RUSSIA - Acquisitions Vs Market Perspective.

The Russian companies' branching out of their country since April 1999 - apart from external acquisitions they had made since 1993/94 (see review of the companies' external assets on the following pages) - has come out of these important developments:

1. From March 1999 they began to count on OPEC's ability to defend crude oil prices. Until late 2001, most of them went along with Moscow's active support of the OPEC price defence efforts through occasional Russian oil export cuts in line with agreements involving non-OPEC states. Until March 1999, when OPEC and four non-OPEC states including Russia agreed to cut production to defend a world crude oil price that had collapsed in 1998, all the Russian oil firms favoured Moscow's export cuts. That was because in 1998 Russia had suffered its worst financial crisis since the late 1991 collapse of the Soviet Union. For all the Russian petroleum companies, including the world's biggest gas producer and exporter Gazprom, a strong oil price and a brighter market perspective for both oil and gas were crucial for their growth.

By late 2001, however, the situation in Russia had changed. There had developed a deep split in strategic thinking among the integrated oil companies in Russia. The split was between the so-called radical firms, which had managed to increase oil production and lower operating costs rapidly as in the case of Yukos and SibNeft, and the conservatives like LUKoil and SurgutNefteGaz (SNG) which had opted against the oil production methods of the radicals (see profiles of the Russian oil and gas producers in OMT, DT and Gas Market Trends No. 11).

2. The radicals that had cut costs and built up huge cash piles since April 1999 by late 2001 had become more interested in growing through acquisition of smaller firms than in high oil prices. That was because assets to be acquired in periods of low oil prices were far cheaper. Yukos, SibNeft and Tyumen Oil (TNK) were prominent among those opposed to Moscow's co-operation with OPEC in defending oil prices from the beginning of 2002. TNK had to pay as much as $1 bn to buy Onako in 2000 because the oil price was high; and now it was to acquire other such assets and benefits more from a low oil price than KULoil or SNG as the latter have higher operating costs.

By end-2001 the radicals had become in far better shape to operate under a low oil price environment, whereas companies like LUKoil and SNG had failed to cope with such a situation. Yukos had become the biggest among the Russian oil firms in terms of market capitalisation, overtaking LUKoil which remains the largest in terms of oil reserves and production capacity. But even in terms of reserves and capacity Yukos is getting close to LUKoil, with its operating cost averaging $2.2/b compared to LUKoil's $3.9/b and SNG's $4/b.

Yukos can only overtake LUKoil in terms of reserves and capacity by taking over another small oil company or two. Yukos CEO Khodorkovsky made public his preference for a low oil price in an article published by The Financial Times on March 12, 2002 (see who's who in Part 5).

Khodorkovsky has become the richest man in Russia and he is only in his 30s. He wants Yukos' share value on the Moscow stock market and in the West to rise as quickly as possible through further acquisitions, hoping oil prices will fall so the cost of buying new assets is not too high, before making his next big move: selling a part of the company at the highest possible price when oil's market value has come up again. The owners of SibNeft, TNK and other radical companies want the same and have similar objectives.