RUSSIA - Oil Producer - Yukos.

Founded at the same time as LUKoil, on April 15, 1993, Yukos is the second largest of Russia's integrated oil companies in terms of oil reserves and production capacity. But it has become the largest in terms of market capitalisation which has increased ten-fold in the past two years to about $20 bn, compared to LUKoil being worth $12 bn (see OMT). Unlike LUKoil which is conservative in its operations, Yukos is a radical aggressively expanding both its production and its assets in Russia and abroad (see the external assets of Yukos & the other oil companies in Part 4). On Aug. 27, 2002, Yukos stock value rose 3.6% to $9.47, while LUKoil increased 2.3% to $16.63, thanks to rising oil prices. But since then oil prices have risen further, so the stocks now are higher.

In the first half of 2002, Yukos' oil production rose by 16.5% to 1.3m b/d and its target for 2003 is 1.4m b/d, with output in 2001 having increased by 17.5%. Its crude exports rose 16% to 700,000 b/d, indicating Yukos had to market incremental production outside Russia because of stable domestic demand. Although the company is transporting an increased amount of oil from west Siberia to China, it is also establishing permanent supply links from Russia to the US Gulf Coast to offload additional output on the American market. Yukos delivered its first shipment of about 1.6m barrels to ExxonMobil in July. But about $17m of the payment for that cargo was frozen by a Texas state court following a lawsuit filed by the services company Dardana. Dardana claimed Yukos failed to pay money owed under a 1995 oil services contract. Later Yukos won a court ruling to release the money by Sept. 3. Yukos is chartering a third tanker to a cargo to the US.

Yukos has five oil refineries with a combined capacity of 700,000 b/d: at Samara (where capacity once was 600,000 b/d and now is 200,000 b/d), at Syrzan, at Tomsk and at two at Kuibychev. KuibyshevNefteOrgSintez (KNOS) is in charge of the refining sector. Several Yukos products marketing units include BryanskNefteProdukt, VoronezhNefteProdukt, LipetskNefte-Produkt, OrelNefteProdukt, PenzaNefteProdukt, SamaraNefteProdukt, Tambov-NefteProdukt, UlyanovskNefteProdukt, and BelgorodNefteProdukt. Other Yukos units include VoronezhNefteProduktAvtomatika, SamaraNefteProdukt-Avtomatika, SamaraNefteKhimavtomatika, Middle Volga Oil-Refining Research Institute and YuganskNefteAvtomatika.

In June 2002 the main Yukos shareholders broke one of the biggest taboos in Russian business by revealed their fortunes through their equity in Bank Menatep which formally holds 61% in Yukos. They are as follows:

- Menatep President/CEO and Yukos Chairman Mikhail Khordakovsky, 38, a Jew said to be a genius in business, holds 59.5% in Menatep and 36.3% in Yukos. He is worth more than $7 bn and is the richest man in Russia. - Leonid Nevzlin, once a Yukos deputy CEO and now head of the Russian Jewish Congress, holds 8% in Menatep and 4.9% in Yukos. - Platon Lebedev, director of Group Menatep - a private vehicle through which Khordakovsky and his partners hold their shares in Yokos - has 7% in Menatep and 4.3% in Yukos. - Vladimir Dubov, a former Yukos executive and now an MP at the Duma, holds 7% in Menatep and 4.3% in Yukos. - Two current executives, Mikhail Broudno and Vassily Shakhnovsky, each has 7% in Menatep and 4.3% in Yukos. The other shareholders have 4.5% in Menatep and 2.7% in Yukos. Now rated as one of Russia's best-managed companies, Yukos wants a New York Stock Exchange listing. Khordakovsky was on June 21 quoted by The Financial Times as saying in the past it was not easy for Yukos to meet US disclosure requirements, adding: "Some years ago, Forbes said I was worth $1.5 bn, and that was the end of any attempt at a peaceful life. But for my colleagues it was a difficult decision. It has taken me two years to persuade them. They were all leading calm and peaceful lives - and this (disclosure) is going to end life as they know it".

Khordakovsky holds 9.5% of Menatep directly. The rest, according to Menatep documents, is vested in a trust, with arrangements for reassigning its voting rights in the event that he is "imprisoned, abducted, or influenced into taking decisions against his free will". Anecdotal evidence suggests that Russian business has become less violent and more orderly in recent years. But his country club remains heavily protected by a high fence, militiamen with automatic weapons and the latest model in walk-through metal detectors.

Yukos was controversial from the day of its 1995 privatisation. Yukos' leadership then was said to include ex-KGB chiefs who engineered the share auctions with Menatep. The market price of 45% of Yukos shares was about $130m, ridiculously low. A pledge of $159m was received by Menatep - in one of several big privatisation deals designed to reward new tycoons loyal to then President Boris Yeltsin, who was seeking re-election. By mid-1996, Menatep's holding had risen to 81%. The share price of its main unit, Yuganskneftegaz, had fallen sharply in 1995 from $17 to $8. Because of the very low price of shares acquired at the auctions, in April 1996 then Premier Chernomyrdin ordered the state property committee GKI to buy back equity in Yukos, SurgutNefteGaz and SibNeft (see background in Vol. 55, DT No. 7).

Yukos is to develop the west Siberian Priobskoye field, which has a reserve of 5 bn barrels, to raise its production capacity from 10,000 to 450,000 b/d. Having retained its alliance deal with Schlumberger, Yukos in July 2000 signed a contract with engineering firm Kvaerner for development of surface infrastructure at the field. It is not yet clear whether BP will be involved in this field as a partner. A JV agreement for the field was signed several years ago between Yukos and Amoco. Yukos needs to invest over $500m to cover its share of development costs and will have to borrow from Western banks. Development costs are estimated at $20-50 bn.

Yukos also wants to develop new fields in east Siberian area of Yurubcheno-Takhomskaya. It is negotiating with BP as a possible partner in them. It proposes to export their oil to China through a 400,000 b/d, 2,250-km pipeline from Angarsk via Daqing to Beijing (see Part 3).

Structure: With its main E&P units being YuganskNefteGaz and Samaraneftegaz, Yukos has increased its reserves and production capacity through bold acquisitions in the past three years, having gained the most among the companies from rising oil prices since April 1999. In May 2002 it won an auction for a 36.8% stake in Eastern Oil Co. (VNK) and paid $225.4m, after settling a conflict with its rival Tyumen Oil (TNK) over ownership rights of west Siberian gas producer Rospan. This raised Yukos' stake in VNK to 90.8%. Yukos had first acquired 45% of VNK at a cash auction in late 1997 and paid $800m. Its main interest then was VNK's 230,000 b/d Siberian producer TomskNeft and its refinery. Yukos later raised that stake by 9% to 54%. In its settlement with TNK, Yukos took a 56% stake in Rospan - which has reserves of 600 BCM of gas and 800m barrels of condensate in the far northern area of Nenets - and TNK paid Yukos $44m for the remaining 44%.

In Feb. 2002 Yukos bought 88% of Arctic Gas Co. (ArktikGaz) from the US operarator Benton Oil & Gas (68%) and minority interests (20%). It agreed to pay $190m for the stock and under-write $100m of Benton's obligations to finance ArktikGaz operations in 2002. ArktikGaz has exploration and development licences in six fields in the Yamal-Nenets region which the company says contain 852m tons of oil, 279m tons of condensate and 919 BCM of gas. The gas is close to Gazprom's network and can be connected by a 38-km, $10-15m pipeline.

ArktikGaz has access to Gazprom's export system. Before the Yukos take-over, it had concluded sales contracts with Ukraine (120 MCM/y in 2001-2010), Belarus (150 MCM/y in 2001-02) and Georgia (60 MCM/y 2002-04) - at a price of $45-50/000 CM. Yukos says the Rospan, ArktikGaz and other fields in its system will enable it to produce 15 BCM/y of gas by 2005, from a mere 2.7 BCM/y in 2000.

In July 2002 Yukos gained majority control over the east Siberian oil and gas producer SakhaNefteGaz (SNG), which is based in the far eastern republic of Sakha-Yakutia. This followed its acquisition of 20% into SNG earlier in the year. In that area, Yukos wants to develop the Talakanskoye oilfield containing 200m tons, and the 700 BCM Chayandinskoye gas field possibly in partnership with TotalFinaElf (TFE). Yukos and TFE have a strategic alliance covering the Shatsky block in the Black Sea, and are now looking into greater prospects in the Caspian region.

Yukos sits of a cash pile of $5 bn, enabling it to make major acquisitions in Russia and abroad (see Part 4). By end-2001 it had raised cash reserves to more than $3.5 bn, from $2.8 bn by end-2000, and high oil prices in recent months have raised its income considerably. According to its financial report for 2001, presented under GAAP, its gross debt was just $117m while adjusted net profit went down 27% to $2.87 bn. Aton Brokerage in Moscow said Yukos' solid results showed it was capable to cutting costs and boosting production. Yukos' operating cost, $2.2/b, is the lowest in Russia, as in the case of SibNeft, thanks to its use of Schlumberger, Halliburton and other qualified firms' specialist E&P services. Yukos is producing three times the Russian average from new wells. In 2000 its profits rose 150% to $3.2 bn, the highest of any Russian company.

Like LUKoil, Yukos is branching into the power business. In 2001 it bought 30% in TomskEnergo, 15% in KubanEnergo, 15% in StavropolEnergo and 15% in BelgorodEnergo - regional power utilities which are expected to become profitable in the coming years. Yukos paid $70m in these stakes. UES said Yukos investment in this sector may reach $400m in the near future.