Yukos chairman sees Western take-over of Russian oil industry

As Mikhail Khodorkovsky sees it, much of Russia's huge oil industry is about to fall into the hands of Western oil giants. The chairman and CEO of Yukos, Russia's second-largest oil company, says that "within five years, only one or two major Russian oil companies will remain independent; the rest will be acquired by Western oil companies."
In an interview here on the sidelines of an oil summit, Mr Khodorkovsky said "this process has already started." He cited recent moves by such companies as BP, which earlier this month raised its stake in Sidanko to 25 % from 10 %, and TotalFinaElf, which is close to signing a deal to acquire majority rights to a Siberian oil field, as evidence that the oil rush is on in Russia.

Other companies are in the midst of negotiations, and Russian companies are getting offers, with European companies leading the charge, Mr Khodorkovsky said. US companies are several years behind, having started showing an interest in Russian companies only after Sept. 11, he said. The ensuing instability in the Middle East has made Russian oil more attractive.
"There is nothing bad in all this," Mr Khodorkovsky said. "Their [Western oil companies'] presence increases our value as well," he said, noting that increased foreign competition for Russian assets will continue to push prices higher.

Western oil companies have become eager to invest in Russia lately because of the improving investment climate under President Vladimir Putin, turmoil and investment restrictions in the Middle East, and a dearth of opportunities elsewhere. Still, a wholesale buyout of Russia's oil industry seems far-fetched, if only because senior Western oil executives say they intend to move only gradually into Russia, a country they still consider risky. Issues related to taxation and laws governing investments in the Russian energy sector are still unresolved, for example.
By talking of foreigners taking huge chunks of the Russian oil sector, Mr Khodorkovsky may be using scare tactics to defenddomestic producers against serious encroachment by foreign oil companies. He has lobbied hard in Russia to prevent foreign oil companies from getting approval for production-sharing agreements, a type of contract with host governments that is widely used by the oil industry in countries outside the industrial West.

A PSA tends to protect an oil company from arbitrary changes in fiscal regimes by specifying a share out over the life of a project. Russian companies, subject to changing tax rules, want foreign companies to bear the same risks and the same costs.
Claims that foreign companies are poised to take over the industry will play well in Russia's parliament and among officials swayed by nationalist sentiment and help blunt arguments in favour of PSAs. Russia has enacted framework legislation for PSAs, but the necessary tax and regulatory changes have yet to be made.
Russia's Energy Ministry has estimated that the country could attract as much as $ 80 bn (EUR 89.06 bn) of foreign investment over the next decade if the PSA mechanisms are properly implemented, according to the International Energy Agency. But Mr Khodorkovsky said there has been a "paradigm shift," with Western companies now willing to invest in Russian oil companies, and bidding for licenses under the same terms as their Russian counterparts, rather than sticking with their demands or PSAs. "The brief period of colonial relations is over," he said. "Today, our Western colleagues have realized that Russia is an ordinary country in which you can work and compete in an ordinary way."

Given the scenario painted by Mr Khodorkovsky, it naturally follows that he is concerned about maintaining the independence of Yukos, whose oil output is soaring and whose share price has nearly tripled since October. "Right now I am at a dangerous juncture; Yukos has become good enough to become attractive, but not highly enough valued on the stock market" to put off potential predators.
So Mr Khodorkovsky is busy trying to raise Yukos' value. Heis sharply raising oil output, already up 17 % to some 1.3 mm bpd in the first quarter of this year; expanding into the production of natural gas by acquiring fields in the Yamal peninsula in Siberia; and setting aside some $ 500 mm this year to invest, as a junior partner, in joint ventures outside Russia to gain experience and a foothold abroad.
"I haven't received as many offers as I would like," Mr Khodorkovsky said, adding that he was also prepared to enter into joint ventures in Russia with foreign companies. The market capitalization of Yukos has the potential to be 120 % to 130 % more than its current $ 21 bn or so even at the company's current rate of oil and gas output, Mr Khodorkovsky said.

Mr Khodorkovsky said the Russian oil industry has the potential for growth only in the next three to four years. As competition increases, returns on investment will slip toward international levels of around 17 % for the best projects, compared with around 25 % that Yukos now records.
"After that, we will be eating each other," he said.