When Russian President Vladimir Putin decided to seize the OAO Yukos shares held by Yukos executive Mikhail Khodorkovsky—who was arrested Oct. 25 at gunpoint—he raised the stakes in the Kremlin's battle with the country's wealthiest oil magnate (OGJ, Nov. 3, 2003, p. 38). But this calculated political move also could have fallout on world oil prices in 2004, according to analysts.
Khodorkovsky resigned Nov. 3 from his position and does not intend to take any position in YukosSibneft, a brief company news release said.
While the Russian stock market eventually stabilized Oct. 31 after another sharp drop the previous day, the controversy is creating a fissure in domestic Russian politics. Russian Prime Minister Mikhail Kasyanov said he is "deeply concerned" about the Khodorkovsky case, and Putin's chief of staff, Alexander Voloshin, resigned over the controversy.
"It's not a favorable development if Russia is to continue to boost its oil output. The Russian government's oil production targets are based in great measure on Yukos's expansion plans," said Amy Myers Jaffe, Wallace Wilson fellow for Energy Studies at the James A. Baker III Institute for Public Policy at Rice University.
The US Department of State said Oct. 31 the seizure of Yukos assets belonging to Khodorkovsky "raised serious questions" about Russia commitment to free markets and an independent judiciary. State Department spokesman Richard Boucher said the case brought into question "the rule of law in Russia."
Meanwhile, Yukos Nov. 4 announced its decision to form a seven-member management board and named Simon Kukes as the new CEO.
"We don't plan any changes in company behavior, because the company is developing normally. Everything stays intact, and we have a strong team," Kukes said during a news conference.
Production slump, higher oil prices
"This could mean higher oil prices next year, and it's possible that prices may not come off to the extent they were expected to, if Yukos met its oil production estimates," Jaffe noted.
Russian government prosecutors Oct. 30 froze a 44% stake in Yukos held by Menatep, a Gibraltar-registered holding company, estimated to be worth $12 billion, as collateral against the charges against Khodorkovsky and Yukos. But on Oct. 31, 4.5% of those shares were returned to shareholders not implicated in the Yukos criminal investigation and were unfrozen by the Russian General Prosecutor's Office.
"While news of the scandal did shake the oil market temporarily, I think this is too complicated for an oil trader to assess what this scandal means, but they will be looking very closely at how this is impacting on Yukos's ability to meet its rising production targets," said Jaffe.
Russian oil forecast released
In its most recent financial report, Yukos crude oil production rose to 65 million bbl in the second quarter from 55 million bbl last year. And there are expectations that Yukos will play a major role in Russia's overall oil production and exports.
Edinburgh-based oil research consultancy Wood Mackenzie Ltd. said Friday Russia's oil production is likely to beat government forecasts and reach 10.4 million b/d or more by 2010, with exports peaking at 5.9 million b/d in 2007.
The firm went on to say Russia's oil production rose to 8.73 million b/d in September, and the industry could produce as much as 12 million b/d in the future.
But WoodMac did say that the Khodorkovsky scandal could lead to a decrease in foreign investment and push its forecast of Russian oil production to the low end of its range. In its more ambitious forecast, WoodMac said it expects Russian oil production to reach 12 million b/d in 2010, with exports of 7.5 million b/d.
Economic consequences
But experts are far from certain about how the whole Putin-Khodorkovsky affair will play out, and one Eurasian energy expert expects the Russian president has thought this through ahead of presidential elections planned for next year.
"It's a populist move by Putin, and his targeting of the most successful oligarch still in Russia is very politically popular. But Putin is extremely sophisticated and he always looks at his long-term strategic plan," said Brenda Shaffer, research director of the Caspian Studies Program at Harvard University.
"Russia has experienced incredible market growth that has been fueled by energy investments and hurting Yukos could endanger that growth," Shaffer noted, adding, "For western energy companies this adds a risk factor to the Russian market." Shaffer went on to say she doesn't expect most foreign governments will make a big deal out of the Khodorkovsky affair, and the controversy is likely to pay political dividends at home.
But Jaffe thinks recent developments in the Khodorkovsky scandal will present several complex problems for Western energy interests trying to get a foothold in the Russian market.
"For foreign companies that have direct interests in Russia, like ExxonMobil [Corp.] or [Royal Dutch/]Shell [Group], I don't think this a problem for companies that have [production-sharing agreements]. But for companies that were seeking to do acquisition, or trying to own a chunk of a Russian oil company, I think this is a big concern," she said.
'Wait-and-see' approach
"We are having questions around the uncertainty of the operating environment for Russia domestic companies. My advice is to back away and take a pause to see how this plays out. But for companies that were in negotiations with Russian oil companies about taking a potential stake, the questions of due diligence are far more complex today than they were two months ago," Jaffe added.
Jaffe also said that if the Russian stock market and oil stocks, in particular, were to fall further, there will be less capital for Russian domestic energy companies to invest in their production expansion plans.
WoodMac said that many western energy firms may take a "wait-and-see approach."
The US-Russian Business Council issued a statement saying the seizure of Khodorkovsky's Yukos shares mark "an escalation of the conflict that has heightened the concerns of all investors in Russia."
"US-Russia Business Council members are concerned that, if not resolved quickly and transparently, the 4-month investigation will further damage investor confidence and threaten Russia's recent economic progress," the group said.
New CEO named
Yukos expects that the managers group also will be nominated by the principal shareholders of Yukos for the management board of YukosSibneft subject to approval by the new YukosSibneft board, slated to be elected at a Nov. 28 extraordinary general meeting.
Kukes emigrated to the US in 1977 and has 25 years' experience in the oil business. He helped with the negotiations that resulted in the creation of TNK-BP, marking the biggest foreign investment in Russian history (OGJ Online, Oct. 17, 2003).
The new Yukos management team Nov. 4 declined to discuss a possible merger with Western companies, such as ExxonMobil Corp. (OGJ, Oct. 13, 2003, p. 40).
"I haven't spoken yet to Western oil companies in regard to opportunities in RussiaUI think the oil companies are watching closely what the development will be and then decide how Russia fits into their portfolio," chief operating officer Stephen Theedes told the news conference. His title on the new management team is executive director and president of Yukos-Moscow.
The following individuals also were elected to the management board: Yuri Beilin, deputy CEO, president, Yukos EP; Mikhail Brudno, president, Yukos RM; Bruce Misamore, chief financial officer, Yukos; Alexander Temerko, senior vice-president, Yukos-Moscow; and Mikhail Trushin, first vice-president, Yukos-Moscow.
Sibneft's impressive profits
In a related development, Sibneft Oct. 30 said that recent strong oil prices and cost controls helped it nearly triple net profits in the first half to $1.38 billion. Yukos's merger with Sibneft is scheduled to close in the near future.
"Sibneft's financial performance was bolstered by sustained favorable international oil prices, success in controlling costs, profitable financial investments, and a substantial increase in oil production," the company said in a statement.
Sibneft's net profit of $1.38 billion for the first half is a 189% increase over a revised $476 million profit in the first half of 2002.
Revenues, meanwhile, were up 73% to $3.44 billion in the first half, compared with $1.98 billion in the same period last year.