Vladimir Shlyomin

In April YUKOS and Sibneft announced their merger and in May they finally approved it. Hence, a new company is entering the oil market. In the opinion of analysts, the deal will be legally completed by December 31, 2003. Preliminary estimates show that by production volumes this oil giant will become Russia’ s absolute leader and the fourth largest company in the world.

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t is not the first time that YUKOS and Sibneft proclaimed their alliance. In January 1998 they declared forming the holding YUKSI, which should have combined their production capacities and management structures. If these plans were implemented, then, as far back as 5 years ago there would have emerged a company that would be the first in the world by its discovered reserves of oil and that would been placed third by oil production. The registration of the deal was approved by the Anti-Monopoly Committee. But in May of that same year both companies said that their joint production activity was held up. As their press release explained, instead, they decided to focus on their "own restructuring due to the instability on the Russian Stock Exchange and persisting decrease of prices for oil".


Since then the situation in the oil sector improved significantly. The companies themselves also changed.
By assessing the new merger plan independent analysts believe that today the probability of success is more real. The oil market is now structured much better and, generally speaking, the tendency to business merging in oil industries has become typical all over the world. In the opinion of experts, in this given case a personal factor plays a very important role. YUKOS’ chairman Mikhail Khodorkovsky and president of Sibneft Evgeny Shvidler are seeking to head a company, which would be competitive not only on the Russian market but on the international ones as well. The mentality and psychology of the chief stockholders of both companies coincide in many respects. They are forceful in achieving their goals in all major business directions and, particularly, in everything that has to do with production growth, cost reduction, attraction of foreign stockholders, increase of capitalization.
On the surface, their main competitors met the news about YUKSI with calm.
Robert Dudly, the president and chief managing director of TNK-BP congratulated stockholders of YUKOS and Sibneft with this development. In his words, "the merger of oil companies is a normal process that has a positive meaning for the market".
President of LUKoil Vagit Alekperov did not conceal that the new large company would be a serious competitor of LUKoil in oil production, prospecting and development of new fields in Russia. What is more, in Alekperov’s opinion, the amalgamated company "was getting a very effective team of managers". Furthermore, the head of LUKoil stressed that such large-scale mergers attract the attention of the world business community and, thus, contributed to the growth of investments in Russia’s economy.
So, if this time nothing disrupts plans of stockholders at YUKOS and Sibneft, by the end of the current year Russia will get the largest private oil company, which by its proven reserves of oil will leave behind both LUKoil and Exxon Mobil. These reserves are estimated at 19.4 billion barrels of the oil-and-gas equivalent (according to the SPE methods).

Drilling Rig at the Sporyshevskoye Field (Sibneft)

YUKOS and Sibneft account for 29 % of all oil produced in Russia. In 2002 the total production volume of these two companies amounted to 754.2 million barrels of oil. Taking into account the share of SIBNEFT in SLAVNEFT’s oil production, this alliance will be producing about 2.3 million barrels a day.
The forthcoming changes will effect the sector of the oil refining industry as well. It is assumed that the property of the joint company will include 6 Russian oil refineries (the Omsk, Achinsk, Angarsk, Kuibyshev, Novokuibyshev and Syzran refineries), the complex Mazeikiu Nafta in Lithuania, shares in the Moscow and Yaroslavl refineries as well as in Belarus’ Mozyrsky refinery. In 2002 the refining production volume of these enterprises reached 421.8 million barrels of oil.
It should be added that the two participants of the alliance own Russia’s largest network of gas stations numbering over 2,500.
Not all politicians in Russia are welcoming the apparent trend of monopolization of the oil market. The State Duma’s deputy Vladimir Medvedev is convinced that the given process cannot be of any benefit to the country. "As a politician and as a specialist, I absolutely do not share the euphoria surrounding this super-giant", says Medvedev. "Assets of the two companies, i.e. their reserves, production capacities and resources, have been essentially handed by the State over to the private business so as this private business could ensure strategic interests of the State by effectively managing these assets". But, in the opinion of this deputy of the Russian Parliament, the situation is taking a different shape. He believes that YUKOS and Sibneft maintain their high efficiency not through rational operation of the fields, increase in labor productivity, restructuring, etc. They are just "skimming the cream off", insists Medvedev.


Critics point out: these two companies now have at their disposal high-flow-rate fields but while trying to produce the "easiest" oil, they are ignoring requirements of subsoil’s rational use. A number of fields, where watering reaches 90 % with a 20 % to 30 % recovery due to gross technological violations, is growing. As for hard-to-recover resources, YUKOS and Sibneft do not develop them at all. In the opinion of some experts, precisely such a selective approach permitted YUKOS to attain a 300% profitability in 2001. At the same time the company is decreasing volumes of development drilling, reducing investments in geological prospecting and allowing the accelerated retirement of wells.
Every major movement on the market of high-liquidity goods – that is what hydrocarbons are in this case – echoes immediately in many sectors of the economy. To producers of steel, pipes, equipment and machinery the emergence of even more powerful structures means an opportunity of obtaining larger orders. Increasing capitalization and combining financial resources of the oil companies will allow YUKOS and Sibneft to start new large-scale projects, which were beyond their power before: like, for example, arranging the oil corridor to China and Japan and new systems of transporting oil to Europe. Russian producers of pipe products are in need of such projects for a long time and particularly those, who are specializing in making pipes for trunk lines. Among them are the Chelyabinsk Tube-Rolling Plant, Vyksa Steel Works and Volzhsky Pipe Plant.
It is interesting to note that in 2002 pipe producers have not had an opportunity to use favorable conditions on the oil market for increasing sales. According to Andrei Deineko, the head of the metallurgical department at the Russian Ministry of Industry, the production of steel pipes oriented on the domestic market fell down 5.4 %. Deineko believes that the reasons were rather unusual: despite the oil production growth by 7 %, there was a tangible decrease of development drilling (by 16.8 %), exploration drilling (by 40.2 %) and bringing of new wells into operation (by 21.9 %). In part, these results prove skeptics’ fears. But, as oilmen themselves explain the reason for reduced pipe orders, the problem comes to specifics of planning. The distribution of funds for 2002 was done in accordance with companies’ budget plans, which were drawn up as far back as 2001, when prices for oil and, as a result, profits were low. But already in the first quarter of the current year the tendency changed in the opposite direction: from January through March Russia produced 1.32 million tons of pipes or by 12.4 % more as compared with the same period of 2002.
Right now it is difficult to predict how the emerging oil alliance will influence the market of pipes for the oil and gas sector. So far YUKOS and Sibneft have chosen suppliers on the basis of their traditional economic ties. However, there are no guarantees that the new major customer will maintain the long-standing bonds.