Hardly had YUKOS and Sibneft completed their merger – formally over on October 3 – when word got out that the company’s leadership was in negotiations to sell a large stake to leading US oil companies. Similar rumors appeared last spring as soon as the biggest merger in the Russian oil industry had started. By August, a probable sale of a stake in the merged company was discussed in publications like The Wall Street Journal, New York Times and Financial Times. US-based ExxonMobil and Chevron Texaco, as well as Anglo-Dutch Royal Dutch/Shell, were named as potential candidates for purchase of a 25-40% stake in YUKOS-Sibneft. The press regularly returned to this topic despite official denials by all companies involved.
At the beginning of October, YUKOS informed the Russian government that talks were being conducted with the US oil companies (but not with Royal Dutch/Shell), however. When Lee Raymond, the President of the world’s largest oil company ExxonMobil, arrived in Moscow and informed Russian premier Mikhail Kasyanov of the negotiations with YUKOS-Sibneft, they began to talk about the sale as done deal. Nevertheless, YUKOS-Sibneft’s President Mikhail Khodorkovsky stated more than once that there are no sale agreements whatsoever.

The merger between YUKOS and Sibneft resulted in formation of the fourth largest privately owned oil company in the world in terms of production, with capitalization exceeding $45 billion. In 2003, YUKOS-Sibneft’s total production will reach 119 million tons of oil (28% of all oil production in Russia). The company’s total reserves amount to 19.4 billion barrels of oil – about one third of all Russian reserves. According to forecasts, the merged company’s revenues in 2003 will amount to $22.2 billion and net profits $6.7 billion. YUKOS was a leader in the industry well before the merger with Sibneft, although LUKoil left it behind in terms of reserves as well as production before the beginning of 2003. Since 1999, YUKOS and Sibneft have become the most rapidly growing and attractive Russian companies for investors. Their managers, who in the end of the nineties came from the financial sector, developed a strategy fundamentally different from the strategies of other Russian oil companies: both YUKOS and Sibneft became patent centers of growth in the industry.
Both companies underwent restructuring and introduced corporate governance programs along with international accounting standards, which made them more transparent and reduced costs. Minority shareholders began to receive dividends. Alfa Bank analysts estimate that the two companies are the most efficient in Russia: both YUKOS’s and Sibneft’s production costs per barrel have been below $ 2/barrel for several years and their breakeven point at the present production volumes is $6.5 and $8.5 per barrel, respectively. Net profitability has been as high as 25-32% over the last few years, and investors appreciated the changes at their true value. YUKOS-Sibneft became the largest company in Russia in terms of capitalization.
“It is not surprising that the merger of YUKOS and Sibneft into one company initiated its international ambitions as well. Due to its leading position on the Russian market, YUKOS-Sibneft may with time turn into a global player, which would require both changes in the strategy and expansion of activities in other markets, however,” Dennis Eklof, an energy analyst with Global Insight, told Expert Magazine. YUKOS-Sibneft President Mikhail Khodorkovsky stated in late September that his company plans to become an international player by 2007.

“There is nothing new in the American giants’ interest in Russian oil, since production in their traditional regions – North America and Western Europe – is declining, and there are not many promising new regions – they are first and foremost Western Africa, Russia, and the Caspian shelf,” notes Simon Williams, Senior Economist at Economist Intelligence Unit. ExxonMobil and Chevron Texaco – the second and the fourth largest companies in the world by oil production volume– are potential buyers of YUKOS-Sibneft.
Both ExxonMobil and Chevron Texaco will have to decide whether it is worth making substantial investments in Russian projects or whether they should forget about investing in Russia. Paul Collison, an oil analyst at Brunswick UBS, believes projects in Russia are of great interest to both companies. Last year, Exxon reported a decline in production the favorable conditions on the oil market. Chevron Texaco has been confronted with this problem for the last four years. To improve the situation, both companies are investing in projects in Algeria, Angola, and Venezuela, countries where risks are higher than in Russia. So, their desire to come to Russia is quite natural.
But what does YUKOS-Sibneft stand to gain? “YUKOS intends to enter foreign markets; however, it lacks experience in evaluating oil projects abroad. The bargain will enable it to obtain a strategic partner who would ensure new projects are appraised correctly,” argues Konstantin Reznikov, an oil analyst with Alfa Bank. Entering these markets will make it easier to introduce Western environment protection and labor safety standards, which with a slight rise in costs will mean increased capitalization.
Oil sector analysts found it difficult to name other commercial benefits that could result from the deal. YUKOS-Sibneft’s shares demonstrate a steady upward trend. Therefore, the companies could make much more money selling them in a few years’ time rather than today.
The Russian companies’ further growth in capitalization is becoming increasingly probable. On October 8, Moody’s increased Russia’s rating to the investment grade (Baa3). This means reducing Russia’s perceived risks as a country for Western investors, who will be much more willing to invest in Russian companies. Hence, a capitalization of $45 billion is far from the limit for YUKOS-Sibneft.

Although there is not much commercial sense in the merger, the deal may have an underlying political basis. With the pressure being exerted on YUKOS by the General Prosecutor’s office, Mikhail Khodorkovsky may manage to stabilize the situation by making an alliance with the American oil giants. The merger will make Washington look at the YUKOS case very differently. The Texas oil lobby’s position in the US is stronger than ever, which is why the merger may secure Washington’s political support for Khodorkovsky. Without political pressure from the state, the chance of selling a stake in the largest Russian company would be much smaller.
Some analysts think that the more active discussion of selling a stake in YUKOS-Sibneft to foreigners is linked to Russian authorities’ decision to freeze the Datsin pipeline project. For YUKOS, this means the failure of a project closely connected to its plans for increasing export volumes and building capitalization. The reduction in the company’s appeal for East Asian investors from may also push YUKOS-Sibneft’s leaders to speed up the sale of the big stake.
If the deal eventually takes place, it will not be today or tomorrow. Most analysts think the Kremlin and the government will try to delay the sale until the elections in March 2004 are over. By that time, the situation may have changed. First, the political pressure surrounding the YUKOS case may disappear, which would reduce arguments in favor of the deal for the Russian company. Secondly, oil prices may fall, and the US companies will simply have not enough money to buy the shares. Lastly, YUKOS-Sibneft’s capitalization may increase so much that the purchase of such a large stake would become tough not only for Chevron Texaco but even for ExxonMobil.

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