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A New Oil Major From Nowhere
By Greg Walters
Staff Writer
Russia's fastest-growing oil company is no longer knocking on the door of the oil major club. It's climbing in through the window.
After roaring out of nowhere to become Russia's No. 10 oil producer by output in just over 2 1/2 years, Russneft says it will double production again this year to reach 400,000 barrels per day. That kind of expansion would bring Russneft to near parity with oil major Tatneft and the remnants of Yukos, or about seventh place.
Following an aggressive -- and, at times, controversial -- expansion strategy, the company has used wheelbarrows full of cash to purchase and then bolt together 25 small, independent Russian oil producers, according to Russneft's count.
Today, the company reckons its own worth to be about $3 billion, having been started from scratch in December 2002, and it has been reported to be moving in on some of the major assets of embattled Yukos -- reports the company vehemently denies.
Exactly where Russneft got the cash to become a major Russian player in less than three years remains unclear.
"With a company like that, you grow if you have money," said Adam Landes, an oil and gas analyst with Renaissance Capital. "But no one really knows where the money came from, or how much has been spent."
Russneft spokesman Eduard Sarkisov said Russneft had taken out "tens of millions" of dollars in loans, but declined to say how much the company had spent on acquisitions.
The company's rapid expansion has caused some analysts to speculate that the company may have the government's blessing to consolidate Russia's oil juniors as part of a bid to boost the country's production.
"I have the sense of benediction from above," said Eric Kraus, head of equities at Sovlink Securities. "The Russian government and the powers that be may be seeking to bring about a consolidation of small and inefficient companies."
Over 100 small, independent companies make up the underbrush of Russia's oil extraction industry.
That the consolidating force for these small, independent producers is a come-from-nowhere company like Russneft instead of a goliath like LUKoil could be because Russia's biggest oil firms "are already financially stretched maintaining their aging infrastructure," Kraus said.
Russneft was started in 2002 by Mikhail Gutseriyev, former head of state oil firm Slavneft. But the company does not disclose its ownership structure.
Gutseriyev -- Russneft's president and the country's 40th-richest man, with a personal fortune of $730 million, according to the Russian edition of Forbes magazine -- was twice elected to the State Duma in the 1990s, most recently as an independent deputy. He quit in 2000 after being appointed president of state-owned Slavneft, a post from which he was fired about a year later for reasons he has said were never explained to him.
Gutseriyev's "large experience in legislative work and in the oil business has, of course, helped the development of Russneft," Sarkisov said. But the company has not received any special treatment from the authorities, he said.
Russneft now plans to spend about $260 million on exploration and development at existing fields in 2005, not counting further acquisitions.
Russneft has repeatedly denied reports that it is chasing after Yukos' former assets.
Hungarian oil company MOL announced in late April that Russneft had "declared its intention" to purchase Yukos' 50 percent stake in a joint venture in the Zapadno Malobalyksky oil field. Russneft said it had never been interested in the stake.
Citing three unidentified sources, Vedomosti wrote in March that Russneft had offered to buy a 76 percent stake in Volgotanker, a former Yukos subsidiary and Russia's largest oil shipping company -- a report Sarkisov called "absurd."
Russneft also denied media reports that it had purchased Yukos' 34 percent stake in Geoilbent, a small oil company based in southern Russia. Both Vedomosti and Kommersant cited unnamed sources saying that the official owner, Cyprus-based Broadwood Trading Investments, was in fact a Russneft unit.
Both newspapers, again citing unidentified sources, recently reported that after a tough court battle over the rights to the rest of the shares of Geoilbent -- which Novatek had tried to sell to LUKoil -- Russneft and LUKoil had agreed to share Geoilbent.
Russneft is already mapping out plans for international expansion into Iraq, Sudan and Kazakhstan, Sariskov said, adding that an initial public offering on a foreign stock exchange was only "a matter of time."
Some analysts argue, however, that the company's role as a mass-consolidator may become increasingly difficult as domestic oil prices rise to approximate international levels.
Russia's small oil producers -- which Russneft has been so eagerly purchasing -- have revenues tied to domestic prices. As those prices rise, so will the cost of buying the companies.
"Small, independent producers are making better margins on the domestic market, so it will be more expensive for Russneft to buy up more production companies in Russia," said Lev Snykov, senior oil and gas analyst at FIM Securities.
"If [Russneft] doubles production this year, they won't double again next year. The increase will be a double-digit figure, but it won't be 50 percent."
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