Russian retrenchment

Falling crude oil prices are forcing Russia's oil companies to engage in a much-needed cost-cutting and reorganization process, according to the French Industry Ministry's Hydrocarbon Department. It said that 1998 could mark a turning point in Russian oil companies' organizational and business practices. Relying on Russian oil ministry data, the study said that high production and transport costs, as well as inflated work forces and subsidiary social obligations, have made Russian

Nov. 23, 1998

3 min read

Patrick Crow
Washington, D.C.
[email protected]

Falling crude oil prices are forcing Russia's oil companies to engage in a much-needed cost-cutting and reorganization process, according to the French Industry Ministry's Hydrocarbon Department.

It said that 1998 could mark a turning point in Russian oil companies' organizational and business practices.

Relying on Russian oil ministry data, the study said that high production and transport costs, as well as inflated work forces and subsidiary social obligations, have made Russian companies particularly vulnerable to low crude prices.

It said oil export revenues have plunged from $15 billion in 1997. Despite a 10% increase in export volumes in the first 7 months of 1998, oil exports have earned only $5.9 billion, nearly 27% less than in the same 1997 period. (Dollar estimates were based on the exchange rate before the August devaluation of the ruble.)

Depreciation of the ruble has provided only slight relief for oil companies, and it could be eroded by inflation. Adding to their woes is the government's plans to increase fiscal pressures on the industry and the collapse of the banking system.

Cuts eyed

The French study noted that Russian oil firms have been forced to cut costs dramatically.

They have fired employees, scrapped noneconomic activities, capped marginal wells, reduced investments, spun off service and supply operations, and have sought more western technology.

It said that reducing staff and abandoning nonoil activities is particularly difficult in Russia, where companies employ 30-70% more personnel than their western counterparts.

Also, about 10% of their budgets is earmarked for large-scale social services projects, such as the operation of hospitals, housing, farms, etc.

These cuts have been painful in regions where the oil companies are the major employers. But the study said that layoffs still are the most frequently used method for reducing costs.

Yukos example

Yukos Oil Co., in the framework of its alliance with Schlumberger Ltd., has been establishing oil service companies and is mulling the spinoff of all of its service operations.

It wants to diversify more overseas and has a goal of producing 25% of its oil from outside Russia within the next few years.

Yukos has reduced its production costs from $9.80-10.60/bbl to $7.20/bbl in July and hopes to go further. Its leaders have announced a reorganization they say will cut production costs 25%.

The regional subdivisions inherited from the Soviet era will be replaced by Yukos EP for exploration and production, Yukos RM for refining and marketing, and Yukos Moscow for management and finance.

The plan, if implemented, could reduce the upstream work force to 25,000 from 76,000. Other Russian oil firms are studying similar measures.

The French study said it's risky to predict the future of the Russian oil industry, but some Russian oil executives think the industry is headed toward even more concentration.