By Heiko Pleines

27-02-00 Yukos, Russia's second-largest oil company, controls four major refineries. The Novo-Kuibyshev, Kuibyshev and Syzran refineries, all situated in the region of Samara, are majority-owned by Yukos. The Achinsk refinery, situated in the Krasnoyarsk territory, belongs to the Yukos subsidiary VNK (the Eastern Oil Company). The four refineries together processed 25.5 mm tons of oil last year.

For a long time, Yukos has been planning to increase its control over the refineries along with other subsidiaries. As part of the single-share conversion program announced last summer, Yukos is now focusing attention on consolidation of its four refineries.
In mid-February, the company's board of directors approved the details of the conversion program. The program states that one ordinary share in the Achinsk refinery may be exchanged for one Yukos share, one ordinary share in the Kuibyshev refinery for 13 Yukos shares, one ordinary share in the Novo-Kuibyshev refinery for 0.6 Yukos shares and one ordinary share in the Syzran refinery for 30 Yukos shares. Preferred shares in the refineries will be swapped for half as many Yukos shares as in the schedule above.

The first stage of the consolidation program, during which Yukos accumulated a share of about 90 % in its oil-production subsidiaries, demonstrated that the rights of minority shareholders tend to suffer badly in single-share conversion programs. However, Yukos managers appear to have learned from the bad publicity that the conversion program has garnered so far (though perhaps they are only bluffing) and have announced that the minority shareholders who will be affected have already approved the plan.
Nevertheless, there have been rumours that the Achinsk refinery will not be a part of the conversion program because of a lawsuit filed by the Birkenholz offshore company. In 1997, Birkenholz concluded a contract for the sale of a 6.3 % stake in the Achinsk refinery to VNK for $ 21 mm.

After VNK was taken over by Yukos, VNK's new management refused to honour the contract and in the second half of 1998 returned the shares to Birkenholz, which sought payment through a court decision. In September of 1999, the Russian Prosecutor General's Office suspended an arbitration court ruling that required VNK to pay $ 22 mm to Birkenholz.
The Supreme Court of Arbitration submitted the case to the Moscow Court of Arbitration for retrial. The Moscow court then ruled in favour of Birkenholz.
Such quarrels over minority rights may have diverted the attention -- not only of the public, but of the Yukos management as well -- away from the real problems faced by the refineries. Last year, they were working far below capacity. The Syzran refinery did worst, with a capacity utilisation rate of about 50 %, while the Achinsk refinery did best with a rate of 75 %.
However, as FSU Oil & Gas Monitor reported Yukos' new arrangement with oil producer Orenburgneft, which appears to part of an attempt to take over the parent company Onako, allows for an increase in crude deliveries to Yukos' refineries in Samara.

Another pressing problem is that Yukos's ageing refineries are in urgent need of modernisation. Last October, the company announced that it plans to spend about $ 63 mm in the next two to three years to upgrade its refineries and expects to invest $ 265 mm more over the next 10 years. The planned upgrade would shift the refineries' output from fuel oil to lighter, more valuable products.
It also includes the conversion of the hydro-refining plant at the Kuibyshev refinery to light hydro-cracking and then, at a later point, the upgrade of the catalytic cracking plant. At the Novo-Kuibyshev refinery, first priority is to be given to the reconstruction of catalytic cracking operations and the conversion of the hydro-refining and Parex unit to light hydro-cracking and isomeration. And as was announced last December, $ 5.5 mm will be invested in the Achinsk refinery to revamp a reforming plant and to retool a plant for hydraulic diesel fuel treatment.

Compared with other refinery modernisation projects currently being implemented in Russia, Yukos' plans for the next three years are rather modest -- and definitely not enough to improve the company's position in the Russian downstream market. One reason for this is, of course, the problem of attracting the necessary finance. At least the first phase of refinery modernisation will have to be financed solely out of Yukos' own profits.
However, the company is not doing everything possible for its refineries. Instead, it is paying much attention to the issue of gaining access to additional refining capacity in neighbouring countries.
Yukos is delivering crude to Lithuania's Mazeikiu Nafta refinery and has reportedly developed plans to obtain a stake in the refinery. Yukos is also keen to bolster its presence in Ukraine. A former top manager of Yukos, Viktor Tarkhov, has been appointed to run the Kherson refinery as vice-president of the Moscow-based Alyans Group. Yukos plans to deliver 1.5 mm tones of crude to Ukrainian refineries and might be interested in taking part in the privatisation of oil-processing plants in that country. The sales are scheduled to take place this year.

In Russia as well, Yukos' business plans for refining activities go beyond its four major refineries. Last September, the oil company opened a new small-size refinery, with a capacity of about 4,000 bpd, in Strezhevoi, a town situated in the west Siberia, in the Tomsk region. Construction costs amounted to $ 20 mm.

This series aims at providing portraits of all FSU refineries. It will continue with a portrait of LUKoil's refineries.