Russian oil merger may shut door on U.S. majors

Is there any connection between this merger and Russia's opposition to the US war against Iraq? -----BumbleBeeBoogie

Russian oil merger may shut door on U.S. majors
Tue April 22, 2003 05:13 PM ET
By Joseph A. Giannone

NEW YORK, April 22 (Reuters) - Last month Exxon Mobil Chief Executive Lee Raymond told analysts that Russia, where rival BP Plc had just announced a $6.75 billion investment, was too risky a place to consider a big acquisition.

"They don't have the Good Housekeeping seal of approval," he said on March 4, referring to Russia's unstable economic and regulatory environment.

Now he may never get a chance to reconsider.

Early on Tuesday Yukos YUKO.RTS , Russia's second-biggest oil company, agreed to acquire No. 5 Sibneft to create the world's fourth-largest oil producer. The merged YukosSibneft will have a market value of about $35 billion, by far Russia's biggest company and big enough to fend off big U.S. and European rivals.

The deal comes two months after Britain's BP BP.L combined its Sidanco holdings with Tyumen Oil (TNK) for $6.75 billion, creating Russia's No. 3 oil company.

As a result, there are few targets left to pick from.

"It makes it more difficult to invest in Russia," said Julia Nanay, a senior director at Washington-based PFC Energy. "BP's deal with Tyumen may be the one deal of its kind we end up seeing in the country."

Exxon Mobil XOM.N and ConocoPhillips COP.N officials did not return calls seeking comment. ChevronTexaco Corp. CVX.N declined to comment.

If the merger is completed, YukosSibneft would dominate Russia's oil industry with 19.4 billion barrels of oil and gas reserves, trailing only Exxon Mobil and Royal Dutch/Shell Group. At 2.3 million barrels per day, it represents 29 percent of Russian crude production.

Russia's massive energy reserves are increasingly vital to the big oil companies, as established fields in North America and the North Sea dwindle and events in the Middle East prompt companies to spread their bets.

SIBNEFT THE BELLE OF THE BALL

Opportunities in Russia are still out there, but none as attractive as Yukos or Sibneft, oil analysts say.

PFC Energy's Nanay said Russia's Tatneft could be acquired, though its assets are less attractive compared with Sibneft. Lukoil and Surgutneftegaz are also potential targets, but their ownership structures could scare away suitors.

Until recently, Yukos and Sibneft were considered the companies most likely to accept an acquisition offer. But the skepticism expressed by Exxon's Raymond carried the day.

"It's difficult to identify a (U.S.) company that has the risk appetite to make a deal like this one," said Alexander Zaslavsky, director of consulting for Eurasia Group. "They've each have had trouble" in the region.

ChevronTexaco's dealings with Kazakhstan, where it participated in the giant Tengiz field, have been strained as the former Soviet state sought changes in the financial terms.

Not that U.S. companies did not try. One industry consultant said Exxon deal-makers were in Moscow about three weeks ago, which supports speculation foreign buyers were taking a look at Yukos or Sibneft.

For the time being, the oil majors will continue to do business in Russia though production sharing agreements, such as Exxon and Shell's $12 billion Sakhalin Island venture.

ConocoPhillips has a small stake in Kashagan, Shtokman and its "Polar Alliance" in Russia's northern territories.

ChevronTexaco is building a pipeline between the Caspian fields and Black Sea, and has a stake in the Sakhalin venture. (Additional reporting by Dmitry Zhdannikov, Mikhail Yenukov, Julie Tolacheva and Oliver Bullough in Moscow.)