Yugansk Buyer Gets Oil and a Town

16 December 2004 11:17
Yukos is everywhere in this western Siberian town. Its local headquarters tower above the other buildings on Lenin Street, where even the New Year's lights are in the shape of the Yukos symbol, a green and yellow triangle.
Surrounded by bog and taiga forests, Nefteyugansk is the home of Yukos and its biggest production unit, Yuganskneftegaz, which the Federal Property Fund plans to auction off Sunday with a starting price of just $8.65 billion.

There is little doubt about who will win the auction, and oil workers joke that the new owner will have a lot of painting to do -- changing all the green Yukos signs to blue, the color of Gazprom, the favored bidder for Yugansk.

But a palpable tension fills the streets because residents know that the winner will not only buy Yugansk but also the town.

Residents only spoke grudgingly with a reporter and insisted that their last names not be published out of fear of losing their jobs once the unit is sold.

Everyone here depends on "the company," as the locals call Yugansk, and people are deeply worried about what will happen after the sale -- despite their ambiguous feelings for Mikhail Khodorkovsky, who has been locked in a conflict with the Kremlin for nearly a year and a half.

Yugansk workers said there is a big threat of disrupted production unless the new owner moves immediately to release money and sign suppliers' contracts. Many contracts expire at the end of the year and have not been renewed because accounts have been frozen since August.

At the wells, which lift 12 percent of the country's annual oil output, it is minus 40 degrees Celsius and an arctic wind is blowing in from the north, making it so cold that talking becomes difficult as jaws go numb and frost forms on eyelashes in minutes.

Nikolai's gold teeth sparkle as the cold Siberian sun reflects off the snow above the Prirazlomny field, one of Yugansk's biggest. He has worked for 18 years as an oilman in Siberia and proudly showed off the sauna, washrooms and new furniture that Yukos installed for the oil crew, which lifts about 500 tons of oil per day in some of the most hostile conditions on Earth.

"There is no money for supplies," he said. "We haven't got anything new -- we are working with what is in the warehouses and there is almost nothing left. All the contracts for next year have to be signed, but they can't be signed because there isn't any money. It is going to be very difficult for the first half of next year. There will be problems."

Inside the hut, he showed Yukos coats and uniforms that Khodorkovsky introduced at Yugansk. But when asked what people think of Khodorkovsky, he turned his blue eyes to the Yukos-supplied computer and fell into an embarrassed silence. "That's a very difficult question," he said, clearly not wanting to say anything.

The conflict between President Vladimir Putin and Khodorkovsky has dominated Moscow politics for more than a year, hammering investor confidence and sending Yukos shares tumbling when it became clear that the company would lose Yugansk in the biggest asset transfer since the 1990s.

But for the inhabitants of this oil town, as far away from Moscow to the east as London is to the west, there is uncertainty and even anger that the battle has dragged on so long, threatening the livelihood of oil workers, who earn 17,000 rubles to 25,000 rubles ($600 to $900) per month after taxes.

Khodorkovsky and a group of his close associates gained control of 78 percent of Yukos for about $309 million in 1995 and 1996 as the government sold off some of its most valuable assets to secure political support and cover a chronic cash shortage following the Soviet collapse. In one of the biggest asset transfers, the Kremlin effectively sanctioned the transfer of the jewels of the Soviet oil industry -- including Yugansk -- to a few well-connected managers and businessmen, the only people able to raise money as the economy hurtled from crisis to crisis.

Now some of those assets are being transferred again, this time to people with different connections.

In Nefteyugansk, some see Khodorkovsky as an adequate owner who has improved the company despite bitter conflicts in the 1990s with workers and minority shareholders. They believe Khodorkovsky is being punished for offending people in the Kremlin who are seeking control of Yugansk.

"It was important for someone to put him in jail and destroy the company. It appears to be an orchestrated campaign," said Sergei, who works on one of Yugansk's crews.

But others are angry with Khodorkovsky and the Kremlin for being willing to put the company and the town at risk in their politically tinged battle.

"Why did he poke his nose into other people's business? He knew what he was doing and he lost, and now this town is in crisis. There is no money here," said Mikhail, who works in a local restaurant.

Production Problems

Some of the country's biggest oil reserves lie under the bogs and pine forests of the Khanty-Mansiisk autonomous district, and geologists estimate the reserves of western Siberia could easily be double or triple current figures.

Senior government officials have said the sale of Yugansk will not affect the country's oil exports. But suppliers and contractors have not been paid since the producer's accounts were frozen, and there is very little left in the unit's warehouses for essential maintenance, workers said.

Yugansk has suspended investment and stopped paying contractors such as Schlumberger, whom it owes about $47 million, Yugansk general director Sergei Kudryashov said in his Nefteyugansk office. "All investment has been stopped since accounts were frozen in August," he said. "There is no money for cement, for drilling, for pipes, for contractors. This has already had an effect on oil production, and there has been a decline in production in the second half of November and in December."

Kudryashov, who said the decline is not due to winter, forecast that Yugansk production will total a little over 52.3 million tons this year and that he hopes to hand over Yugansk in good condition as long as he continues to get electricity and access to the state-controlled pipeline system.

"I am responsible for making sure there is no collapse here and there will be no collapse until Dec. 19," he said. "As long as I am here there won't be a collapse, but after that, how can I answer for what happens? It all depends on financing and how fast it can be restored."

The new owner of Yugansk will also have to move fast to decide where to send the 1 million barrels of oil per day lifted in Nefteyugansk because current production is sent to Yukos refineries in Samara and Yugansk reservoirs can hold only about one day of production.

An official at a top oil-field service company in town said the situation was critical. "It is like someone selling you a cow that the owner hasn't been able to feed for weeks. Whether the cow lives or not all depends on how fast you feed the cow: If you don't it will die, and if you do it will recover," said the official, who asked not to be identified, citing the sensitivity of the situation.

Oil Town's Story

Nefteyugansk was founded in 1967, about a decade after reports of oil in the bogs near the area's branch of the Ob River drew Soviet geologists, and it grew fast as its booming oil industry drew workers from across the country.

The territory was originally home to distant clusters of Russians and Khanty, the Siberian people whose name makes up the first part of the district's name, Khanty-Mansiisk, one of the country's richest areas because of its oil wealth.

The town's 107,000 inhabitants depend on Yugansk for their livelihood: The unit employs 6,000 workers directly and another 30,000 work for suppliers and contractors.

But it is struggling with a rapidly growing tax bill. The Federal Tax Service says it owes 146 billion rubles in back taxes and fines for 2000-2003, and its offices were searched last week by law enforcement agencies in connection with unpaid taxes for 1999. The unit also owes about 27 billion rubles in unpaid taxes for this year.

The company, whose headquarters are located next-door to the mayor's office, is by far the biggest local taxpayer, accounting for about two-thirds of the city's budget.

Yugansk's social program -- including a mortgage support program for workers -- was halted in September. Although the company has not laid off any workers, contractors have, and there are rumors of mass layoffs in town.

"No one knows what will happen. It is all uncertain. For me I don't care who the owner is -- Yukos or Gazprom. What I care about is getting my wages and stability," said Alexander, who has worked for more than 20 years on a Yugansk repair brigade and earns about 17,000 rubles per month after taxes.

"But in this situation it is not the top people who suffer, it is the workers and the town who suffer," he said. "Production is continuing but there is nothing new coming through, no supplies for the stores. It is very dangerous. Without all these parts, we can't replace them if they break. Of course that's dangerous. The problems will be afterward."

Workers said wages at Surgutneftegaz, just an hour's drive away, are higher and that some drillers have left to work for the company. Surgutneftegaz is managed by Vladimir Bogdanov, a Siberian oilman who once worked at Yugansk and is thought to be close to the Kremlin.

"Everyone is looking for work because there are cutbacks all over," said Maxim, 28, a Yukos employee who is looking for work.

Four senior managers left this month for other oil companies, Kudryashov said, declining to identify them.

At the central market in Nefteyugansk, traders stand in the open air selling fur hats, leather coats, fish and whole carcasses of mutton, frozen solid by the arctic temperatures.

"There is no money. People are simply not buying anything," said Abdul, a Tajik who has a stall at the market. "December is usually a good month for us, but it is much worse than last year. People don't have any money because of the situation in the town."

A one-room apartment in the center of Nefteyugansk costs 550,000 rubles to 600,000 rubles ($19,600 to $21,400), but demand has fallen and no one is buying, real estate agents said.

Yukos' influence remains everywhere, from the New Year's lights on the main street to the sports complex and even the main Orthodox church, both of which Yukos helped to finance. Bank Menatep St. Petersburg, which was formerly controlled by the biggest shareholder of Yukos, is the main bank in town.

The town's museum has a Yukos display, complete with a copy of the decree that created Yukos in 1993 and a picture of Khodorkovsky with a moustache. The museum and the display, however, are now in the dark after an unexplained power outage.

Sunday's auction will be the end of the Khodorkovsky period, and residents are wondering what will follow.

"Everyone is talking about the sale, of course. The production here is very important. Tell me, who will buy?" said Lyudmila, a resident of 35 years and a former teacher, wrapped up for her walk to the church. "Who are these Gazprom people, and are they good?"

(The Moscow Times, 12.16.2004)