BRUSSELS - The crucial consequence of Moscow's
campaign to nail Yukos, the country's leading oil
producer, is the end of any possible energy alliance
between Russia and the US, according to European Union
diplomats and officials.
Yukos' former golden
boy, chief executive Mikhail Khodorkovsky, languishing
in jail since October 2003, was President George W
Bush's and Vice President Dick Cheney's man. But way
beyond his personal fate, it is the symbol of the fall
of Yukos - no hope of cheap Russian oil for America and
extra profits for ExxonMobil, ChevronTexaco and
ConocoPhillips - that is really rattling markets and
driving oil prices higher.
Soon after September
11, when the Bush administration seriously started
looking for major oil sources other than the Saudis, a
deal with Russian oligarchs might have seemed the ideal
solution. In May 2002, at a summit in Moscow, Bush and
Russian President Vladimir Putin forged what looked like
an alliance, further developed in an "energy summit"
held in a Houston steel-and-glass tower in October of
that year. The deal was straightforward:
Washington/Houston injects tons of dollars into the
Russian oil sector, and Russia up to 2010 becomes
America's number one supplier. The key Russian partner
in this deal was to be Khodorkovsky - the son of a
Moscow worker turned king of business and head of Yukos,
producer of 1.7 million barrels of oil a day and the
largest Russian oil company ahead of LUKoil.
Khodorkovsky could not but be a Western darling.
His hero was Standard Oil's founder John Rockefeller. He
installed five Americans on the Yukos board. The
company's public relations was handled by an American
firm. He created a charity, Open Russia, which boasted
Henry Kissinger and Lord Rothschild as chairmen. Wall
Street loved him, because he guaranteed fortunes to
Yukos' shareholders, especially himself (he owns 44% of
the shares).
In April 2003, as the US was taking
over Iraq, Yukos was about to take over one of its
rivals, Sibneft. This would have created a US$35 billion
company, the fourth-largest private company in the world
and the first in Russia, with oil production similar to
Kuwait's (2.3 million barrels a day). But just as
Khodorkovsky was entertaining the idea of selling
control of Yukos to ChevronTexaco, Putin struck. In
October, Yukos was billed $3.4 billion for back taxes
for 2000, its assets frozen and Khodorkovsky was in jail
and on trial on separate charges of tax evasion and
fraud.
Russia's shock and awe Last
month, a surrealist spectacle took place during the
short Siberian summer. In the midst of its battle with
the Kremlin, Yukos inaugurated an electrical plant in
the Tomsk region. American Steven Theede, 30-plus years
in the oil business, appointed as Yukos director-general
by the end of June to try to save the company, made the
trip from Moscow on a chartered jet full of journalists,
trying to put the best face on it all.
European
Union (EU) diplomats in Brussels say that at the time
Theede was explaining oil shipments to China were at
risk because there was no money to pay the Russian
railways, and the company would have to stop paying
salaries by the first half of August. The time has now
come.
Depending on the observer's angle in the
political spectrum, the campaign to get Yukos is
interpreted either as a hostile corporate takeover
masterminded by Putin's FSB - former KGB - friends
running the Kremlin, or a well-deserved punishment to
the Russian oligarchs who profited from the wild
privatization of the 1990s. The consensus in the EU is
that Yukos is essentially being "de-privatized" and
re-nationalized because of a huge amount of unpaid
taxes, which the company could easily take care of if
the Kremlin had not frozen all of its assets.
The most probable endgame of the Yukos saga,
according to analysts in Moscow and around the EU, is
the Kremlin forcing the company to sell its main assets
- Yuganskneftegaz, Tomskneft and Samaraneftegas - to one
or a few oil majors with close ties to the Kremlin, like
Gazprom, Rosneft or Surgutneftegaz. Rosneft - the
seventh-largest Russian oil company - seems to be very
well positioned: Igor Sechin, a close Putin adviser, and
considered to be one of the main figures behind the
attack on Yukos, is now Rosneft's chief executive
officer. This leaves many, behind closed doors in
Brussels, London and Frankfurt, talking about what
amounts to "Putification" of Russian oil: drive down the
price of Yukos and then sell it to the Kremlin's
friends.
The jewel in the crown
Nefteiougansk, which rose from the ashes in the
1960s on the margins of the Ob river, is literally in
the middle of nowhere. The most important building in
the city of 100,000 is the headquarters of
Yuganskneftegaz - the jewel of the Yukos crown. Yugansk
pumps 60% of Yukos' oil, has reserves worth more than
$50 billion and nowadays produces more oil than Iraq.
There's a plaque in the building - signed by
Khodorkovsky - stating that the city is, indeed, "Yukos'
capital".
But the shining light of
Yuganskneftegaz itself is the immense Priobskoie
oilfield in western Siberia - which brings tears to
Yukos managers' eyes as it is said to be able to keep
producing oil "for 50 years". This oilfield has been
doubling its production for the past few years and is
now responsible for at least half of Yukos' output of
1.7 million barrels a day.
Russian bailiffs are
adamant: Yuganskneftegaz will be sold off for a fraction
of its real value to compensate for Yukos' unpaid taxes.
Yukos, in a statement, insists this would be the end of
the company. "If Yuganskneftegaz is sold, the management
of the company would be compelled to announce the
bankruptcy of Russia's largest oil company."
Yukos insists Yuganskneftegaz is worth at least
$30.4 billion, according to leading consulting firm
DeGolyer and MacNaughton. Other independent analysts
talk about $16 billion. But everybody seems to agree on
one point: it could be sold for as little as $1.75
billion.
Follow the money Yukos has
already sent 11 letters to the Kremlin, to Prime
Minister Mikhail Fradkov and to Finance Minister Alexei
Kudrin, pleading for some kind of settlement.
Khodorkovsky has repeatedly offered to give up his 44%
stake. But the Kremlin could not possibly take this
offer: it would have to lift a freeze on the Menatep
holding's majority stake in Yukos - a very risky move.
So the Kremlin's answer has been thunderous
silence. It hasn't escaped anybody's attention that if
the Kremlin made its position clear, Yukos would be able
to borrow money on the global financial markets. But the
justice minister even blocked a proposition for parts of
Yukos being bought by a British consortium, including a
collection of Dubai princes.
Yukos could go
bankrupt at any moment. It needs $1.7 billion every
single month just to maintain its operations - like
paying fees to the state-owned Transneft pipeline
network and a huge amount of taxes. There's not much it
can do with its accounts frozen. Yukos has until August
30 to pay the hefty $3.4 billion bill for taxes and
penalties unpaid in 2000. This could skyrocket to at
least $10 billion if the Russian authorities decide to
apply similar charges for 2001 through 2003.
So
the war is now between the Kremlin and Yukos' majority
shareholder, the Menatep Group, an offshore holding
based in Gibraltar and so immune to the Kremlin's
attacks. While Yukos is still active, Menatep is trying
to get maximum liquidity: there will be maybe those $10
billion in back taxes to pay, plus some kind of
satisfaction to minor shareholders - most of them
Americans - who still control 25% of Yukos' capital (the
major American shareholders bailed out two months ago).
Washington is obviously applying some pressure over the
Kremlin to protect their interests - but to no avail.
Eric Kraus, chief equity strategist at Sovlink,
tries to sum it all up: "It looks like Menatep is trying
to bring down everything with it, while the government
appears to be willing to inflict as much damage as need
be. The only innocent victims are going to be
international investors." Earlier this week, Yukos cut
its output forecast for 2004. The company as we know it
may no longer exist after August 30.
I want
my own pipeline Pipelines in Russia are a state
monopoly. They have belonged to the state company
Transneft since Soviet times. Russia produces anything
around 8.5 million barrels of oil a day - and up. The
antiquated Transneft network allows for only 3.5 million
export barrels a day, on three different pipelines: one
to Eastern Europe; one to a new terminal in the Baltic
which gets frozen in winter; and one to the Black Sea
port of Novorossiysk. Some of the daily non-export
production is for the national market, a few hundred
thousand barrels is exported by rail to minor ports, but
the bulk is stocked up - to the despair of Russian oil
majors whose profits could skyrocket even more with the
barrel flirting with the $50 mark.
But Transneft
does not care about profits. Its business - under direct
control of the Kremlin - is strategic. This situation
ended up forcing the four Russian oil majors - Yukos,
LUKoil, Sibneft and TNK - to open a new front in their
private war against Transneft.
Enter Murmansk.
The perfect spot: 200 kilometers north of the Arctic
Circle, very close to the Norwegian border, hit by the
warm waters of the Gulf Stream, the only Russian port
allowing supertankers. And crucially it is only 9,300
kilometers from refineries in Texas, against 20,500
kilometers for tankers leaving from the Persian Gulf.
In November 2002, after that famous energy
summit in Houston, the four Russian oil majors committed
themselves to build an immense, $4 billion private
pipeline from Western Siberia to a private terminal in
the Barents sea - so as much oil as necessary could be
exported to the US with no hassle. Murmansk, halfway
between Moscow and the North Pole, where the sun simply
does not shine for two whole months in winter, was
supposed to be the place where the US, in 2007, would
quench its thirst for oil.
Or will it? As the
chess game stands, it looks like Siberian oil will most
likely go to China. Yukos itself, before the crisis, was
betting heavily on China. Yukos' managers were dreaming
of China's consumption of 160 million tons by 2010 -
four times what it imports today. So it invested in a
2,400 kilometer pipeline from Angarsk, very close to
Irkutsk , to Daqing in Manchuria, with oil coming from
fields in Eastern Siberia, north of the Baikal lake. The
only thing missing for the deal - after four long years
of negotiations - was an imprimatur from the Kremlin. It
came on April 2003 - before Putin made his move.
There is an alternative route: it favors Japan,
and is proposed by the state-owned Transneft, meaning it
has an attentive audience in the Kremlin. It's longer,
and much more expensive, than the Chinese route, going
all the way to the Pacific near Vladivostok. Russia is
very much tempted to strike a strategic, energy alliance
with Japan. But the Kremlin decided, also in April 2003:
the priority is the Chinese pipeline.
The
Angarsk-Vladivostok route makes no sense - industry
experts argue. Better to sell Russian oil from the
Sakhalin islands - where a congregation of oil majors is
investing $20 billion in offshore projects. Yukos, for
its part, still bets heavily on Murmansk - dreaming of
selling Russian oil for the same price as Arab oil.
Splendid independence The Kremlin
essentially is on the verge of making decisions that
will influence its foreign policy for decades to come.
An energy alliance with the US - via Murmansk? A
pipeline to China? A pipeline to Japan? And what about
the strategic alliance with the European Union?
After Putin's extremely friendly response to
America's grief on September 11, the Russians were
expecting at least more technological transfer on the
oil front. It didn't happen. So Bush's unilateralism in
fact was in part responsible for Putin's change - from
his 2001 pro-Americanism to the 2003 Paris-Berlin-Moscow
axis prior to the invasion of Iraq.
Putin is in
a splendid position of independence - of sorts. With
high oil and gas prices, Russia has been growing at
about 7% a year since 2001. But it needs a massive
injection of foreign capital in its derelict oil and gas
industry - so it may be able to export not 4.6 million
barrels a day, but maybe 8 or 9 million. Russia needs
the American and British oil majors: it's more
cost-effective than depending on bank loans or the
financial markets.
The key question being
debated in the European Union - and of course in Moscow
and Washington - is which alliance will prevail: with
the US or with Western Europe? With China, it's not
really an alliance: it's a question of making money
because, as any visit to the region reveals, Russia
remains terribly afraid of Chinese demographic and
economic pressure over the Siberian border.
So
Russia may gain a lot by getting close to Japan. Japan -
like America - also needs to get rid of its dependence
on Saudi oil, and it is increasingly buying more and
more Russian oil and gas. EU diplomats are betting that
Russia, although not neglecting the US, wants above all
an economic partnership with Japan, a strategic
partnership with India, and a strategic energy
partnership with the EU. It helps that Putin loves and
understands German culture and speaks fluent German, and
that French President Jacques Chirac loves Russian
culture and speaks Russian. It's up to the EU to get its
political act together.
The way Putin
re-engineered the whole game suggests that the Russia-US
energy alliance may not have resisted the Iraq disaster.
The key lesson from the Yukos saga is that Russian oil
will continue to flood world markets: but this will
happen under Putin's state capitalism strategic rules.
And one thing is certain: they are not exactly Dick
Cheney's.
(Copyright 2004 Asia Times Online Ltd.
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