The oil company Sibneft became the fifth largest company in Russia in terms of  production in February, leaving behind Tatneft. By the end of the year, the company will boost  output by 26 % to 20.7 mm tons, compared with last year, and double output by 2005.  Company leadership notes that the company may invest annually the required $ 1 bn if the world  oil price is not below $ 16.5 per barrel. 

As output grows, Sibneft management will increase the credit portfolio, which currently stands at  $ 840 mm.
Nearly 48 % of the company's total oil export is used as a security for credits.  Company leadership is holding talks on credits with several foreign banks: West LB, ING Bank,  Societe Generale and others. 

This summer, Sibneft intends to borrow $ 200-300 mm for capital investment. In addition, the  company will solicit another credit to take part in the privatisation of a 19.68 % stake in Slavneft  by the end of the year. This year, Sibneft's main investment will be committed to the Sugmut  deposit in the Yamal-Nenets area, the Priobskoye and Palyanovskoye deposits in the  Khanty-Mansi area. 

 In addition, around $ 100 mm will be invested in the Sibneft-Yugra joint venture between Sibneft  and Sibir Energy, which develops the Yugorskoye deposit. Last year, the company extracted  80,000 tons of oil at the deposit and aims to produce 500,000 tons in 2002. 

LUKOIL
Operating performance Production soared 17 percent last year to 1.24 million barrels per day (bpd) due to the inclusion of Komitek and three fully controlled joint ventures into consolidated production reporting. Including all Russian joint ventures and subsidiaries, production was up 2.8 percent at 1.56 million bpd.

Organic growth was low at 1 percent due to the stagnant production in the company’s core western Siberia region, which currently accounts for 72 percent of total production (the region produced 83 percent in 1999). So far, the Komitek acquisition appears to be paying off – production at the three Timan-Pechora subsidiaries (Komitek, Nobel Oil, Bitran) was up 5.7 percent last year and accounted for 9.2 percent of LUKoil’s total output.

Production at international projects continues to increase at a rapid pace (39 percent last year). Major growth was recorded at the Azeri-Chirag-Guneshli (the Azerbaijani part of the Caspian) and Tengiz (Kazakstan) oil projects.
Crude oil exports fell 2.6 percent to 594,000 bpd and amounted to 38 percent of production, putting LUKoil more or less in line with the sector average. Product exports, however, jumped 37 percent to 174,000 bpd.

Financial performance
For 2000, we estimate that LUKoil will report a 129 percent increase in net income and a 118 percent increase in earnings before interest, taxation, depreciation and good will amortization (EBITDA) on a 75 percent revenue increase.
First half of 2000 U.S. GAAP accounts published last December indicated a rather strong performance from LUKoil, driven primarily by oil prices and recent acquisitions. 
Revenues rose 116 percent in the first half of 2000 versus a 63 percent increase in production costs and a 70 percent rise in total operating expenses. As a result, the operating margin jumped from 11 percent to 30 percent.

The balance sheet appears healthy, with an estimated $2.8 billion in total debt, $1.2 billion in cash and equivalents and equity of $9.8 billion.

YUKOS 
Operating performance Production rose 11.5 percent last year to 992,000 bpd, the best record in the sector and an astonishing performance given Yukos size. This growth was mainly driven by rapid output growth at the Priobskoye oilfield, as well as by increased utilization of new recovery technologies in the older fields.

Crude oil exports soared 23 percent to 438,000 bpd. The export/production ratio increased from 40 percent to 44 percent, the highest in the sector. Clearly this high share of exports in a period of record oil prices had an extremely beneficial impact on the bottom line.
Volumes refined at the company’s four principal refineries – Achinsk, Samara, Syzran and Novokuybishev – fell 15 percent to 434,000 bpd as Yukos re-routed some deliveries to Angarsk refinery in eastern Siberia, with which it signed a strategic partnership agreement in March 2000.

Financial performance 
We estimate that Yukos revenue grew 73 percent in 2000 to $7.7 billion due to a combination of growing volumes, higher prices and increased exports. The company’s EBITDA margin will probably have remained unchanged at 44 percent. Yukos boasts the highest EBITDA and operating margins among the U.S. GAAP reporting oil companies in Russia, which we attribute to large-scale optimization of operating taxes. 
In 2001, continued above-average volume growth should cushion Yukos from falling export prices. We estimate that revenue will fall only 2 percent year on year to $7.5 billion but forecast the EBITDA to fall by 12 percent, as rising costs will lead to declining margins.
The balance sheet improved dramatically in 2000 as Yukos moved from a net debt of $310 million to an estimated net cash position of $1 billion at year-end.

Despite generating an estimated $2.4 billion in operating cash flow last year, Yukos’ CAPEX amounted to only $500 million. Note that after subtracting a $1.3 billion improvement to the balance sheet, described above, we still could not allocate $600 million. Company executives cited long-term supplier advances and various investments (Eastern Siberian Oil Company being one) as the uses of extra cash flow.

SIBNEFT 
Operating performance Production rose 5.4 percent in 2000 to 344,000 bpd, the first year of rising production in a decade. Production at the Sugmut field rose 45 percent to 48,000 bpd.

Sibneft exported 32 percent of its oil production and 21 percent of refined product output last year, largely unchanged from 1999 levels. Refinery throughput was unchanged at 250,000 bpd. Light products amounted to 80 percent of output, which is by far the highest percentage of any major refinery in Russia and is a further improvement from the 78 percent achieved in 1999.

Sibneft acquired a 40 percent stake in Orenburgneft last year for $250 million to $300 million. We expect this equity to be used as a bargaining chip to increase the utilization of Omsk refinery (64 percent at present) by securing additional oil supplies from TNK, Orenburgneft’s majority shareholder; but it is also possible that management may either sell the stake or insist on a joint operation with TNK.

Sibneft has also formed a 50/50 joint venture with Sibir to develop the southern part of the Priobskoye field. 

Financial performance
Sibneft skipped publication of semi-annual US GAAP numbers last year over a dispute with its auditor. On a full-year basis, we expect the company to report 70 percent revenue growth and 152 percent EBITDA growth in 2001, due to a combination of higher volume and prices. Margins are forecast to expand by 1,000 bp-2,000 bp.

Operating and net margins are below the sector averages due to high depreciation charges. Sibneft carries its U.S. GAAP books in dollars, which has made depreciation expense immune to the ruble devaluation. As a result, Sibneft’s depreciation equals that of LUKoil and Surgutneftegaz, despite production being 72 percent lower.

On a cash basis, margins are traditionally slightly below those of industry peers, due to higher exposure to the domestic market. This, however, should work in Sibneft’s favor this year as domestic prices outperform exports. 

Sibneft’s financial position is very stable.
The company repaid its $150 million Eurobond issue last August, but subsequently had to raise $375 million in new debt financing.

SURGUTNEFTEGAZ
Operating performance Surgutneftegaz delivered another year of strong operating performance in 2000. Output rose 8 percent to 812,400 bpd due to another increase in development drilling, the introduction of several new fields and continuing deployment of new oil recovery methods and technologies. Crude exports rose 13 percent year on year and amounted to 34.4 percent of output, up from 33 percent in 1999.

Refinery throughput at the Kirishi refinery fell 7 percent in 2000 to 320,000 bpd after the management decided to stop processing third-party oil. At the same time, Surgutneftegaz deliveries to Kirishi rose 8 percent. Due to an excellent optimization of product output, the refinery’s light-heavy product ratio improved sharply to 68 percent-32 percent from 50 percent-50 percent in 1999. The refinery currently operates at 84.2 percent of capacity, among the highest levels in Russia, and exports approximately two-thirds of its output.

Financial performance Surgutnefetgaz’s own forecasts for 2000 are for revenue of $5.6 billion (up 70 percent year on year), gross profit of $3.5 billion (up 82 percent) and pre-tax income of $3.16 billion (up 82 percent). Although Surgut’s RAS accounts are not directly comparable with U.S. GAAP, we believe that Surgut is the most profitable company in the sector due to tight cost-control. The pre-tax margin stood at 57 percent in 2000, up 400 basis points from 1999.

Kirishi refinery, which is not consolidated in Surgut’s performance, posted a 48 percent gain in revenues to $571 million. Due to a drop in refining volumes, however, its pre-tax margin shrank 900 basis points to 35 percent, and pre-tax income rose only 12 percent to $199 million.

TATNETFT
Operating performance Production rose 1.1 percent in 2000 to 486,000 bpd, the first gain since 1995 and actually quite an achievement given the company’s poor reserve quality.

In order to capture downstream margins, Tatneft processed 50,000 bpd at the refining unit it leases from Nizhnekamskneftekhim and marketed the resulting products. As a result of this processing activity, deliveries to Nizhnekamskneftekhim (NKNH), commonly transacted at a 30 percent discount to market prices, fell to 60,000 bpd last year.
Tatneft’s gas-station network expanded from 60 to 183, mostly in Tatarstan and the Moscow region. Jointly with LUKoil, Tatneft also acquired a 45 percent stake in the Moscow Refinery last year, its major domestic crude customer after NKNH.
Operating performance has also improved at Nizhnekamshina. Total tire production rose 4 percent and gross margins were reportedly positive.
Oil exports rose from 32 percent of output in 1999 to 40 percent as Tatneft exported additional volumes it bought from independent Tatarstan producers.

Financial performance
For 2000, we expect Tatneft to report 96 percent growth in revenues, 88 percent EBITDA growth and 122 percent earnings-per-share growth. In addition to high oil prices, the improved exports ratio and successful marketing of oil products boosted performance.

The balance sheet continued to improve due to the company’s ongoing debt reduction program. Total debt fell by $275 million to $620 million at year-end 2000, and the net debt/equity ratio has improved from 0.52 percent in 1999 to 0.21 percent.

For 2001, we expect a 33 percent drop in EBITDA on a 13 percent decline in revenues. In the absence of downstream business, Tatneft’s performance is inherently more sensitive to oil-price volatility. But a moderate reduction in working capital needs, combined with higher depreciation expense, should still allow Tatneft to generate operating cash flow of $617 million. 
 

Several pieces of legislation have been adopted recently that will help form a special tax regime for projects operating under production sharing agreements.

The draft law "On Direct Production Sharing" is awaiting the president’s signature. It was adopted by the Federation Council and establishes a simplified procedure for production sharing between the government and investors.

It is well known that the law "On Production Sharing Agreements" (PSA) basically substitutes some taxes and duties for production sharing. In other words, an investor running a PSA project is exempt from taxes and duties, except royalties, profit tax, universal social tax and duties on the use of land and natural resources.

A special taxation system for PSA needs to meet the following two basic requirements. It must fit in with the principles established in the law "On Production Sharing Agreements" and be compatible with the Russian Tax Code and other legal and executive acts concerning taxation.

The State Duma Committee on Budget and Taxes, together with representatives of the fiscal structures, drafted a relevant document that was submitted to the Duma on January 23, 2001. But on April 26 the Finance Ministry refused to cooperate and put forward its own draft. Finally, it was decided that the latter document should be finalized and submitted to the government by June 20, 2001.

The Finance Ministry’s draft provides for a dramatic increase in the number of taxes (from four to 22) and, what is worse, establishes that investors’ expenses cannot be reimbursed in excess of the limits set by the agreement. This means that it will not be long before such "limits" appear in every PSA. And the larger the number of taxes the less production is left to be shared between the parties of a PSA. This is a step back toward the existing taxation system that we have been trying to put straight for six years.

On April 13, 2001, the Consultative Council on Foreign Investments in Russia, the European Business Club, the American Chamber of Commerce’s Russian branch, the German Economic Union and the Oil Consultative Forum, who represent the interests of foreign investors in Russia, sent a letter to Economic Development Minister German Gref where they clearly stated that the Finance Ministry’s draft law was not in line with the law "On Production Sharing Agreements." They said it "will not help create any adequate conditions for investments," that it "undermines the foundations of the production sharing principles and ideas," and "leaves no opportunity for any long-term economic assessments."

The letter, which definitely deserved serious attention, was shown little respect by the government. As if deriding it, the government meeting that convened shortly after it was received resolved "to uphold the main principles of the Finance Ministry’s draft." 

Without waiting for the deadline of June 20, the Finance Ministry finalized the draft and submitted it to the government on May 11. Compared with the initial draft, the final version showed some improvements as well as some changes for the worse. For example, a number of purely conventional payments, such as "compensation to the state for exploratory and prospecting work," were classified as taxes.

In their letter, the investors gave a highly positive appraisal of the draft law prepared by the State Duma Committee on Budget and Taxes. The letter said that the adoption of this draft "with some amendments and appendices would be a major step forward and … would signal the improvement of Russia’s investment climate in the oil and gas industry."

The investors’ opinion was ignored, and the Duma’s Committee’s proposals were rejected right away.

Another dangerous provision in the government’s draft substitutes "royalties" for "extraction tax." As things stand, the "royalty" rate varies between 6 percent and 16 percent and is specified in a PSA license, while the government’s draft calls for setting the "extraction tax" at 16.5 percent. Obviously, this may push some of the PSA projects out of business.

According to estimates made by the head of the YUKOS oil company, Mikhail Khodorkovsky, the substitution of "royalties" for "extraction tax" will nearly double the tax burden.

The cost of oil production and operational efficiency of an oil company strongly depend on the deposit’s location, depth of the oil layer, deposit’s capacity, and so on. The proposed "extraction tax" does not take these differences into account.

So, the "extraction tax," if introduced, will cause numerous problems and require existing licenses to be revised. What is worse, the tax will destroy the present rational use of natural resources and provoke social and political destabilization in a number of regions. For many oil provinces, especially the old ones located in Tatarstan and Bashkortostan, the tax may well turn out to be too much.

In other words, the government’s draft law will stimulate operations at the richest oilfields and will force companies to abandon deposits as soon as oil production costs increase, leaving the problems to future generations.

Meanwhile, the adoption of the draft law "On Direct Production Sharing" has made both the Duma and Finance Ministry drafts obsolete. This gives all interested parties – the State Duma and the government – one more chance to draft a sensible version of the Tax Code’s article "On Production Sharing" to make it possible for Russia to take part in serious talks with potential investors. (The author is a member of the Expert Council, part of a State Duma commission in charge of Production Sharing Agreements)             By MIKHAIL SUBBOTIN / Special to Oil, Gas and Energy 
 

In a deal that could lead to a joint venture agreement, IPC and Chukotneftegasgeologia have a joint study agreement covering an area in the Chukotka region. The two will assess the technical and economic feasibility of producing small onshore oil fields in the ANADYR ANDKAHTYRKA BASINS,aimed at yielding exports for western markets.

Crude from the two basins has a high wax content, but it is low in sulfur and the fields are close to the Pacific Coast.

 IPC said depending on results of the study, it could enter a production agreement with Chukotneftegasgeologia in the next 2-5 years.