Yukos chief says Russia offers many opportunities for western oil firms

Feb. 12, 2002
Mikhail Khodorkovsky, CEO of OAO Yukos, says Russia continues to offer many opportunities for foreign oil production and service and supply companies.

Sam Fletcher
OGJ Online

HOUSTON, Feb. 11 -- Russia is a land of opportunity for oil companies ready to purchase upstream reserves and downstream markets, and for vendors providing a wide range of oil field services, said Mikhail Khodorkovsky, CEO of OAO Yukos, Russia's second largest oil company.

"Western companies in Russia don't need oil fields: They need a field and a market, and they can only get that by acquiring a Russian company," he said. "Many are still looking for an opportunity to find and develop a field with 100% export. But that's no longer possible."

In order to participate in the local market, western producers will have to buy local companies, he said in Houston.

Once those buy-outs begin, Khodorkovsky said, "only one or two" integrated international Russian oil companies will still be left by the end of this decade. He expects Yukos to be among the survivors.

Khodorkovsky told OGJ Online he sees signs of the pending buyouts. BP PLC is nearing negotiations for a Russian acquisition, he said, and the Royal Dutch/ Shell Group probably isn't far behind.

Meanwhile, the French firm TotalFinaElf SA "is not walking around Russia for no reason," said Khodorkovsky. Yukos and a unit of TotalFinaElf recently formed a joint venture to explore and develop the Shatsky Ridge area in the Russian portion of the Black Sea (OGJ Online, Jan. 25, 2002).

Russia also offers a $10 billion market for oil field service companies, said Khodorkovsky.

In 1998, Yukos formed a 5-year strategic alliance with Schlumberger Ltd. for oil field services. Schlumberger also is assisting an independent Siberian Services Co., formed by Yukos to provide a range of services for oil producers at international standards.

In October 1998, Tyumen Oil Co. and Halliburton Energy Services signed a cooperation agreement for the Samotlor field's rehabilitation, exploration, and development in the Khanty Mansiyski Autonomous Okrug. More recently, Halliburton International Inc. signed an agreement to provide a full range of oil field services to OAO Sibneft, Russia's sixth largest oil company (OGJ Online, Feb. 11, 2002).

Baker Hughes Inc. and Western Atlas, which merged in 1998 to form Baker Atlas, also are among the western pioneers in Russia's oil field service and supply business.

As what range of oil field services are needed in Russia, Khodorkovsky said, "You name it."

For example he said, a few years ago he negotiated with Japanese and US firms to take over operations of Yukos' fleet of 14,000 vehicles ranging from cars and trucks to buses and bulldozers. "I told them to take it all and bring in new vehicles and provide me with complete transportation services," Khodorkovsky said. "Running that transportation myself involved 10-15% of my total costs and personnel."

At first, the foreign firms were interested in the proposal. "But then they got spooked by the big startup capital investment, the need to buy some of the equipment in Russia, and the need to adjust to Russian law," he said.

Changes in Russian laws and tax structures are easing the entry of foreign companies into Russian markets, said Khodorkovsky.

However, he said, "If I wanted to do business in America and I came in with Russian lawyers, I would be considered insane. Yet American companies come to Russia with their American lawyers and complain about problems adjusting to our laws."

Apparently US law firms are smarter than some US oil companies. "We now have American law firms in Russia that consist entirely of Russian lawyers," he said.

What western oil companies have in abundance, and that Russian producers probably need most, are experienced project managers who can focus on progress and costs.

"Everything else is no problem at all. We have plenty of good engineers in Russia, but the management skills that have to do with understanding the economics of a project is another issue," Khodorkovsky said.

As a result, he said, "We have to pay a lot to get project managers from the West, a premium of 30-50% over the market of what they would earn with another international company."

Russia is working with a university in Scotland to help train Russian project engineers. But it will take 10 years for those students to complete their degrees and gain the necessary experience.

Meanwhile, Khodorkovsky said, "We need managers who have worked in a lot of countries and who know how to integrate into another culture."

Contact Sam Fletcher at [email protected]