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#11 - JRL 7251
Financial Times (UK)
July 16, 2003,
Big Oil plays the field in Russia but western independents find going tough: Small groups say might is right in country where they face many obstacles
By Toby Shelley

The joint venture deal signed last month between BP and the Russian group TNK was hailed as confirmation that Russia is now a safe environment for western energy companies.

That may be the case for Big Oil but western independents are finding the going tough, say company executives.

True, some are expanding. US-based Teton tripled its production in May by acquiring Anderman's interests in the Chernogorskoye joint venture with the Russian company Sidanco. London-listed Sibir has found a way around restrictions on the export of crude oil by winning access to the Moscow city refinery.

But even Sibir, although it has the advantage of an influential local partner, faces problems. Last week, the company disclosed that Sibneft, its partner and operator in the Priobskoye group fields, has not reported to it since last year after the two companies took different sides in a contest over the Moscow refinery.

The Aton Capital Group called this a "a major negative" and withdrew a buy recommendation.

Legal wrangles persist, some of them dating back a number of years. Northern Petroleum, another British independent, has been battling AGO, now part of the big company Lukoil, since 1995. "We felt our rights were clear and we used good lawyers but the Russians felt they could walk away", said Derek Musgrove, its managing director.

A few years ago there were scores of small foreign-owned companies or joint ventures with foreign partners in the Russian oil sector but a sweeping consolidation has removed many of them, said Steven Dashevsky, head of research at Moscow-based Aton. Most were happy to be bought out at the "top dollar" prices offered: "People are not packing up and leaving but packing up and selling."

Soco, another London-based company, received Dollars 50m in cash and assump tion of Dollars 11m in debt for its share of a Russian joint venture in which it valued its assets at Pounds 22.3m.

Those who have had their fingers burnt cite three big problems: partner risk; the allied issue of the attitude of the judiciary towards foreign companies; and limits on crude exports.

Henry Cameron, chief executive of Sibir, said the partner risk was best circumvented by bringing in Russian shareholders. Sibir is 50 per cent Russian owned.

Northern's Derek Musgrove said if relations break down Russian partners are confident that "cost and time are on their side - they are happy to drag things out". Roger Cagle, chief financial officer of Soco, which pulled out of Russia in 2001, says who the local partner is matters: "We turned up with Lukoil - without such a partner it would have been very difficult to work."

But even Mr Cagle refers to service providers simply walking away from agreements, leaving the foreign independent to go to a local court that may not hear a case for a long time and any way is likely to favour a Russian party. This month Northern will appear in a court in the Arctic circle unsure even of the nature or content of the case.

Brian Hall, chief executive of Aminex, said, "You get nowhere in local courts. You are better treated at the federal level but it takes many months to get there."

Only around 30-40 per cent of crude can be exported for sale at international prices. The rest is divided between the domestic Russian market and FSU countries. With a domestic price of around Dollars 8 a barrel there is little or no profit on those sales.

Structural change in Russia and its oil sector explains much of the demise of the independents, said Mr Dashevsky.

"Russia doesn't need the 300 oil companies it had, like it doesn't need the 2,000 banks it has," he argued.

Now companies such as Lukoil are driving forward consolidation and buying out Russian interests of Soco, Aminex and Bitech. In May, Rosneft bought Anglo-Siberian.

Mr Hall said the foreign independents were no longer important to the oil sector because after two years of high prices it had amassed plenty of capital it would otherwise have sought from foreign partners.

Mr Dashevsky is critical of western independents' expectations and he argues that the rules of the game are increasingly transparent and increasingly equal for large and small companies, foreign and domestic.

Company executives are divided over whether President Vladimir Putin has made a difference.

Mr Musgrove thinks junior companies remain pawns in internal politics and that promises made when Mr Putin came to power have changed little, but Mr Hall and Mr Cagle think new company codes have improved things.

Still, the perception among many of the small players is that might is right and that Russians remain suspicious of outsiders seeking to profit from their country's natural resources.

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