Investor Backlash to Oil Companies’ Interests in Yukos Auction

With the news that energy companies such as Chevron, BP, ENI, and Enel are interested in participating in the upcoming auctions of Yukos assets, investors and shareholders are beginning to cry foul. The first major indication – a letter from California State Controller John Chiang to Calpers, California’s massive state pension fund, expressing concern over the group’s stake in Chevron and BP in regards to the companies’ decision to engage in ethically and legally questionable investments in Russia.

California State Controller and Calpers Board Member John Chiang is concerned that participation in the Yukos auctions may make Chevron complicit “in illegal and unethical activities by the Russian government.” From the FT:

Doubts raised about Calpers investments By Catherine Belton in Moscow California’s State Controller is calling for Calpers, the huge Californian state pension fund, to review its investments in Chevron and BP over their potential participation in the sell-off of Yukos, the now bankrupt Russian oil major whose owner, Mikhail Khodorkovsky, has been jailed. John Chiang, also a Calpers board member, said in a letter dated March 22 to the fund he was concerned about the legal risks attached to Chevron’s possible participation in the Yukos auctions, which Yukos’ owners have slammed as the biggest expropriation in history. “I am concerned that Chevron. . . may be exposing itself to litigation and divestment campaigns based on allegations of complicity in illegal and unethical activities by the Russian government,” Mr Chiang wrote in the letter, obtained by the Financial Times. “We should engage in immediate due diligence to assess the risks and, if warranted, take appropriate mitigation steps,” said Mr Chiang who oversees California’s $100bn budget and the $233bn Calpers has under management. Russian officials have asserted that Chevron has expressed interest in bidding for the Yukos assets, which include two production units with a combined output of 500,000 barrels per day and seven refineries. But the US oil major itself has declined to comment. A spokesman for Mr Chiang said the state controller would now extend his calls for a review of the fund’s investments in BP too. “The state controller will take the same route with BP as with Chevron,” said the spokesman, Garin Casaleggio. “He’s going to ask for another assessment of the risks to the portfolio.” Calpers holds approximately 47.2m shares in BP with a market value of about $478m. It owns 11.35m shares in Chevron valued at $704.6m. But analysts said a review by Calpers, which is known for taking a more vocal and proactive approach to ethical investing, was not likely to lead to other funds following suit, while it is likely oil foreign oil majors would pay little heed. “Oil companies are used to criticism over their investments,” said Chris Weafer, chief strategist at Alfa Bank. “It goes with the territory.” Calpers is now one of the few global funds to refrain from investing in Russia.

From the Globe and Mail:

Yukos auction plans ignite investor backlash SHAWN MCCARTHY OTTAWA — Western oil companies and banks that are lining up to participate in the auction of remaining assets from Russia’s OAO Yukos are facing stiff resistance from supporters of the oil giant’s former owners. California controller John Chiang has written to fellow board members of the giant California Public Employees Retirement System, urging them to oppose any bid by Chevron Corp. for a stake in a former Yukos subsidiary. In the letter to be delivered this week and provided to The Globe and Mail on Sunday, Mr. Chiang warned that California-based Chevron — in which the state pension fund is a major shareholder — would face “allegations of complicity in illegal and unethical activities by the Russian government” if it purchased Yukos assets. As a result, the company could be subject to legal action, posing a risk to Calpers’ investment, the state controller said. Yukos, once Russia’s largest oil company, was forced into bankruptcy when its founder and chairman, Mikhail Khodorkovsky was prosecuted and jailed for tax evasion. He now faces new charges for corruption and money laundering. State-owned companies OAO Rosneft and OAO Gazprom have already acquired some of the prized assets, and are now leading contenders to win a bankruptcy auction for the remaining ones. Several western companies, including Britain’s BP PLC, Italy’s Eni SpA, and Chevron, are expected to bid in joint ventures with the Russian firms. Rosneft announced this month that it has arranged a $22-billion (U.S.) loan to finance Yukos acquisitions. Its lenders include Barclays, Goldman Sachs and JPMorgan. In an interview, Mr. Khodorkovsky’s lawyer, Robert Amsterdam, complained the western firms are so eager to do business in energy-rich Russia that they are lending an air of legitimacy to political persecution of his client and corruption by Russian President Vladimir Putin’s administration. “Western banks and western energy companies are prepared to engage in conduct that is corrupt because they are trying to curry favour with the Kremlin,” he said. The company’s western investors, who now hold worthless shares, warned this weekend that they would launch lawsuits worth billions of dollars against oil companies that purchase Yukos assets or banks that finance the auction. BP said on Friday that it would bid on Yukos assets after company chief executive officer John Browne met with his Rosneft counterpart and Mr. Putin. Tim Osborne, a director of Group Menatep, who owns a majority of Yukos shares, told The Independent newspaper that his group would pursue legal action if BP — or any other western company — succeeds in the Yukos auction. While the U.S. State Department has complained the Yukos affair “raises questions about Russia’s commitment to rule of law,” the Russian government insists Mr. Khodorkovsky and his associates were themselves corrupt and deny the prosecution was politically motivated. The controversy over the Yukos bankruptcy is being rekindled as Canadian business people prepare to meet today with Russian counterparts in Ottawa for the first bilateral business summit. Companies such as Petro-Canada, Kinross Gold Corp., and Bombardier Inc. are participating in sessions aimed at expanding trade and investment ties between the two countries. Mr. Amsterdam had a cautionary note for would-be investors, urging them to steer clear of politically sensitive sectors that are increasingly falling under state control, such as energy and mining. “Russia is an important country and one with which we should all do business, but we shouldn’t do business their way,” he said.