RUSSIA - The Russian Oil & Gas Producers - Tyumen oil Co. (TNK).

Founded on Aug. 15, 1995, TNK aroused interest because of its big oil producing units, such as NizhnevartovskNefteGaz (NNG) and the giant Samotlor field, and the Ryazan refinery close to the Moscow region. But after TNK was formed it became known NNG had huge debt from outstanding taxes. A complaint was filed with the prosecutor-general's commission in Nizhnevartovsk. With the firm having bribed its way through the local authorities, however, the commission said NNG did not violate the law.

While LUKoil and SNG are among the conservatives (see OMT & DT), TNG is a radical, like Yukos and SibNeft aggressively expanding its oil and gas production capacity and acquiring additional reserves through takeovers. But its average operating cost has risen to $4.5/b because of an extremely high water content at Samotlor, TNK's main oilfield producing 400,000 b/d, where water accounts for 96% of several billion barrels of reserves.

The group's oil production now averages 825,000 b/d, up from 540,000 b/d in mid-2000. This includes 160,000 b/d produced by Onako, an integrated company which TNK bought from the government in Sept. 2000 and which is operated as a separate entity. The group's gas output in the first half of 2002 was 1.6 BCM - making it the fourth largest associated gas producer among Russia's oil companies. Its gas production capacity is 3.3 BCM/y.

TNK's acquisitions include a 29% stake in Rusia Petroleum, based in east Siberia's Irkutsk region, whose assets include the giant Kovykta gas/ condensate field found in 1987. The field needs over $12 bn to develop and have a pipeline, with 20 BCM/y to be supplied to South Korea and China.

TNK has had a bad reputation. It is owned by a partnership of Alfa Group (a financial-industrial group which includes Russia's largest private bank, Alfa, controlled by Mikhail Friedman and ex-foreign trade minister Piotr Aven) and US-based investment group called Access Industries/Renova of Leonid Blavatnik and Viktor Vekselberg (Russian US citizens). The partnership in 1999 raised its stake from 50.1% in a tender for the government's remaining 49.8% equity. In 2001 TNK consolidated its upstream by issuing 1.2 bn new shares which brought the stake to about 85%.

Through obscure dealings, TNK in 1999 ruthlessly exploited Russia's labyrinthine bankruptcy laws in a war with BP for control of Sidanko (see the next profile). TNK's campaign to take over Tura Petroleum, a 50-50 JV of its TyumenNefteGaz and Black Sea Energy of Canada, which also involved bankruptcy proceedings, was another example. On June 28, 2000, police raided TNK's offices in Nizhnevartovsk. This was linked to TNK's battle with Slavneft, in which the Alfa Group had bought a minority stake.

The partners and Semyon Kukes, the TNK president who spent ten years in the US working for Phillips and Amoco, have intimate links with the top authorities in Tyumen. TNK's board chairman Sergey Sobyanin, is the region's governor. Its nine-member board also includes Khantiy-Nansiysk Governor Alexander Filipenko and Ryazan Governor Vyacheslav Lyubimov.

In April 2002 TNK's Deputy Chairman Vekselberg became the firm's CEO to concentrate on "strengthening TNK's position on international markets and relations with investors, as well as financial and business circles in Europe and the US". The change was due to TNK's growing activities and to split responsibilities between President Kukes and the chief executive. To improve TNK's image and get advice from the real professionals, the partners in June 2002 formed a consultative board consisting of Sir Peter Walters (BP chairman from 1981 to 1990 & chairman of pharmaceuticals giant SmithKline Beecham from 1994 to 2000), William Purves (HSBC Holdings chairman from 1990 to 1998 and a director of Shell Transport & Trading from 1993 to 2002), Adrian Lajous (former head of the Mexican NOC Pemex), and James Harmon (former head of US Ex-Im Bank). Walters was made chairman of this board which, however, has no executive power. The board will meet with the main TNK shareholders at least four times a year to issue recommendations and advise on how to increase TNK's market capitalisation and improve corporate governance.

Walters said in Moscow in June: "One of the main risks to any company is reputation risk. A company's strength is based on its reputation. We plan to help management evaluate those aspects by which TNK will be judged internationally". Before he spoke, Kukes said: "We have realised that, as a Russian company, we do not know how to do a lot of things. We created this board to tell shareholders what we are doing right and what we are doing wrong". Kukes said TNK was planning to turn selected advisers into executive directors in due course.

TNK's oil production is concentrated in the Khantiy-Mansiysk district of the west Siberian region Tyumen. The main field there, Samotlor, used to be the biggest Soviet oil producer in the 1970s when its output averaged 2m b/d. To resolve part of the water problem at the field, Halliburton has been contracted to drill 70 new directional and horizontal wells and sidetrack 150 existing wells. It was because BP (which had brought 10% of Sidanko in 1997) had lobbied against US Ex-Im Bank guarantees for $498m in loans to rehabilitate Samotlor and modernise the Ryazan refinery that TNK in 1999 agreed to return the oil producer ChernogorNeft to Sidanko (see Chronology in OMT No. 10).

In 2001 a company linked to Alfa Group bought 40.3% into Sidanko. The move was seen as a prelude to an acquisition of Sidanko by TNK. But Kukes was in June 2001 quoted by Petroleum Argus as saying he favoured a partnership with BP, rather than an attempt to take Sidanko which would cause another war with the Anglo-US super-major. He also said: "We are owned by two financial guys who really want to maximise shareholder value, and they understand that bringing in a firm like BP to a joint venture, or as a shareholder (in TNK), would help". Argus said Kukes saw partnership with BP as essential for TNK's involvement in the BP-led development of Kovykta

TNK in early 2000 won the right to explore and develop the Synatyskaya block in the northern republic of Komi which includes ten oil structures. In April 2000 TNK got two blocks in Irkutsk near the border with China. Khanda and Yuzhno-Ust-Kut, adjacent to Kovykta, are said to have 10 TCF of gas and 135m barrels of condensates. In mid-2001 Urals Oil was created to develop oilfields in Sverdlovsk and on the border between this region and Khantiy-Mansiysk, with TNK holding 51% and the Sverdlovsk government having 49%. In July 2002 TNK got a five-year appraisal licence for the Lopukhovskoy block in shallow waters north of the far eastern island of Sakhalin, where four prospective structures are said to contain 500 BCM of gas and 130m tons of oil, with the firm to spend $60m on exploration. TNK-Uvat, founded in Jan. 2001, is to develop eight Uvat oilfields in west Siberia were recoverable reserves are estimated at 800m barrels, and TNK's target is a 100,000 b/d production stream. TNK is awaiting a PSA for this.

Downstream, TNK's 370,000 b/d Ryazan refinery is being upgraded under a $270m plan, with ABB Lummus having installed a Texaco technology. A new unit on stream in late 2001 raised catalytic cracking capacity from less than 1m to 1.7m t/y. This should reach 2.5m t/y in 2003. An isomerisation plant is to be installed by 2004. TNK, which has 650 petrol stations in Russia excluding those of Onako, owns 100 gasoline stations in the Moscow and Ryazan areas. It is supplying them with diesel which complies with EU Auto Oil specifications, containing 0.034% of sulphur. It co-operates with ChevronTexaco in marketing, trading and retailing in Russia, Belarus and Ukraine.

TNK intends to become a major gas producer and marketer in Russia and abroad. Apart from its Khanda and Yuzhno-Ust-Kut gas fields and its 29% stake in the adjacent Kovykta giant in the far east, TNK has 44% in the west Siberian gas producer Rospan, where recoverable reserves are estimated at 600 BCM of gas and 800m barrels of condensate. Yukos holds 56% of Rospan. TNK plans to produce 15 BCM/y.