleum (TNK-Nyagan) and ONAKO|
|Tatneft||21,000||24,448||Controlled by the government of Tatarstan Republic|
|Sidanko||20,000||8,224||British Petroleum participation|
|Sibneft||--||16,322||Controls Slavneft cash flows|
|Bashneft||12,261||Controlled by the government of Bashkortostan Republic|
|Slavneft||11,930||Federally owned (10 percent shares belongs to Belarus)|
|RAO Gazprom||9,915||Controlled by the Federal Government|
|9,244||Small enterprises with Russian investments, total|
|21,012||Small enterprises with foreign investments, total; incl. those extracting more than 500,000 tons/year|
By the mid-1990s the oil sector had been split up into a number of larger and smaller oil companies, which by sometimes mysterious ways came under the control of a handful of oil barons. The largest of these new oil companies were LUKoil, Yukos, Sibneft, Rosneft, Tatneft, Sidanco, KINEF (Surgutneftegaz / Surgut), Slavneft, and Tyumen Oil (TNK).
- Lukoil, formed in 1993, was the largest of Russia's newly integrated oil companies, with estimated reserves of around 8 billion barrels. In 1995, the company produced 1.1 million barrels of crude oil per day, and had four refineries with a total refining capacity of 470,000 barrels per day.
- Yukos was the second largest producer, with reserves of around 7.3 billion barrels. The company produced 719,000 barrels of oil per day in 1995. From the company's three refineries, with a combined capacity of 653,000 barrels per day, 1994 refining throughput was 363,490 barrels per day. Yukos, one of the largest oil companies in the world, produced more oil than Sibneft and Sidanko combined, yet control of the firm cost a Russian bank only $159 million.
- Surgutneftegas was the third largest producer, with reserves estimated at almost 5.5 billion barrels. In 1995 production averaged 669,000 barrels per day while refining throughput was 243,000 barrels per day [the company had one refinery with a refining capacity of 386,000 barrels per day].
- Sidanko, with reserves estimated at just over 6.5 billion barrels, had three refineries. Crude production for 1995 averaged 459,000 barrels per day, and refining throughput averaged 400,000 barrels per day. The company was the largest of Russia's refiners by 1996, with a capacity of 790,000 barrels per day.
- Tyumen Oil Company (TNK), the newest company, produced 456,000 barrels of crude per day in 1995. The company owned one refinery, with a capacity of 360,000 barrels per day. In 1995, its refining throughput averaged 148,000 barrels per day. Its reserves were estimated at 6.5 billion barrels. On the heels of Yeltsin's re-election in 1996, the Russian government placed the Tyumen Oil Company on the auction block. Alfa Group obtained 40% of Tyumen at a fraction of the company's value, allegedly relying on the company's allies at the highest levels of the Russian government. The terms of this process had been encumbered with ridiculous conditions which virtually guarantee that Alpha Bank, a group with close ties to the Cabinet, would win. Analysts greeted accusations of a rigged auction for Tyumen with little surprise, saying that if true, the Tyumen sale follows a long line of staged auctions that have prevented real competition for the purchase of stakes in Russia's most attractive enterprises.
- Siberian Oil Company (Sibneft) owned one refinery and has reserves estimated at 2.9 billion barrels. Production in 1995 averaged 409,000 barrels per day for the company, while refining throughput was 330,000 barrels per day. Its refining capacity is 524,000 barrels per day. Oneximbank head Vladimir Potanin organised a loan of $2 billion in exchange for shares of the Boris Berezovsky company due to be privatised. This is how Berezovsky and Alexander Smolensky gained the majority of shares of Russia's seventh biggest oil company, Sibneft.
- Slavneft had two refineries and production of 266,000 barrels per day in 1995. One refinery was located in Belarus. The combined refinery capacity was 670,000 barrels per day as of 1996.
- Rosneft had three refineries, with 477,000 barrels per day combined capacity in 1996. Reserves were estimated at just under 3.3 billion barrels. Production averaged 254,000 barrels of crude oil per day while refining throughput was 97,700 barrels per day in 1995.
- The three smaller companies - Eastern Oil Company, Orenburg Oil Company (ONAKO), and Komitek - each had one refinery. In 1995, Eastern Oil Company's production averaged 224,000 barrels per day, while refining throughput was 110,000 barrels per day. ONAKO's production averaged 144,000 barrels per day while its refining throughput was 88,000 barrels per day. Komitek's production averaged 89,000 barrels per day while its refining throughput was 54,000 barrels per day.
By the dawn of the new century the largest foreign investment projects in Russia were taking place on Sakhalin Island at the far eastern end of the country. Seven oil and gas development projects, and related pipelines and infrastructure, were planned to take advantage of the enormous subsoil hydrocarbon resources off Sakhalin in the Sea of Okhotsk. ExxonMobil, Shell and BP are a few of the energy companies that have had some level of activity in the Sakhalin region. In 1998 the Alliance between JSC NC Rosneft (25.5%) and PJSC NC Rosneft - Sakhalinmorneftegas (25.5%) and BP (49%) under Sakhalin V was formed. In 2001 Sakhalin IV went under the Agreement on the Alliance between JSC NC Rosneft/PJSC NC Rosneft - Sakhalinmorneftegas and BP. More than $5 billion had been invested through 2006 in the Sakhalin II consortium, and in September 2005 ExxonMobil celebrated the first production of oil at its $12 billion Sakhalin I venture.
The performance of top major Russian oil companies that dominate the industry is highly varied. The lack of a robust 'independent' sector among Russian producers is seen as a significant impediment to exploitation of resources located in a very large number of discovered but undeveloped fields.
Mikhail Khodorkovsky, CEO of Yukos, acquired state-owned assets during privatization, but adopted open and "transparent" business practices as part of his strategy to build Yukos into a major global energy company. Yukos and Sibneft on 19 January 1998 announced plans to merge. The new company, Yuksi, would have overtaken LUKoil as the largest Russian oil company and would have become the third-largest private oil producer in the world. Yuksi will also include the Eastern Oil Company, in which Yukos has a controlling stake, and the East-Siberian Oil and Gas Company, which is affiliated with Sibneft. Prime Minister Chernomyrdin welcomed the merger of Yukos and Sibneft, saying that "Russian companies should compete [abroad], but within Russia they should agree between themselves." Boris Berezovskii, a major investor in Sibneft, said that "at last Russia has rejected the idea of demonopolization, which does not correspond to the spirit of the times." But the two sides aborted merger talks in May 1998 amid differences over strategy.
In 2002, the two largest Russian oil companies, Yukos and LUK oil, which ranked first and third in market capitalization on the Russian stock market, revealed their ownership structure and identified the exact amounts of shares owned by their top managers.
In 2003 the Kremlin became aware of negotiations between Mikhail Khodorkovsky of Yukos and several foreign companies (Chevron-Texaco and Exxon-Mobil) concerning the sale of a major piece of the Russian corporation. Khodorkovsky was arrested in October 2003 on charges of tax evasion, embezzlement, and fraud. In July 2003 Moscow audited Yukos and levied a charge of $US 3.5 billion against the company, a sum that skyrocketed to US$ 28 billion by 2005. These events forced the auction of Yukos, with the majority of the company's shares engulfed by Rosneft, which subsequently became Russia's largest oil company.
On 03 February 2004 core shareholders for Russian oil majors Yukos and Sibneft signed an initial protocol on reversing their planned $13 billion merger. Combined into one entity, YukosSibneft [YukSi], the company would have become Russia's largest oil firm, with an estimated production of roughly 2.4 million barrels per day. The merger, first announced in 1998, was announced publicly by the two firms in April 2003. In November 2003, Sibneft backed out of the deal following the arrest of Yukos president Mikhail Khodorkovsky. In 2005 Gazprom purchased the private Russian oil company Sibneft for $13.1 billion, in the largest-ever merger in Russian corporate history. Gazprom gained a controlling stake of 50 percent of the shares in midsized oil producer Slavneft when it bought Sibneft from Roman Abramovich in 2005.
LUKoil is the largest Russian oil business group, with annual turnover of over $60 bln. LUKOIL Group produced 95.235 million tonnes of oil in 2006 [of which 89.561 million tonnes of oil was produced inside Russia], or 1.926 million barrels per day [including 1.811 million barrels per day produced inside Russia]. A leader among Russian oil companies for openness and transparency, it was the first Russian company to receive full listing on the London Stock Exchange, and is the only private Russian oil company whose share capital is dominated by minority stakeholders. It had the largest trading volumes among foreign companies traded on the London Stock Exchange (IOB) in 2006. Lukoil claims 0.3% of global oil reserves and 2.3% of global oil production, with 18.6% of Russian oil production and 18.1% of Russian oil refining. It claims to be the 2nd largest oil company worldwide by proven reserves of hydrocarbons, and the 6th largest oil company worldwide by production of hydrocarbons. According to the data audited by Miller and Lents (USA), LUKOIL's proved reserves as of 01 January 2007 were estimated at 20.360 billion barrels of oil equivalent (boe), including 15.927 billion barrels of oil and 26.597 trillion cubic feet of gas.
Rosneft was once the Russian state holding company but was turned into an integrated company during the restructuring in the second half of 1995 after many of its producers, refineries, and product distributors were parceled out to other companies. The company continued to remain solely responsible for the government's share under Production Sharing Agreements drawn up with foreign companies. By 1998 it occupied only ninth place in oil extraction (more than 13 million tons of oil in 1997), with only one large oil-extraction enterprise -- Purneftegaz -- remaining with the company. Daily oil production rose sixfold, from 270,000 barrels in 2000 to 1.6 million barrels in 2006. The company claimed reserves of over 40 billion barrels of proved, probable and possible oil and gas reserves.
Initially, Rosneft was established in 1993 as a state enterprise on the basis of assets previously held by Rosneftegaz, the successor to the USSR Ministry of Oil and Gas. In 1995, a Russian government decree transformed Rosneft into an open joint stock company (OJSC). In October 1998, the Russian government decided to strengthen the Company's management so that Rosneft could once again become a key player on the Russian energy market. The government appointed the Company's current president, Sergey Bogdanchikov.
Yuganskneftegas, a Yukos unit based in Siberia, was purchased in December 2004 by Rosneft corporation for $9.35 billion dollars at an auction organized by the Kremlin. With its acquisition of Yuganskneftegas, Rosneft, catapulted itself to become the second-largest Russian oil company. Yuganskneftegaz is one of Russia's largest oil-producing enterprises and accounts for approximately 70% of Rosneft's oil production and proved oil reserves. It was integrated into the Company's production system at the beginning of 2005.
In July 2006, Rosneft conducted one of the largest and most successful IPOs in global financial history, placing about 15% of its shares on stock exchanges in London and Moscow. As a result, the Company raised USD 10.7 billion. In 2006, Rosneft had the largest proved oil and gas condensate reserves among the world's publicly traded oil companies. As a result of ongoing mergers and acquisitions program, in 2007, Rosneft became the world's largest company in terms of reserves. Igor Sechin, Chairman of the Board of Directors of Rosneft Oil Company, remained deputy head of the Administration of the President of the Russian Federation, a post he has held since 2002. Sergey Naryshkin, Deputy Chairman of the Board of Directors of Rosneft, became Deputy Prime Minister of Russia in 2007.
In 2006 the government's direct share in the equity of Rosneft was 0.000000009%%, with OJSC ROSNEFTEGAZ holding 75.16%, OJSC YUKOS Oil Company 9.44%, and with other entities holding the remaining 15.4%. In 2005 the government's direct share in the equity of Rosneft had been 0.000000011%, while the remaining 99.999999989% was owned by OJSC ROSNEFTEGAZ.
In April and May 2007, Rosneft significantly increased the number of production assets in its vertically integrated structure, including Samaraneftegaz in the Samara Region and Tomskneft in Eastern Siberia, as well as an additional five major oil refineries: the Kuibyshev, Novokuibyshev and Syzran refineries in the Samara Region and the Achinsk Refinery and Angarsk Petrochemical Company in Eastern Siberia. The Company also purchased a series of other significant assets. On July 12, 2007, Rosneft was declared the winner of an auction for Lot 17 of the YUKOS assets that were sold in connection with the company's bankruptcy proceedings.
TNK-BP is a leading Russian oil company and is among the top ten privately-owned oil companies in the world in terms of crude oil production. The company was formed in 2003 as a result of the merger of BP's Russian oil and gas assets and the oil and gas assets of Alfa, Access/Renova group (AAR). BP and AAR each own 50% of TNK-BP. The shareholders of TNK-BP also own close to 50% of Slavneft, a vertically integrated Russian oil company.
By 2007 TNK-BP was the third largest oil producer in Russia, after Rosneft and Lukoil, producing about 1.5 million barrels per day in 2007 (excluding a 50% interest in Slavneft, with Gazprom holding the other half). TNK-BP is also the third largest Russian oil company in terms of reserves. In 2007 the company produced on average 1.6 mboed. Including its 50% share in Slavneft, average production was 1.8 mboed. The independent audit conducted by DeGolyer and MacNaughton confirmed that as of 31 December 2007 TNK-BP's Total Proved Reserves were 8.225 bn bbl of oil equivalent.
TNK-BP's three Russian shareholders were Mikhail Fridman's Alfa Group, Viktor Vekselberg's Renova Group and Len Blavatnik's Access Industries. Founded in 1989, Alfa Group Consortium is one of Russia's largest privately owned financial-industrial conglomerates, with interests in oil and gas, commercial and investment banking, asset management, insurance, retail trade, telecommunications, media, technology, as well as other industrial-trade and special-situation investments. RENOVA Group is a stakeholder and strategic investor of leading Russian stand-alone and holding companies in the metallurgical, oil, machine engineering, mining, chemical, construction, housing & utilities and financial sectors.
Russian shareholders and BP each own half of the company. A group of powerful Russian industrial and financial tycoons - Mikhail Fridman, German Khan, Viktor Vekselberg and Len Blavatnik - became embroiled in a bitter dispute with BP over their TNK-BP joint venture. In September 2008 BP and Alfa Group/Access/Renova (AAP), the main stockholders of TNK-BP Company, agreed on revison of the structure of corporate management. The structure of the executive board will be changed: it will be comprised of representatives of BP and AAP (4+4) and three independent directors, not affiliated with any of the sides.
On 15 May 2007 Mikhail Gutseriyev, the president and the majority owner of mid size oil company RussNeft [not to be confused with Rosneft] was charged with "large scale illegal businesss activity", according to the Interior Ministry. RussNeft is one of Russia's top ten oil and gas companies, with a staff of 17,000, and produces 17 million tonnes of crude a year. Gutseriyev, whose personal wealth was estimated at almost $3 billion, was ranked Russia's 31st richest man in 2007 by Forbes. Gutseriyev had lost his job as the head of then state-owned Slavneft in a 2002 scandal, but in the process managed to acquire some of company's assets and built RussNeft.
The international trader Glencore International AG (formerly called Marc Rich & Co AG) became a shareholder of RussNeft's production subsidiaries, and RussNeft acquired some assets of the disgraced Yukos. Marc Rich had been indicted in the United States of wire fraud, mail fraud, racketeering, racketeering conspiracy, criminal forfeiture, income tax evasion, and trading with Iran in violation of trade embargo, before being pardoned on January 20, 2001 by President Bill Clinton [on his last day in office]. Rudi Giuliani's first big Racketeer Influenced and Corrupt Organizations Act (RICO) case was the much-celebrated 1984 case against Marc Rich, the wealthy oil trader. A close reading of the allegations shows that these also effectively reduce to tax charges. The core of the case is that Mr. Rich wrongly attributed domestic income to a foreign subsidiary. prosecution tactics later reined in by the Supreme Court and the Justice Department." By the time the Department of Justice had finally reined in their tactics, the Southern District prosecutors had misused RICO and its asset forfeiture provisions to induce Mr. Rich's companies into a $200 million guilty plea just to survive, and Mr. Rich had been labeled a racketeer and fugitive for not returning from his headquarters in Switzerland to be subjected to what he believed would be an unfair and prejudicial racketeering trial.
The investigative division of the Interior Ministry said in a 15 May 2007 statement that it was charging Gutseriyev with conducting illegal activity as part of an "organized group", wording strongly reminiscent of charges facing former Yukos chief executive, Mikhail Khodorkovsky, who has been jailed since October 2003 for fraud and tax evasion while his company was taken over by state-controlled Rosneft. If tried and convicted, Gutseriyev faces up to six years in prison, in a case reminiscent of legal battles for the now bankrupt oil firm Yukos. The Yukos case was widely seen in the West as targeted against its founder Mikhail Khodorkovsky for funding the opposition and as part of a Kremlin campaign to regain control of oil and gas assets.
Gutseriyev resigned as chief executive of RussNeft in late July 2007. The businessman said he had been forced to quit and dismissed the charges against him as "ridiculous and withstanding no criticism." The billionaire later said he would pass control of the holding to a new owner capable of resolving RussNeft's problems. This announcement coincided with reports that BasEl [Base Element], owned by Kremlin-friendly tycoon Oleg Deripaska, intended to buy Gutseriyev's former company. Gutseriyev fled Russia via Turkey and then was reported to have moved to London. In September 2007 the Moscow City Court upheld an arrest warrant for the fugitive businessman and a ruling to arrest 100% of RussNeft's shares. The court also banned any transactions with the frozen shares.
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