Accessibility links

Breaking News

Russia: Top Political, Industrial Players Sign Oil Deal

Moscow, 9 April 1998 (RFE/RL) -- Since the beginning of the year, oil analysts have been busy keeping themselves abreast of the fast developments in Russia's oil-and-gas industry. In fact, since the January merger of oil majors Yukos and Sibneft, which created Russia's biggest oil holding Yuksi, important new cooperation deals have been announced almost on a weekly basis. Some deals have included foreign partners, but, perhaps, the most impressive agreements involve domestic companies, despite the fact that depressed world oil prices significantly threaten profits this year.

Yesterday, five of Russia's most important political and industrial representatives signed a broad oil cooperation agreement that could turn out to be one of the most interesting financial deals of 1998. It could also have significant developments especially for one of the participants, Moscow Mayor Yuri Luzhkov.

Apart from Luzhkov, the deal was signed by another influential political figure, Tatarstan's President Mintimer Shaimiev, and by three oil executives: LUKoil President Vagit Alekperov, the head of Tatarstan's oil company Tatneft, Rinat Galaev, and the head of Moscow's Central Fuel Company (CFC), Yuri Shafranik.

According to the deal, LUKoil, Tatneft and CFC have agreed to cooperate in oil production, refining and marketing activities.

Until the establishment of Yuksi, LUKoil was Russia's largest oil producer. An oil analyst at investment bank MFK-Renaissance, Scott Saliterman, told Reuters news agency that the agreement may be aimed at securing markets in the face of the creation of Yuksi. Saliterman added that a cooperation pact between LUKoil and Tatneft was already underway before yesterday's deal.

The cooperation deal is very important financially, and also politically, judging from the influence of its subscribers. However, unlike Yukos and Sibneft, the companies involved have not formally formed a consortium. LUKoil's Alekperov was quoted today by the daily "Russky Telegraf" as saying, "the signing of the cooperation pact should under no circumstances be considered a merger."

Analysts say that the deal with CFC will help LUKoil and Tatneft boost sales of crude oil and refined fuel in the booming, lucrative Moscow market, which is tightly controlled by Moscow city authorities. Alekperov said that the dramatic slump in world oil prices has forced LUKoil to search for other reliable markets for its crude. He said that unprofitable oil exports have already obliged LUKoil to cut its total production by about four percent.

CFC owns both the Moscow refinery and the local marketing-and-distribution company Mosnefteprodukt. With the agreement, LUKoil and Tatneft each bought a 13 percent stake in CFC, that was previously 100 owned by the city of Moscow. As Alekperov put it, for giant LUKoil, "the main goal of the agreement is the opportunity to sell our oil and oil products in the Moscow market."

Indeed, for both LUkoil and Tatneft, a cooperation agreement with Luzhkov will prove essential to obtain licenses and real estate facilities necessary to open new petrol stations in the capital. According to some observers, LUKoil had already obtained Luzhkov's green light to build some new filling stations in Moscow. So far, only a handful of the petrol stations LUKoil operates across Russia and the CIS were located in Moscow.

The business interests of the oil companies seem to have coincided happily with Luzhkov's. For the populist Moscow mayor, the pact agreement could serve important financial and political goals.

Luzhkov yesterday dismissed suggestions that a political motivation could be behind the deal, and told reporters that the only purpose of the agreement was to guarantee supplies of oil products to the capital. Luzhkov has repeatedly denied having presidential ambitions, but, since last year, he has dramatically accelerated Moscow's financial and political drive in other Russian regions.

Yesterday's pact gives him the opportunity to complement his control of Moscow's refinery, and of the capital's growing network of petrol stations, with the participation in essential oil production projects. Most observers say that this factor can be seen as a tool that will help Luzhkov strengthen his already existing financial platform, in view of the next presidential election.

The deal will also boost Luzhkov's image and influence outside Moscow. Some observers have said that Moscow is not well regarded in the other Russian regions, and that this lack of popularity could be a major gap for Luzhkov's presidential candidacy. But the Mayor and his advisers, since last year, have carefully worked on improving the image of the capital and of its ruler. With this goal in mind, they have focused on the fact that Luzhkov is a "regional" leader, who is joining forces with others in the common battle against the dominating policies of federal authorities.

Moscow authorities last year launched and lavishly funded television concern, TV-Center, that is rapidly developing nationwide, and is supporting Moscow's 'regional image,' as well as Luzhkov's own populist brand of nationalism and protectionism, which is widely appealing to many in Russia.

At the signing ceremony yesterday, Luzhkov said Moscow authorities "always felt the need to combine their abilities into one system that could connect them with the resources of oil production structures, and with the people and the industries of the regions." He added that "nothing can bind together a conglomerate better than ownership of common property."

CFC has been busy in recent months signing bilateral deals with regions and companies, and is interested in broadening its activities beyond refining and distribution. The companies undersigning yesterday's agreement announced in a statement that they "plan to create financial-industrial groups and other economic structures" to deal with projects outside Moscow, including privatization bids.

However, Luzhkov said that Moscow's CFC "does not have any interest in the privatization of Rosneft," Russia's last fully state-owned, major oil company. This option would not be viable also because LUKoil has already signed an agreement with gas giant Gazprom and oil major Royal/Dutch/Shell to bid in the Rosneft auction.