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Last Updated: Friday, 17 December, 2004, 06:23 GMT
Yukos and the geopolitics of oil
By James Arnold
BBC News business reporter

Yukos headquarters
This year's events have left Yukos looking pretty small

For sale: an oil company, heavily tarnished. One careless owner, who may sue the successful buyer. Price: surprisingly low to the right bidder. Non-Russians need not apply.

Tempted? Probably not, but then the Russian Government isn't really looking to draw a crowd to the 19 December auction of Yuganskneftegas.

Three companies are interested in Yuganskneftegas; another may pitch in at the last minute; but the likeliest winner - gas monopoly Gazprom - is not in serious doubt.

Much has been made of the political implications of the hounding of Yukos, the company that owns Yuganskneftegas.

In fact, the real interest is economic: the dismantling of Yukos and the aggrandizement of Gazprom are just part of the biggest shake-up in the Russian oil business in more than a decade.

Close call

This weekend's auction is not exactly a nail-biter.

One bidder is Gazprom, possibly backed by a syndicate of Western investment banks.

Top Russian oil producers
Two other potential bidders - Intercom and First Venture - are reckoned by the sporadically-informative Moscow rumour mill to be fronts either for Gazprom or Surgutneftegas, a loyal oil firm which may join in to make up the numbers.

The starting price is some $8.6bn (4.4bn; 6.4bn euros) roughly half the official government valuation of Yuganskneftegas, and well below the $20bn minimum that Yukos is sticking to.

Yukos, which depends on Yuganskneftegas for 60% of its output, tried to scupper the sale with a declaration of bankruptcy in a US court.

But even Yukos' supporters are holding out little hope: Tim Osborne of Menatep, which represents Yukos shareholders, said: "I still think that the auction will go ahead and that it will be sold at the price that everybody's talking about."

Wicked, or incompetent?

Most commentators on the affair, particularly in the West, have tended to focus on the political.

Two main theories are in circulation:

  • Vladimir Putin
    Is Putin pulling the strings, or a helpless bystander?
    The conspiracy theory argues that President Vladimir Putin hates Yukos, and especially its founder, Mikhail Khodorkovsky, because of their support of opposition parties.

    Fundamentally suspicious of big business, Mr Putin has chased out or brought to heel the clique of "oligarchs" that ruled the roost under his predecessor, Boris Yeltsin. Yukos proved an unusually awkward customer, and so is being dealt with especially harshly.

    The implication of this theory is that Yukos is only the most egregious of many cases; other businesses will be brought to book, if not necessarily for funding opposition parties than for not toeing the Kremlin's line.

    A recent decision to insist on payment of back taxes by mobile operator Vimpelcom has been held up as the next case study.

  • The cock-up theory, meanwhile, is similar in the sense of seeing a politically-inspired government campaign against the oligarchs.

    But it attributes the curiously protracted and secretive campaign against Yukos to a struggle for influence and money among various groups. Mr Putin, the theory goes, is not directing matters, because events have spiralled beyond the government's control.

    Cold comfort

    Neither theory is especially comforting for Russian business. The government is either wicked or incompetent, or both.

    Gazprom headquarters
    As Yukos shrinks, Gazprom gets bigger
    More persuasive, however, is a third explanation - one which has, if anything, even more troubling implications for economic reform.

    On 2 November, Gazprom registered a new subsidiary, Gazpromneft, whose purpose was to gather together the firm's modest oil resources. (In 2003, the company produced just 16,000 barrels per day of oil, less than 1% of the output of Yukos.)

    Gazpromneft is to be the vehicle for the previously-announced takeover of Rosneft, a once-mighty state oil producer now reduced to medium size.

    Building a champion

    The merger of Gazprom and Rosneft will have three main effects.

    First, it will create a company with the potential to produce one million barrels per day of oil within the next few years.

    Second, it will leave Gazprom fully state-owned, diluting private shareholders - currently 62% of the total - to a minority.

    Third, Gazpromneft will be the perfect vehicle for the takeover of Yuganskneftegas, which will double its potential output and make it the country's biggest oil producer by far.

    Money talks

    The question is why.

    The Kremlin insists its interference in the sector is minimal, and that oil companies are simply consolidating in response to global pressures in the industry.

    Yukos shares
    This strikes most observers as disingenuous. "Companies like Rosneft don't buy a new photocopier without asking the government first," sneers one analyst.

    From Moscow's point of view, there are powerful economic reasons for consolidation.

    The energy business is booming: a recent World Bank report found that profit margins in the Russian oil sector were up to 36%, and 64% for gas, compared with close to zero in the West.

    Gazprom, behemoth though it is, is being chipped away at by hungry private firms, whose share of gas production has risen from 8% to 12% in the past five years.

    Gazprom's mature gasfields are in decline: to replenish production, it needs access to the plentiful gas produced - and in many cases, simply burned off - by oil companies.

    Power games

    There is a bigger dimension, too.

    Russia has long used its dominance of the ex-Soviet energy infrastructure - pipelines and pumping stations, storage deports, refineries and ports - to exert control over its neighbours.

    Yuganskneftegas
    Private firms are the main source of growth in Russian oil
    Under Mr Putin, these measures have been emphasised: he has, for example, signed deals to route almost all present and future energy exports from Kazakhstan and Turkmenistan.

    Increased muscle for Gazprom means increased geopolitical influence, the theory goes.

    And with Europe heavily reliant on energy imports - the new East European EU members buy 75% of their gas and 80% of their oil from Russia - Russia will increasingly be able to exert that influence westward.

    Back to the USSR

    Fair enough, up to a point.

    All governments fret about their energy security, especially since September 11, 2001. The West might be relieved that its energy imports are to come from a solid, massively-capitalised Gazprom than from a rabble of flakey privateers.

    But for those looking for progress from Mr Putin, the development is a dismal one.

    Russia spent much of the first half of the 1990s dismantling its state oil apparatus, and then gathering the fragments into more or less viable corporations. Now, that process seems to be going into reverse.

    A return to quasi-ministerial control would be a blow to the industry's efficiency, and is scarcely calculated to spread the wealth of the industry most efficiently to the areas that need it.

    Nor is Yukos expected to be the end of Gazprom's ambitions: an obvious next step would be to absorb Transneft, Russia's vastly influential pipeline monopoly.

    The fall of Yukos was the story of 2004; next year, it will be the rise of Gazprom.




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