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Tuesday, September 28, 2004

THE RECENTRALIZATION OF RUSSIAN OIL

The Russian oil ministry announced today that the sale of Yukos should net approximately $15 billon, $7 billion of which would be used to pay the government for back taxes. This announcement ends a month of incredible change in Russia, both in the energy industry and in politics in general.

September has been an astounding month for Russia. The simultaneous attacks on two Russian passenger jets combined with the horrific and deadly attack on the middle school in Belsan rocked Russia to its core. In the wake of those attacks Russian President Vladimir Putin made radical and historic changes to the Russian governing structure, claiming the changes would better help him keep the nation secure. However, the changes seem in fact to have little to do with the battle agains terrorism and are rather a centralization of power aimed at giving Putin a stronger hand in governing Russia. And these changes, albeit a bit more quietly, were mirrored this week in the Russian oil industry as well.

On September 13, came the big political punch following the terroist attacks. President Putin proposed the implementation of a "vertical" system of power to combat militant attacks. The plan calls for the introduction of proportional parliamentary voting, as well as the appointment instead of election of regional governors instead of the current system of direct election. While central control of the state has not recently been in doubt -Putin's Unity Party already has a two-thirds majority in the Duma and effective control over the nomination of candidates for regional elections- these moves make his dominance official and certainly much harder to reverse.

Much more quietly Putin has been exercising the same sort of consolidation of power in the energy industry. On September 14 Russia announced that its monopoly natural gas firm, Gazprom, would acquire state-owned oil company Rosneft. Merging the partially state owned Gas firm with the fully state owned oil firm will create an enormous state controlled entity, giving Putin that much more power over the powerful energy sector. Gazprom is the world's largest gas producer and boasts the most gas reserves in the world.


Ironically, creating this state controlled behemoth will also allow Russia to sell shares in the company on the open market, thereby attracting foreign investment capital. Prior to the merger only a limited number of shares were made available to foreign investors for fear of giving over this strategically essential company to foreginers.

More importantly to Putin, however, having the gas monopoly under state control will prevent it from becoming the launching pad for a political rival, as happened in the case of Yukos, the country's largest oil firm. Putin began in 2003 to see Yukos CEO Mikhail Khodorkovsky as an intolerable political threat. He jailed Khodorkovsky in November 2003, and has proceeded slowly but surely to dismantle the company. Some analysts have speculated that Yukos' primary production division, Yuganskneftgaz, will now be purchased by the newly formed state oil-gas conglomerate, adding 1 million bbl/d to the conglomerate's oil production. Such a move would insure that Yukos would never again become a base of power for a prospective political rival.

Russian Oil Output


Jul. '04

(1,000 bbl/d)

Year to
Date (1,000 bbl/d)

Lukoil

1,682.2

1,670.3

Surgutneftegas

1,202.6

1,168.3

Yukos

1,728.9

1,714.6

Sidanco

423.5

401.1

Tyumen Oil (TNK)

1,024.2

962.9

Sibneft

698.5

672.4

Slavneft

444.6

424.9

Rosneft

434.9

421.2

Russneft

137.8

116.2

Tatneft

501.0

503.2

Bashneft

243.1

242.1

Gazprom

236.5

238.6

Other Producers

571.1

517.0

Grand Total

9,328.8

9,052.7


<>

However, that still leaves Russia with one perhaps threateningly large oil company, Lukoil. Its output of 1.6 million bbl/d would match that of a Gazprom-Rosneft-Yuganskneftgaz merger and would certainly constitute a sizeable base from which an enterprising rival might launch a political career -should he so dare. Russiais currently set to sell off the state's 7.6% stake in Lukoil, which at first blush seems curious if Putin is really worried about it being used to launch a political rival. On the other hand, 7.6% is not enough to stymie a rival there should one arise, and Lukoil's current chief, Vagit Alekperov, by and large stays out of politics and allies with President Putin. Putin likely feels that he will have enough power over the Alekperov led company through political alliances -and the implicit threat posed by the Yukos dismemberment- to be to too concerned about it serving as a political base any time in the forseeable future.

September has thus been a month of incredible consolidation of power by the Russian President. The governing structure and the all-important energy sector are now more centralized under one powerful leader to an extent not present in Russia since -dare one say- the days of the Soviet Union.

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