LUKoil Mulls a Bid for Yugansk

By Catherine Belton
Staff Writer

The nation's No. 1 oil major, LUKoil, said Monday it could consider taking part in a sell-off of Yukos' main production unit, Yuganskneftegaz, if the sale was conducted via an open tender.
"If the tender is open, then it is our duty to our shareholders to consider any possibilities, including this one," LUKoil vice president Leonid Fedun told reporters, Interfax reported.
He added that, even though he was personally against it, other members of the LUKoil board could be considering a bid for Yugansk, which is being sold as part of the controversial legal onslaught against Yukos to cover outstanding back tax debts, currently totaling about $3.75 billion.
"I think it is better for us not to spend a lot of money on Yukos if it is sold, but to invest in other projects," Fedun said. "This is my personal opinion. But there are the opinions of other shareholders, other managers and other board members that could differ from my own."
He said LUKoil would make a final decision on whether to take part in the sell-off after the sale terms are disclosed.
Fedun's comments came exactly one year after the arrest at gunpoint of then-Yukos CEO Mikhail Khodorkovsky at a Siberian airport in the early hours of Oct. 25, 2003.
Khodorkovsky's arrest came amid an escalating conflict with the Kremlin as he appeared to challenge President Vladimir Putin's power base and refused to back down, even after the arrest of one of his closest associates, Platon Lebedev, last July.
Over the year that he has been held in Matrosskaya Tishina prison on charges of heading an organized crime group involved in large-scale fraud and tax evasion, the state's legal onslaught against Khodorkovsky, his associates and Yukos has heralded a massive shift toward greater state dominance over the economy and has proved the linchpin for increasing Kremlin control over political life.
Once the darling of Western financial markets, Yukos' market capitalization has plummeted from $32.3 billion just before Khodorkovsky's arrest to $7.7 billion now.
As Yukos nears breakup under the weight of growing back tax claims and a company-wide accounts freeze, state-controlled gas giant Gazprom has gained in power, moving aggressively into the oil sector by merging with state-owned Rosneft. The combined force of Gazprom and Rosneft is considered the main contender for Yugansk, which produces more than 60 percent of Yukos' total output.
Even though Gazprom CEO Alexei Miller has said Gazprom does not intend to take part in the sale, which is planned for around the end of November, Deputy Economic Development and Trade Minister Andrei Sharonov has said companies affiliated to the gas giant could bid.
If its bid succeeds, Gazprom would not only be the world's biggest gas producer, but would also be in control of about 2 percent of global oil output.
The market was still waiting Monday for an announcement by the Federal Property Fund on the terms of the sale. In a sign of continued infighting over the sale terms, an expected announcement on the sale Friday was postponed. Federal Property Fund spokesman Vladimir Zelentsov said Monday he had no information on when it could be announced.
The Justice Ministry has said Dresdner Kleinwort Wasserstein valued Yugansk as being worth $10.4 billion. But the investment bank later released copies of its full report, showing that it considered that sum "overly conservative" and that it valued the unit at between $14.7 billion and $17.3 billion. But two recent Interfax reports, citing different unnamed officials, put the government's price tag as being even lower, at $3.75 billion and $4 billion, roughly equal to Yukos' outstanding tax debts and raising investors' worst fears of a fire sale to insiders.
LUKoil spokeswoman Olga Sergeyeva said Monday she considered it a done deal that the unit would be sold off for about $4 billion. "They've already said the price is going to be equivalent to its tax debts," she said. LUKoil's new partner, ConocoPhillips, which this month bought a 7.6 percent stake in LUKoil, would not be involved in any decision to take part in the Yugansk sell-off because it does not yet have the 10 percent stake required for a seat on the board, she said. Conoco declined to comment.
Analysts doubted, however, that LUKoil would risk its reputation by bidding for the unit. "LUKoil takes its goal of being an international oil company with a high rating very seriously and dealing in stolen goods would not support that," said Adam Landes, oil and gas analyst at Renaissance Capital, adding that he did not think LUKoil had enough funds to take part in the sale if it was conducted openly.
Yukos' owner, Group Menatep, has threatened that any buyer of Yugansk would face "a lifetime of litigation" in international courts for purchasing what it says would be illegally expropriated property.
As jockeying ahead of Yukos' breakup mounted, a further blow was dealt to the company's former status as the darling of Western financial markets on Friday when the CEO of oil field services giant Schlumberger, the company that helped Yukos acquire this reputation, said his firm was withdrawing equipment it provided to Yukos because he feared it would be unable to sustain activity.
A Yukos spokesman said Monday that Schlumberger had removed part of the equipment it provided to Yugansk. He said the company had been unable to pay any of its service providers for the past two months due to mounting back tax payments and the accounts freeze.
Schlumberger has largely been credited with providing the technology that fueled Yukos' massive annual surges in production of 10 percent and more since it was hired in 2000. Yukos' output growth blazed a trail for other Russian oil majors to follow suit in hiring Western oil technology, as the nation's overall output boomed.
Now, Yukos says, without the equipment Schlumberger provided, it will be unable to continue its growth. It will, however, be able to maintain production at current levels for several months to come, Yukos spokesman Hugo Erikssen said.
For Yukos to maintain current production levels from its existing wells at 1.7 million barrels per day, the company just needs to continue receiving electricity. The equipment removed by Schlumberger was used for so-called "fracturing" processes aimed at triggering intensive production hikes, a Yukos source said.
Yukos' cash crunch has also forced it to cut back exports by rail to China due to its inability to pay transportation costs. The company announced at the end of September that it had to cut back exports to CNPC. The Chinese oil giant said Monday it was demanding compensation for losses incurred by the supply cuts. Yukos transport and logistics official Alexander Sapronov told Interfax the company had been forced to stop trading with CNPC because the delivery route was inefficient.

(From The Moscow Times, 26.10.2004)