Kondpetroleum finds new parent

by David Flanagan

Kondpetroleum's absorption into the Tyumenneft (TNK) holding appears to be good news for all concerned. Not quite a marriage of convenience, but the timing definitely suits both.
Kondpetroleum, previously a division of the troubled Sidanko group, has been bankrupt since around December 1998. Market observers know all about TNK's aspirations regarding Chernogorneft, but the take-over of Kondpetroleum may have come as something of a surprise. The company paid $ 52 million for Kondpetroleum at an auction held in Nyagan in the Khanty-Mansi district.
Kondpetroleum operates a crude production joint venture synonymous with its principal field, Kransnoleninskoye, in conjunction with Yugraneft. The company has a production-sharing agreement (PSA) covering this field, authorised by Russia's adoption of the PSA "List 1" earlier this year. The Krasnoleninskoye field includes three development areas: Talinsky, Yem-Yogovsky and Kamenny. Western classification standards indicate recoverable reserves at the field are around 609.5 million metric tons.
Kondpetroleum urgently needs funding to exploit these properties as it has been struggling operationally for some time. It is currently sitting on nearly 1,000 idle wells out of Sidanko's total of less than 2,500, a higher than ideal ratio. TNK estimates that it will have to drill an additional 4,000 wells in order to raise oil recovery levels to a satisfactory point. Also, there is a high gas factor. Furthermore, the water cut (proportion to oil) is also high, reaching around 88% in places, but TNK knows all about this kind of problem, as Samotlor has presented similar problems in the past. There is obviously little in the way of quick profits for TNK here.
The motive, however, is consistent with TNK's overall growth strategies, and in the context of the company's current situation, the timing of these acquisitions is shrewd. While the whole market has been mesmerised by the unfolding saga regarding Chernogorneft, a company larger than Kondpetroleum in terms of crude output -- but not, at around two-and-a-half times Kondpetroleum's size, vastly so -- TNK appears to have stuck to a policy of "business as usual", and kept its concentration upon expansion plans. Kondpetroleum will add around 10% to TNK's existing crude output and is therefore not an insignificant deal in the Russian market.
To illustrate, Kondpetroleum's monthly crude output has been in the region of 200,000-250,000 metric tons recently. This compares with for example, Komitek (now absorbed into LUKoil), which probably produces around 300,000 metric tons each month, roughly half as much again as Kondpetroleum. Both LUKoil and TNK want to upgrade production at their new acquisitions, and hence these figures will probably climb. Indeed, TNK believes that the output of Kondpetroleum could quadruple to over 10 million metric tons per annum, given its strong reserve base.
The clear trend among the integrated companies is for rapid development of crude output-generating assets, generally regarded as the profitable end of the oil business. LUKoil and TNK are the most evident protagonists in this process, but others surely harbour ambitions for expansion.
To complement the Kondpetroleum deal, TNK has also acquired the West Talinskoye field, a property adjacent to Kondpetroleum's Krasnoleninskoye field, with estimated reserves of 40 million metric tons, and plans to spend some $ 155 million on expanding output of the field to around 1.7 million metric tons per annum. The two fields will therefore be developed concurrently. TNK has stated that it will operate the field using technology provided by Halliburton Energy Services, Reda Pump and Centilift.
The Kondpetroleum take-over will succeed in raising TNK's profile, although in international terms, Kondpetroleum is not a very well-known entity and does not appear to export crude. The Sidanko subsidiaries which seem to have been most active in the export market are Udmurtneft, Saratovneftegaz and Varyeganneftegaz. The Kondpetroleum take-over may eventually allow TNK to jump up a rank in the integrated companies' league in terms of crude output, perhaps soon overtaking its nearest rival, Tatneft.