A PSA of the action
Russian prime minister Mikhail Kasyanov was last month given a
stern talking-to about improving the business environment in his
country by Jean Lemierre, chairman of the European Bank for
Reconstruction and Development.
After Kasyanov's visit to the EBRD on 20 September, the bank announced that Lemierre had ?urged the Russian government to speed up reform efforts? on energy and power sector restructuring, banking restructuring, the break-up of natural monopolies in an organised and transparent manner and the creation of a ?level playing field? for business, especially with regard to the legal system.
At the centre of attention are the EBRD's two major syndicated loans to Russian companies this year: $150 million to Lukoil, approved by the bank's board in May, and $250 million to Gazprom, approved on 5 September.
The Lukoil loan was the first syndicated deal to a Russian corporate on that scale since the Russian banking crash of 1998. But sources close to the deal said that by late last month the money had still not been disbursed, because Lukoil, Russia's largest oil company, has failed to meet agreed conditions.
There are three issues. First, that Lukoil produces full accounts to international standards ? which the company says is simply a matter of time. Secondly, that it leave Western Petroleum of Switzerland out of offtake arrangements. And thirdly ? which reportedly is the hardest part ? the EBRD wants Lukoil to reveal the identity of the beneficiaries of Reforma Investment of Cyprus, which bought a 9% stake in Lukoil auctioned by the Russian government last year.
Neither the company nor the EBRD will comment, but the Wall Street Journal suggested that the bank may end up by making arrangements whereby the identity of those who control Reforma will be made known to its staff, but not made public.
The dispute says much about the future financing of the Russian oil and gas sector. The companies are wallowing in so much cash that they are not desperate to borrow ? but know that high prices will not last forever, and that solid relationships with western banks should be built. The banks, for their part, cannot resist the companies' incredibly healthy balance sheets. But if issues of financial transparency and corporate governance are not faced now, relationships will be built on shifting sands, vulnerable to future price falls. The long-term loser will be the Russian economy, which desperately needs long-term investment to realise the country's wealth and underpin recovery.
These considerations prompted concern on the EBRD board about both the Lukoil deal and the loan to Gazprom, to fund installation of a management information system for the company's accountants and to help with infrastructure upgrades. At least $100 million of the loan, which is collateralised on gas exports to Hungary, will be syndicated to commercial banks.
There are two corporate governance issues that have particularly tarnished Gazprom's image. The first is the Florida-based trading company, Itera, which since its foundation in 1994 has specialised in collection of Gazprom's unpaid bills in CIS republics. Last year Itera moved into gas production and contract sales, areas hitherto dominated by Gazprom, with the larger company's co-operation. Itera's ultimate beneficiaries are unknown and there is concern that its owners may be linked to Gazprom management. The second problem is financial transparency. The Natural Gas Companies Worldwide report, produced by Sheffield Energy Resources & Information Services, earlier this year highlighted the ?unreasonably low transfer price for gas purchased from [Gazprom's] production segment? by its distribution division.
As Kasyanov listened to Lemierre insisting on ?speeded-up reform? and a ?level playing field?, he may well have reflected on ambitious pipeline and other cap-ex projects under consideration in the oil and gas sector, which ? given the parlous state of Russian banking ? may well require loan capital raised abroad.
Cap-ex projects
A second branch of Gazprom's Yamal-Europe pipeline is the focus of a complex political dispute in central Europe. The $1 billion, 30 billion cubic metres (bcm) per year pipeline ? if it goes ahead ? will be backed by a consortium including Wintershall, Ruhrgas, Gaz de France, and ENI of Italy, with whom Gazprom held talks at the end of August. The new pipeline will branch off from the existing Yamal-Europe pipeline to Germany, and carry gas through Slovakia to southern Europe ? thus avoiding Ukraine. Friction has mounted in recent years over Ukraine's gigantic debt for Russian gas; Russia alleges that when it threatens to halt supplies due to non-payment, up to 10 bcm per year of gas is siphoned off illegally from its pipelines through Ukraine to western Europe.
Poland is under strong political pressure from Ukraine not to agree to the Slovakia-south Europe leg of the pipeline being built. The issue was left unresolved at a meeting in Smolensk in early August between Viktor Khristenko, Russian deputy prime minister, and Polish prime minister Jerzy Buzek.
Gazprom has made much of the possibility of a $10 billion Trans-Baltic gas pipeline that it would build as a joint project with Fortum of Finland ? but this could not be ready until 2010. Ruslan Nikolov, oil analyst at ABN Amro in London said: ?There is considerable political hostility to Gazprom in central Europe, as their failure to buy into the Hungarian gas industry showed. So they may have real difficulties with the second branch of the Yamal-Europe pipeline. But the Trans-Baltic route is not a serious altrenative.?
Two pipelines from Siberia to supply China and the Far Eastern market, one gas and one oil, are under consideration.
On 12 September, Russian, Korean and Chinese government officials initialled an agreement stating that the feasability study on the gas pipeline, the estimated cost of which is $4.5 billion, will be completed in 2001. The Korean Gas Corporation and the Chinese National Oil Corporation (CNOC) were parties to the agreement along with the Russian project company Rusia Petroleum, which holds licences in the Kovykta gas condensate field, one of the world's largest with up to 2,000 bcms of reserves.
A production sharing agreement (PSA) for Kovykta is awaiting approval at the third reading in the Russian parliament, and BP Amoco, which holds a stake in the company, has been under pressure from local stakeholders ? including TNK, the Irkutsk region, Irkutskenergo power utility and Rosinvestneft energy investment company (Rinko) ? to invest more in the field.
Yukos, Russia's second-largest oil holding, may also be interested in Kovykta. It is aggressively buying assets in east Siberia, including a 19% stake in East Siberian Oil Company, and in the last month signed a partnership agreement with Rinko, which has a controlling stake in the Angarsk oil processing plant. Yukos is also anxious to tap China's potential, has signed contracts to deliver oil from its Tomsk and Yugansk fields to CNOC, and has announced the construction of an oil pipeline in partnership with Transneft, Russia's pipeline monopoly, and CNOC, as a priority investment project. Industry sources say Surgutneftegaz, whose main production units are at Khanty-Mansiisk in western Siberia, would like to expand eastwards may also support the project.
Yukos was partnered with Menatep bank, which crashed in 1998, leaving bad debts with western banks, in some cases collateralised on Yukos shares. It has been criticised for diluting minority shareholders in its production subsidiaries and was barred from the Moscow stock exchange for a year from June 1999 for regulatory offences. It therefore has a confidence problem to overcome with western investors, but showed its determination to do so on 14 August when it syndicated a nine-month $50 million trade finance loan to eight leading western banks. The company says it plans a level 2 ADR issue this year.
Among the other investment projects planned by the cash-rich Russian oil companies are:
? Tyumen Oil Company's expansion, the latest chapter of which was the purchase at auction of 85% of Onako oil company, the first Russian privatisation since president Putin took office. TNK subsidiary Yevrotek paid $1,080 million for the stake, narrowly beating a rival bid from a consortium backed by Yukos, Sibneft and Stroitransgaz ? a price analysts regarded as a serious reflection of the company's worth.
TNK would not give details of how it raised the money, but it clearly helps that the company is in political favour both in New York and in Washington. It has had a $300 million loan from Sberbank, the state-owned savings bank, and issued three ruble-denominated bonds this year. It is also relying heavily on a $672 million export credit from US Ex-Im bank ? the approval of which came earlier this year, having been held up until TNK and BP Amoco had resolved their dispute over the break-up of Sidanco ? to finance other cap-ex. The first $217 million tranche of this money was disbursed in August, to employ ABB Lummus Global to carry out modernisation work at the Ryazan refinery.
? Sibneft's plans to spend $225 million modernising its upstream operations, including work contracted out to Schlumberger, and $30 million on downstream. The company raised a $100 million loan from MDM and, having closed a three-year eurobond in July, is considering issuing a further eurobond if necessary.
? The development by Lukoil of the Timan Pechora field north of the Arctic circle. In August Lukoil completed the purchase from TotalFinaElf of a 20% stake in the Kharyaga PSA at Timan Pechora; the French operator thus retains 30%, Norsk Hydro of Norway has 40% and the local Nenets oil company has 10%. Kharyaga, one of the three ?grandfather? PSAs agreed prior to legislation being finalised, is expected to produce 340 million barrels of oil over 33 years; it started production in October 1999. Lukoil also last year bought KomiTEK, a production company with licences adjacent to the Kharyaga project.
PSA legislation
A welcome development for Russian oil and gas projects is the active interest taken by president Vladimir Putin in resolving outstanding problems on PSA legislation. Last month he unexpectedly handed control of PSA matters to the ministry of economic development and told his government to resolve outstanding legislative problems by early next year.
Putin told a conference of oil company representatives and politicians on 3 September on Sakhalin island that PSA is a key priority ? and announced, to the surprise even of high-ranking officials, that control of PSA matters is to be switched away from the fuel and energy ministry.
Putin's speech at the PSA-2000 gathering in Yuzhno-Sakhalinsk followed the adoption by the government on 31 August of a schedule to speed up finalisation of the normative acts, the executive instruments attached to the PSA law governing crucial details about tax and cost recovery.
Glenn Waller of the Petroleum Advisory Forum, which represents foreign oil companies in Russia, said Putin's speech at Yuzhno-Sakhalinsk was ?very encouraging?. Referring to the way that talks over the normative acts dragged on endlessly under Yeltsin, Waller said: ?The problem has been an absence of political will at the top. With the election of a new president this has changed. Putin has said clearly that PSA is necessary to attract foreign investment and that the practical measures to implement it must be taken.?
Waller said he was confident that the government would address the priorities, i.e. put in place the normative acts, of which the most contentious concerns cost recovery, the special PSA chapter in the tax code and some technical amendments to the PSA law.
Richard Freeman, vice president (Russia) of Texaco oil company, speaking at a Euromoney conference in Moscow last month, was less enthusiastic and said the country's investment climate remained ?difficult?. He welcomed Putin's statement on PSA and said ?if the legislation can be implemented, with all the normative acts, by early next year, investment will come in from oil companies ? not like a waterfall, but it will start to flow.?
While Putin's determination to hurry up PSA legislation has been unanimously welcomed, there are some worries about the reins being handed to economic development minister German Gref, instead of to a special state agency as had originally been expected. One of Gref's key economic advisers, Vladimir Mau, is on record as saying the PSA law is unnecessary, and the leading business newspaper Vedomosti even suggested Gref would kill off the legislation. Western oil company sources say that the fears are exaggerated, and they expect Gref ? who has put strong supporters of the legislation in charge of administering it ? to carry out Putin's wishes.
After Kasyanov's visit to the EBRD on 20 September, the bank announced that Lemierre had ?urged the Russian government to speed up reform efforts? on energy and power sector restructuring, banking restructuring, the break-up of natural monopolies in an organised and transparent manner and the creation of a ?level playing field? for business, especially with regard to the legal system.
At the centre of attention are the EBRD's two major syndicated loans to Russian companies this year: $150 million to Lukoil, approved by the bank's board in May, and $250 million to Gazprom, approved on 5 September.
The Lukoil loan was the first syndicated deal to a Russian corporate on that scale since the Russian banking crash of 1998. But sources close to the deal said that by late last month the money had still not been disbursed, because Lukoil, Russia's largest oil company, has failed to meet agreed conditions.
There are three issues. First, that Lukoil produces full accounts to international standards ? which the company says is simply a matter of time. Secondly, that it leave Western Petroleum of Switzerland out of offtake arrangements. And thirdly ? which reportedly is the hardest part ? the EBRD wants Lukoil to reveal the identity of the beneficiaries of Reforma Investment of Cyprus, which bought a 9% stake in Lukoil auctioned by the Russian government last year.
Neither the company nor the EBRD will comment, but the Wall Street Journal suggested that the bank may end up by making arrangements whereby the identity of those who control Reforma will be made known to its staff, but not made public.
The dispute says much about the future financing of the Russian oil and gas sector. The companies are wallowing in so much cash that they are not desperate to borrow ? but know that high prices will not last forever, and that solid relationships with western banks should be built. The banks, for their part, cannot resist the companies' incredibly healthy balance sheets. But if issues of financial transparency and corporate governance are not faced now, relationships will be built on shifting sands, vulnerable to future price falls. The long-term loser will be the Russian economy, which desperately needs long-term investment to realise the country's wealth and underpin recovery.
These considerations prompted concern on the EBRD board about both the Lukoil deal and the loan to Gazprom, to fund installation of a management information system for the company's accountants and to help with infrastructure upgrades. At least $100 million of the loan, which is collateralised on gas exports to Hungary, will be syndicated to commercial banks.
There are two corporate governance issues that have particularly tarnished Gazprom's image. The first is the Florida-based trading company, Itera, which since its foundation in 1994 has specialised in collection of Gazprom's unpaid bills in CIS republics. Last year Itera moved into gas production and contract sales, areas hitherto dominated by Gazprom, with the larger company's co-operation. Itera's ultimate beneficiaries are unknown and there is concern that its owners may be linked to Gazprom management. The second problem is financial transparency. The Natural Gas Companies Worldwide report, produced by Sheffield Energy Resources & Information Services, earlier this year highlighted the ?unreasonably low transfer price for gas purchased from [Gazprom's] production segment? by its distribution division.
As Kasyanov listened to Lemierre insisting on ?speeded-up reform? and a ?level playing field?, he may well have reflected on ambitious pipeline and other cap-ex projects under consideration in the oil and gas sector, which ? given the parlous state of Russian banking ? may well require loan capital raised abroad.
Cap-ex projects
A second branch of Gazprom's Yamal-Europe pipeline is the focus of a complex political dispute in central Europe. The $1 billion, 30 billion cubic metres (bcm) per year pipeline ? if it goes ahead ? will be backed by a consortium including Wintershall, Ruhrgas, Gaz de France, and ENI of Italy, with whom Gazprom held talks at the end of August. The new pipeline will branch off from the existing Yamal-Europe pipeline to Germany, and carry gas through Slovakia to southern Europe ? thus avoiding Ukraine. Friction has mounted in recent years over Ukraine's gigantic debt for Russian gas; Russia alleges that when it threatens to halt supplies due to non-payment, up to 10 bcm per year of gas is siphoned off illegally from its pipelines through Ukraine to western Europe.
Poland is under strong political pressure from Ukraine not to agree to the Slovakia-south Europe leg of the pipeline being built. The issue was left unresolved at a meeting in Smolensk in early August between Viktor Khristenko, Russian deputy prime minister, and Polish prime minister Jerzy Buzek.
Gazprom has made much of the possibility of a $10 billion Trans-Baltic gas pipeline that it would build as a joint project with Fortum of Finland ? but this could not be ready until 2010. Ruslan Nikolov, oil analyst at ABN Amro in London said: ?There is considerable political hostility to Gazprom in central Europe, as their failure to buy into the Hungarian gas industry showed. So they may have real difficulties with the second branch of the Yamal-Europe pipeline. But the Trans-Baltic route is not a serious altrenative.?
Two pipelines from Siberia to supply China and the Far Eastern market, one gas and one oil, are under consideration.
On 12 September, Russian, Korean and Chinese government officials initialled an agreement stating that the feasability study on the gas pipeline, the estimated cost of which is $4.5 billion, will be completed in 2001. The Korean Gas Corporation and the Chinese National Oil Corporation (CNOC) were parties to the agreement along with the Russian project company Rusia Petroleum, which holds licences in the Kovykta gas condensate field, one of the world's largest with up to 2,000 bcms of reserves.
A production sharing agreement (PSA) for Kovykta is awaiting approval at the third reading in the Russian parliament, and BP Amoco, which holds a stake in the company, has been under pressure from local stakeholders ? including TNK, the Irkutsk region, Irkutskenergo power utility and Rosinvestneft energy investment company (Rinko) ? to invest more in the field.
Yukos, Russia's second-largest oil holding, may also be interested in Kovykta. It is aggressively buying assets in east Siberia, including a 19% stake in East Siberian Oil Company, and in the last month signed a partnership agreement with Rinko, which has a controlling stake in the Angarsk oil processing plant. Yukos is also anxious to tap China's potential, has signed contracts to deliver oil from its Tomsk and Yugansk fields to CNOC, and has announced the construction of an oil pipeline in partnership with Transneft, Russia's pipeline monopoly, and CNOC, as a priority investment project. Industry sources say Surgutneftegaz, whose main production units are at Khanty-Mansiisk in western Siberia, would like to expand eastwards may also support the project.
Yukos was partnered with Menatep bank, which crashed in 1998, leaving bad debts with western banks, in some cases collateralised on Yukos shares. It has been criticised for diluting minority shareholders in its production subsidiaries and was barred from the Moscow stock exchange for a year from June 1999 for regulatory offences. It therefore has a confidence problem to overcome with western investors, but showed its determination to do so on 14 August when it syndicated a nine-month $50 million trade finance loan to eight leading western banks. The company says it plans a level 2 ADR issue this year.
Among the other investment projects planned by the cash-rich Russian oil companies are:
? Tyumen Oil Company's expansion, the latest chapter of which was the purchase at auction of 85% of Onako oil company, the first Russian privatisation since president Putin took office. TNK subsidiary Yevrotek paid $1,080 million for the stake, narrowly beating a rival bid from a consortium backed by Yukos, Sibneft and Stroitransgaz ? a price analysts regarded as a serious reflection of the company's worth.
TNK would not give details of how it raised the money, but it clearly helps that the company is in political favour both in New York and in Washington. It has had a $300 million loan from Sberbank, the state-owned savings bank, and issued three ruble-denominated bonds this year. It is also relying heavily on a $672 million export credit from US Ex-Im bank ? the approval of which came earlier this year, having been held up until TNK and BP Amoco had resolved their dispute over the break-up of Sidanco ? to finance other cap-ex. The first $217 million tranche of this money was disbursed in August, to employ ABB Lummus Global to carry out modernisation work at the Ryazan refinery.
? Sibneft's plans to spend $225 million modernising its upstream operations, including work contracted out to Schlumberger, and $30 million on downstream. The company raised a $100 million loan from MDM and, having closed a three-year eurobond in July, is considering issuing a further eurobond if necessary.
? The development by Lukoil of the Timan Pechora field north of the Arctic circle. In August Lukoil completed the purchase from TotalFinaElf of a 20% stake in the Kharyaga PSA at Timan Pechora; the French operator thus retains 30%, Norsk Hydro of Norway has 40% and the local Nenets oil company has 10%. Kharyaga, one of the three ?grandfather? PSAs agreed prior to legislation being finalised, is expected to produce 340 million barrels of oil over 33 years; it started production in October 1999. Lukoil also last year bought KomiTEK, a production company with licences adjacent to the Kharyaga project.
PSA legislation
A welcome development for Russian oil and gas projects is the active interest taken by president Vladimir Putin in resolving outstanding problems on PSA legislation. Last month he unexpectedly handed control of PSA matters to the ministry of economic development and told his government to resolve outstanding legislative problems by early next year.
Putin told a conference of oil company representatives and politicians on 3 September on Sakhalin island that PSA is a key priority ? and announced, to the surprise even of high-ranking officials, that control of PSA matters is to be switched away from the fuel and energy ministry.
Putin's speech at the PSA-2000 gathering in Yuzhno-Sakhalinsk followed the adoption by the government on 31 August of a schedule to speed up finalisation of the normative acts, the executive instruments attached to the PSA law governing crucial details about tax and cost recovery.
Glenn Waller of the Petroleum Advisory Forum, which represents foreign oil companies in Russia, said Putin's speech at Yuzhno-Sakhalinsk was ?very encouraging?. Referring to the way that talks over the normative acts dragged on endlessly under Yeltsin, Waller said: ?The problem has been an absence of political will at the top. With the election of a new president this has changed. Putin has said clearly that PSA is necessary to attract foreign investment and that the practical measures to implement it must be taken.?
Waller said he was confident that the government would address the priorities, i.e. put in place the normative acts, of which the most contentious concerns cost recovery, the special PSA chapter in the tax code and some technical amendments to the PSA law.
Richard Freeman, vice president (Russia) of Texaco oil company, speaking at a Euromoney conference in Moscow last month, was less enthusiastic and said the country's investment climate remained ?difficult?. He welcomed Putin's statement on PSA and said ?if the legislation can be implemented, with all the normative acts, by early next year, investment will come in from oil companies ? not like a waterfall, but it will start to flow.?
While Putin's determination to hurry up PSA legislation has been unanimously welcomed, there are some worries about the reins being handed to economic development minister German Gref, instead of to a special state agency as had originally been expected. One of Gref's key economic advisers, Vladimir Mau, is on record as saying the PSA law is unnecessary, and the leading business newspaper Vedomosti even suggested Gref would kill off the legislation. Western oil company sources say that the fears are exaggerated, and they expect Gref ? who has put strong supporters of the legislation in charge of administering it ? to carry out Putin's wishes.
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