RUSSIA - Orenburg Oil (Onako).

TNK bought the government's 85% stake in Onako, a small integrated company in the south-east of Russia, at a cash auction on Sept. 19, 2000 for $1.08 bn. TNK's bid was 2.5 times the $425m starting price. It was the second largest privatisation in Russian history, in terms of the money received by the government after sale of the telecommunications group SvyazInvest. It was not only a rare example of a fair privatisation, in contrast with the transfer of state oil assets at ridiculously low prices during the Yeltsin era, but it boosted the value of TNK and the other oil companies. It was the first such auction in the Putin era, raising the chances of the government getting a lot more money than it originally estimated out of the pending sale of SlavNeft and stakes in LUKoil and other companies. But it was still a good bargain for TNK, as it paid between 53 cents and $1.39/b of oil reserves (depending on how one calculates the equity accounting). This compared with 99 cents/b for LUKoil, 70 cents for the blue-chip average in Russia, and $4.83/b for the average integrated oil major in the West.

Onako consists of the 160,000 b/d oil producer OrenburgNeft, a 81,000 b/d refinery at Orsk, 22 oil depots and 132 petrol stations in the Orenburg region. The new TNK-Onako combine has lifted the group to fourth place in the Russian rankings behind LUKoil, Yukos and SNG. But TNK has not been able to absorb Onako, although in late 2000 TNK vice president Vitaly Tkachev was made CEO of OrenburgNeft (ON) - the leading subsidiary.

After the acquisition, TNK was shocked to discover that SibNeft had earlier quietly accumulated a 42% stake in ON (SibNeft was beaten at the auction because it bid $1 bn for Onako). After almost two years of fruitless negotiations, TNK recently offered SibNeft 10% of TNK stock in exchange for the latter's 42% stake in ON.

TNK needs to remove SibNeft as a minority shareholder before consolidating control over ON. Consolidation is required for a successful initial public offering (IPO) of British Virgin Islands-incorporated TNK Int'l, which holds a 97.1% stake in TNK and 91% in Onako. The IPO is planned for the first half of 2003. TNK has also proposed that, as part of the swap deal, Tyumen Oil will allow SibNeft free rein in the forthcoming sale of a 19.68% state equity in SlavNeft. But SibNeft executives say the proposed swap is just one of several options being discussed.

In June 2002 TNK awarded the private Russian field services company PetroAlliance (PA) a pilot risk-sharing contract for the latter to conduct well re-completion and install wellhead equipment on seven idle wells in ON's Rostashinskoye and Zayachye fields. The wells were shut because of an almost 100% water cut in output. PA will share the risk with TNK of having little or no oil output after service work is completed. It will be paid by TNK only if production of at least 300 b/d for each well is achieved. TNK will allow the wells to operate for three months to ensure that works have been conducted properly. After successful completion of this trial period, the payment to PA will be disbursed. This is the first-ever risk-sharing service contract in the decade-long history of Russia's privatised oil industry. The approach allows PA to beat giants like Halliburton.

Excluding its subsidiaries and affiliated companies in Russia and abroad, TNK in the first quarter of 2002 posted a new profit of $5.7 in the first quarter of 2002, compared to a net loss of about $66m in the first quarter of 2001. Revenues were up 34% to $587m, while costs rose 8% to $329m. The figure were compiled under Russian accounting standards.