RUSSIA - The External Investments Of Yukos.

In mid-2002, as it built up a $5 bn cash pile thanks to high oil prices since April 1999 and its low production cost, Yukos planned to invest up to $4 bn over a period of three years in projects outside Russia. It allocated $2 bn for cash purchase of assets, and another $2 bn through financing or JV investment by 2005, most of which were be in downstream ventures.

On Sept. 2, 2004, however, a Moscow court ordered Yukos' bank accounts frozen and the move caused world oil prices to rise considerably. There was speculation on the market that the move was to affect Yukos' oil exports. But President Putin had recently assured President Bush and other Western leaders that Russian oil exports would not be affected by whatever was to happen to Yukos.

Yukos had been in discussions with Total, Marathon and other majors about partnerships in upstream ventures outside Russia. It has upstream JVs in Peru and Hungary, a retail business in Turkey and wanted to operate in Iraq. LUKoil and Yukos in 2002 agreed to form two JVs in Belarus, one with oil distributor BelNefteProdukt and the other with the largest oil refinery in the country, the 600,000 b/d Naftan plant in Novopolotsk. LUKoil and Yukos were together to supply the refinery with about 140,000 b/d of crude oils. The products were to be sold in Europe as well as the local market. In July 2000 LUKoil, Yukos and Gazprom formed a JV to explore for offshore oil and gas in Russia's sector of the Caspian Sea.

Yukos International is a London-based holding company for John Brown Hydrocarbons and Davy Process Technology, two field service firms which Yukos bought in late 2001 for $100m from the Anglo-Norwegian engineering and construction conglomerate Kvaerner. Yukos had earlier tried but failed to buy the whole of Kvaerner. In February 2002 UK political veteran David Owen was appointed as chairman of Yukos International.

On Aug. 20, 2002, Yukos bought for $85m the 26.85% stake of the US energy group Williams in the Mazeikiu Nafta refinery in Lithuania, which has a capacity of 265,000 b/d. This brought Yukos' share in the plant to 53.7% and gave it management control, with the Lithuanian state as the residual shareholder.

The deal ended a political fight for control, in which Williams won the initial privatisation in 1999 against Russian bids by stressing its influence with the US administration and lobbying hard in Washington against LUKoil, previously its main crude oil supplier. It also signalled a turn-around in Lithuania, just three years after politicians fought hard to exclude Russian bidders from the sell-off in order to break with the nation's Soviet past and attempt to ease accession to NATO and the EU.

The deal enabled Yukos to replace LUKoil as the main crude oil supplier to the refinery and to consolidate its westward expansion outside Russia, gaining a strong grip over the Baltic states, for which Mazeikiu is the only oil refinery. Yukos said on Aug. 20, 2002 it planned to purchase a number of petrol stations in the region and shift downstream, increasing sales of its Russian crude oil production to Mazeikiu from 94,000 b/d to 141,000 b/d from the fourth quarter of 2002. Yukos had a ten-year contract to supply the refinery with crude oil.

Combined with a previous purchase for $75m of a first 26.85% shareholding finalised earlier in 2002 and $75m in loans made to the refinery by Williams, Yukos was to spend $235m to acquire control. Williams had fought with LUKoil which later cut off supplies to Mazeikiu, giving Yukos the chance to sell its crude to the plant.

Mazeikiu Nafta had been seeking bids for a contract to market 60,000 b/d of its products in West Europe. Its contract with BP expired on Oct. 1, 2002. The refinery had earlier in 2002 sold a trial batch of zero-sulphur diesel, which is not mandatory in the EU until 2009. The plant's largest customers include BP, Shell, Hydro-Texaco and Statoil.