Russian gas giant OAO Gazprom confirmed yesterday what everyone in the international oil and gas business suspected — that it will control Yuganskneftegaz (“Yugansk”), which was formerly the main oil-production unit of OAO Yukos. Here are the earlier posts about the Yukos chapter 11 case in Houston and the Russian government’s auction of Yugansk.
Gazprom’s control of the Yugansk unit — which generated 60% of Yukos’ oil and gas production — is a key development in the Russian government’s plan to transform Gazprom into a major international oil and gas company on the level of Exxon Mobil Corporation and other majors.
When the Russian government announced the auction of Yugansk earlier this fall in order to fund payment of a portion of Yukos’ alleged $28 billion tax debt, Gazprom — which is 60% owned by the Russian government — was generally considered to be the odd’s on favorite to be the winning bidder at the auction. However, Gazprom’s financing for its bid through Western financial institutions was undermined last Thursday by the entry of a TRO in Yukos’ surprise chapter 11 case in Houston. That TRO enjoined Western financial institutions from participating in financing an acquisition of Yugansk.
Nevertheless, Russian officials scurried around last Friday and Saturday to arrange alternative financing, and Baikal Finance Group — a new special purpose entity controlled by Russian individuals with close ties to Gazprom — submitted the winning bid at the auction. On this past Tuesday, Russian oil company OAO Rosneft — a Russian government-controlled company that Gazprom is acquiring in a previously announced merger — announced that it had purchased Baikal Finance. That announcement confirmed Gazprom’s effective control of the Yugansk unit.
By controlling the Yugansk unit, Gazprom adds a prodigious oil production unit to its already formidable gas production unit. Already the world’s largest producer of gas, Gazprom will now become one of the world’s biggest oil and gas companies with combined reserves that are about six times more than Exxon Mobil’s. Russia is second in world oil production after Saudi Arabia.
Nevertheless, the Kremlin’s heavy-handed handling of Yukos and its valuable Yugansk unit may have far reaching implications for Russian business interests in the international business community. The Russian government’s willingness to elevate its control of Russian oil and gas interests over the promotion of Western business interests is a serious deterrent to future Western investment in Russian companies. Yukos is now the poster boy of that policy — once a darling of Western investors, the Russian government’s actions have now rendered Yukos essentially worthless. It’s hard for the Moscow Chamber of Commerce to put a happy spin on that story in attempting to attract Western capital.
Moreover, Gazprom faces huge obstacles in maintaining a presence as a major oil and gas company. Although it is currently pumping huge quantities of natural gas, replacing that gas is not easy. Inasmuch as most of Gazprom’s reserves are in remote regions that require technological expertise that Gazprom does not currently possess, Gazprom will face increasing production costs as it attempts to maintain or increase its production levels. During the first half of this year, Gazprom’s net income fell 13% to $3 billion even though its revenue rose 12% to $15.7 billion. By way of comparison, Exxon Mobil earned $11 billion in the same period on revenue of $138 billion. Consequently, if oil and gas prices dip, Gazprom’s profit margins could be squeezed even further.
Meanwhile, Houston-based ConocoPhillips announced an agreement yesterday with Gazprom to study at development of the potentially lucrative Shtokman gas field in the Barents Sea. The study will evaluate the feasibility of producting and transporting liquefied natural gas from the field to the United States and European markets.
Discovered in 1988, The Shtokman field is estimated to contain more than 100 trillion cubic feet of gas. Inasmuch as it is located approximately 350 miles off the northwest coast of Russia in the South Barents Sea Basin in water depths of 1,000 feet, the Shtokman field will require at least three or four phases for full field development.
Earlier this year, ConocoPhillips became a large equity investor in Lukoil — another Russian oil major — and became a 30 percent partner in another exploration joint venture with Lukoil. ConocoPhillips announced earlier this week that it is increasing its equity stake in Lukoil to 10% by the end of the year.