#8 - JRL 7277
Financial Times (UK)
August 5, 2003
Suitors turn blind eye to Yukos crisis
Western oil groups are undeterred by probes into the Russian giant
By Andrew Jack
Potential suitors are continuing to voice a strong interest in the Russian oil group Yukos as the scandal surrounding the company escalates.
Over the past month eight investigations have been launched by the Russian authorities into Yukos and related companies - and none against other large groups that allegedly indulged in equivalent business practices over the past decade. Many observers see a clear political motive.
Yukos, Russia's largest oil company, has been warning of the risks to the country's improved business climate and to the strong pace of economic growth generally over the past four years, if attacks against it continue.
But, in the middle of the controversy, ChevronTexaco was this weekend the latest company to hint that it is interested in taking a significant stake in Yukos. "They are engaged in talks and probably seriously," says one Moscow oil executive.
Shell, Total and ExxonMobil have all been studying the Russian oil sector in recent months with a view to acquisitions, joint ventures, asset swaps, greenfield developments and the purchase of minority stakes in existing groups. Leading western oil groups are seeking new zones for expansion and Russia has emerged from a period of post-Soviet chaos as a tempting and under represented territory in their portfolios.
"The risk for the majors is not that of being in Russia but of not being in Russia," says Steven Dashevsky, head of research at Aton, a Moscow brokerage. "Russia has low production costs, a large share of proven and potential unproven reserves, and low valuations. Within five years, it could offer them their single greatest competitive advantage."
At the same time, the scope for foreign predators within Russia is shrinking fast. BP's joint venture with TNK announced this year raised the interest and profile of Russia among its competitors and removed from consideration one of the principal acquisition targets.
When Mikhail Khodorkovsky, head of Yukos, unveiled a merger with rival Sibneft soon after, that removed the two other leading Russian candidates from the hands of potential purchasers. Many analysts saw the deal as a pre-emptive gesture to prevent a foreign group from acquiring Sibneft.
Such investments from abroad potentially provide additional "political protection" to Russian companies, making it more difficult for the government to pressurise them. That is one reason Yukos could be happy to hear of Chevron's interest.
However, the scale of the combined YukosSibneft group is so large that few foreign oil companies have the resources to acquire even a minority blocking stake. Chevron, which already has substantial exposure in the region through the Tengiz project in Kazakhstan, would prove particularly stretched.
How far it or others would want to take a stake in Yukos, particularly while the investigations continue, is more open to question. It depends on how far potential acquirers believe the underlying reason for the current crisis is the political threat represented by Mr Khodorkovsky and how far it is a broader attempt to redistribute the ownership of business assets, or to limit foreign investment.
Attacking Sibneft, which is controlled by the powerful businessman Roman Abramovich, would suggest a far broader destabilisation of Russia's business environment, creating even greater dangers for foreigners.
However, for those who interpret the situation as Mr Khodorkovsky's punishment for becoming too influential a lobbyist and political counterweight to the Russian authorities, Yukos or other potential acquisitions could still progress quickly. "These deals survive or die on their own terms," says the oil executive.
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