Oil and gas key to Russia's revival

Russia's parliament last week rejected for the second time the reappointment of Victor Chernomyrdin as prime minister. President Boris Yeltsin sees Chernomyrdin as the best hope for repairing the economic and political damage caused by the ruble's freefall. The energy industry is probably the only sector strong enough to halt Russia's decline into chaos, and Chernomyrdin's experience as prime minister, energy minister, and head of Gazprom may be critical. Russia's oil

Sept. 14, 1998

3 min read

David Knott
London
[email protected]

Russia's parliament last week rejected for the second time the reappointment of Victor Chernomyrdin as prime minister.

President Boris Yeltsin sees Chernomyrdin as the best hope for repairing the economic and political damage caused by the ruble's freefall.

The energy industry is probably the only sector strong enough to halt Russia's decline into chaos, and Chernomyrdin's experience as prime minister, energy minister, and head of Gazprom may be critical.

Russia's oil production appears relatively unharmed by the turmoil so far.

Three joint ventures involving Dana Petroleum plc, London, will even benefit in the short term, according to Dana CEO Tom Cross.

Dana's Russian interests are: the YoganOil JV with Lukoil, producing 3,000 b/d of oil in South Vat Yoganskoye field; the YuganskOil JV with Yukos and Tyumen Oil Co., delivering 600 b/d of oil during testing in Sortymskoye field; and a 10% interest in the Salym production-sharing agreement operated by Shell Exploration & Production BV.

Strong partners

Cross said the current situation is similar to the period in 1993 just before the ruble was linked to the dollar on Moscow's currency market.

"We completed our 1993 work program," said Cross, "and found we had spent less than we anticipated. At the moment, we are producing and selling oil successfully, but we are waiting to see the outcome of deliberations over a new prime minister.

"What tends to happen is that, when the ruble declines against the dollar, there is a short-term positive effect for us because we plan projects in dollars but pay for work done in rubles.

"The key to our success in Russia is working with strong partners. The government has to listen to them, because they are involved so much in the country's revenue generation."

Shares boost

Stockbroker HSBC Securities, London, contends that Dana's recent 10.5 pence (17.5¢)/share price was 40% below its true value.

"The shares have been hit hard," said HSBC, "by the combination of the slide in oil prices and the worsening situation in Russia. However, the reaction in the market is now overdone.

"While the Russian situation is undoubtedly severe, it is key that the Russians maximize their foreign currency earnings over the next few years in order to service foreign debt.

"Oil and gas are among the largest dollar-earning exports from Russia and, therefore, maintaining maximum production is vital at a time of economic difficulty."

Now Yeltsin is expected to nominate Chernomyrdin once again for the No. 2 job. If Chernomyrdin is not backed for the third time, the president may be forced to dissolve parliament.

In the meantime, Chernomyrdin is acting prime minister. Yeltsin hopes that having an energy man beside him at the helm will help revive a currency that has lost two-thirds of its value in the past month.