[A-List] Russia: oil industry developments

["Michael Keaney" <michael.keaney@xxxxxx>]

Yukos unveils oil refining, export strategy
By John Helmer
Asia Times, November 23 2002

MOSCOW - Russian expansion into the global oil refining sector will be
carefully calibrated, according to Oleg Sheiko, executive vice president of
Yukos for corporate finance.

An Italian news report last week claimed that a preliminary agreement had
been struck between Yukos and ENI for the acquisition of 50 percent stakes
in ENI refineries at Gela, Milazzo (Sicily), and Marghera (Venice).

Sheiko refused to confirm the report. He said that before acquiring
low-margin refining stakes, Yukos had to get the ratio right between the
price they paid for the asset, and the volume and value of crude oil supply,
which the refinery would take from Yukos.

Yukos produced 6.429 million tonnes last month, passing LUKoil for the first
time on the Russian oil production ladder. Output growth at Yukos has been
18 percent this year, and is expected to be roughly the same in 2003.

According to Chris Weafer, oil analyst at Alfa Bank in Moscow, Russian oil
producers are under pressure to find markets for this added output. "Every
extra barrel of oil extracted from the ground in 2003 will have to be
exported as crude or product, because of zero net domestic growth, hence the
importance of trying to develop direct export routes to the US and Japan,
and the need for more downstream diversification into refineries both inside
and outside Russia's borders."

Weafer calculates that by mid-2003, Russia will be exporting 1.2 million
barrels per day more than it did 18 months ago. He confirms the race to sell
this oil is global and intense.

According to Sheiko, the over-capacity of refining in Europe this year, and
the fall of refinery margins, have generated "lots of projects on offer for
us to consider." In Italy, as elsewhere in Europe, he told Asia Times
Online, Yukos' "first priority is to secure long-term supply contracts for
crude. Our second priority is to acquire minority stakes in refineries, so
long as that leads to the first priority."

To establish beachheads for shipments to its export markets, Yukos has
already completed the acquisition of the Mazheikiu Nafta refinery in
Lithuania, and has acquired a controlling stake in the Slovak Transpetrol
pipeline transporting Russian crude into Germany. Mazheikiu cost Yukos $150
million, and will secure an annual supply of 8 million tonnes of crude.
Another 4 million tonnes would be supplied to the Lithuanian terminal of
Butinge, Sheiko added. Revenue from the crude deliveries will be roughly 10
times the value of Yukos's investment.

According to Sheiko, he turned down a bid to buy into the Greek state
refinery company "because the economics weren't there. The refining margins
were too low; and the volume of crude supplies was not linked to the
investments." He said that a similar calculation dictated Yukos' refusal to
bid for the state stake in the Polish refinery at Gdansk.

"We have our stand-alone project criteria, when we must take account of our
cost of capital. The issue is to calculate the cost of investment in
relation to the value of oil deliveries."

The pressure to secure markets for its oil output is also driving Yukos to
accelerate planning to expand Russian infrastructure for shipping oil
abroad. According to Sheiko, the two Yukos priorities at the moment are for
a new crude oil terminal at Murmansk, and for a new pipeline to China.

Transneft, the state pipeline monopoly, has told Asia Times Online that it
will add 100,000 barrels per day in new capacity through its pipeline to
Primorsk port, on the Gulf of Finland, next year.

In October, Yukos began test shipments of large tanker volumes of crude from
its terminal at Vitino through Murmansk port. "Transportation of oil using
tankers of over 100,000 tonnes from Murmansk to Europe is indeed more
cost-effective for the oil companies," commented Kirill Portnov, an analyst
at the Moscow-based Petroleum Argus Agency.

He added that Yukos may test loading of Very Large Crude Carriers (VLCC) at
the same location. The route from Murmansk to the United States is shorter
than the current route Yukos is using through the Mediterranean for its
monthly shipments to Houston, Texas.

Moscow industry sources told Asia Times Online that VLCC operations from
Murmansk were likely only if a new pipeline was built to deliver crude to
the port, and if a terminal was constructed to consolidate deliveries from
several companies and sources, and store it before shipping.

In a few days, Sheiko said, he would hold fresh talks with the China
National Petroleum Corporation on the planned pipeline from the Yukos
Siberian base at Angarsk to the northern Chinese petroleum terminal at
Daqing. This outlet is projected to have a capacity of 400,000 barrels per
day.