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Petroleum Industry
Russian oil rumbles

The past six months brought rumbles of change to the petroleum landscape in Russia, with the arrest of a Russian oil “oligarch” and the disruption of a merger between two of the country’s largest oil companies. Although most observers say that geologists on the ground have not seen immediate effects, the seeming shift in the Russian government’s attitude toward its oil companies may herald future change in how western oil industry does business there.

“Russians are developing their own reserves and pushing out Americans.”
-Michael Cruson, Berry Energy, Golden, Colo.

The jailing last October of the head of Yukos Oil Mikhail Khodorkovsky, allegedly approved by President Vladmir Putin, sent a merger with oil company Sibneft tumbling. Sibneft pulled out of the deal in November, the day before the merger was to become final. A March 1 Moscow court decision has further squelched the merger by annulling Yukos’ shares issued to Sibneft, which facilitated the deal a year ago.

The merger would have combined Russia’s largest (Yukos) and fifth-largest (Sibneft) oil companies. The dissolution of the deal could be bad for Yukos, says John Grace, president of Earth Science Associates, a consulting company based in Long Beach, Calif. Yukos would have relied on the merger for production growth, using Sibneft’s younger fields farther north to alleviate the company’s dependency on one very large oil field, Priobskoye.

“Growth in Priobskoye is the largest single factor in [Yukos’] production in the last three years,” Grace says. Thus, the fallout could also affect Russia’s overall oil supply. Without Sibneft — which has brought in foreign service companies to manage its operations — Yukos’ own capital to continue developing Priobskoye is lacking, he says.

“In a year or half a year, the situation will stabilize,” says Gregory Ulmishek, a Russian oil expert at the U.S. Geological Survey, who thinks that the outcome of the Yukos-Sibneft deal will not impact Russian oil production in the long run. However, he says, “there should be and there is a kind of cautious feeling and mode in western companies.”

The purchase of a Russian oil company by BP last year may have been the height of western involvement in Russia’s oil industry and was certainly the largest to date, Ulmishek notes, at more than $7 billion (Geotimes, April 2003). Although western companies will remain much more active as consultants to Russian-owned companies, Ulmishek says, Russia still has issues that make business dealings far from transparent.

“U.S. companies have been active in Russia for a number of years, successfully or unsuccessfully,” Ulmishek says. But large western corporations have paid more attention to Kazakhstan and Azerbaijan, countries that “developed a legal system earlier than Russia did,” he says. Small western companies also have additional difficulty working in Russia because the country’s “widespread corruption [remains] pervasive on all levels,” Ulmishek says.

George Carlstrom, a geologist who works in Russia with the Discovery Group based in Denver, Colo., says that Russian companies remain lodged in old ways of thinking from the days of the state-run oil industry, effectively managed as one giant organization. “In the U.S. context, it’s all federal acreage,” he says of Russian oil fields, but “the government has more share in how you develop.”

Indeed, Russia may decide to return to a more centrally run oil exploration and production system, says Michael Cruson, vice president of Berry Energy in Golden, Colo., which is looking into opportunities in Russia. Cruson foresees a “rollback to Russian control,” more like the bureaucratic system in place before former Prime Minister Boris Yeltsin’s 1991 privatization efforts. Russian data has become more available to outsiders, but, Cruson says, “Russians are developing their own reserves and pushing out Americans; westerners are contractors, not equity owners.”

Robert Cluff, head of the Discovery Group, says he can imagine Russia melding past and present to develop a “state-run industry that runs in a quasi-private, capitalistic mode,” much like Saudi Arabia’s Aramco or Mexico’s Pemex. “We’ll see signals of that in the next nine months,” he says, for example, if the Russian government rolls together some oil companies or returns to setting drilling quotas.

In the meantime, Putin had a sweeping victory in Russia’s March 14 elections, and his government is pressing forward on building a controversial Russian pipeline to the Pacific coast of Nakhodka (far east Russia). Yukos is under investigation for fraud and two other high-level executives have been arrested. Mikhail Khodorkovsky, who remains one of the richest men in the world according to Forbes magazine, also remains in jail.

Naomi Lubick

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