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Jens Hartmann: By the Grace of Putin

We pleased to offer this translation of a column written by Jens Hartmann in yesterday’s edition of the German daily Die Welt.

By the Grace of Putin By Jens Hartmann rosneft_diewelt.jpg Rosneft is one of the most powerful energy companies in the world. Its know-how comes from former competitor Yukos, which was broken up by the Kremlin and whose assets were plundered by Rosneft. The Arctic Circle lies somewhere in the south. A herd of wild reindeer, frightened by the noise of the rotors on our Mi8 helicopter, toils through waist-deep snow. There isn’t a human settlement to be seen within a radius of 100 km – only whiteness adorned by stunted conifers. The Siberian river Yenisei, flows slowly through the terrain, pushing masses of water into the Arctic. Oil in the Land of the Gulags Banished by the tsar, Stalin served time in a camp here in eastern Siberia. He must have hated the area. So much so that he later had his victims construct a railroad here. It is called the “death line” or “Stalinka” and was built over corpses. With the dictator’s death in 1953, construction work was halted. Should the snow reveal the landscape for the short summer, one can find rails, watch towers and skeleton. In all, 1,300 oil workers have started down the road to conquering this former empire of the Gulag. They are developing the Vankor oil field for the oil group Rosneft. Vankor is virgin territory. The 2.5 billion barrels in reserves discovered there so far (a barrel being 159 litres) are worth US$150 billion on the world market at today’s prices. Yukos Reloaded Russia’s oil company of the moment is Rosneft. While the industry showed a growth in production of only 2.2 percent last year, the state controlled company increased its output by 8.5 percent to 80.6 million tons of oil. This year, 90 million tons are to be pumped. Rosneft has greater oil reserves than ExxonMobil, BP, ChevronTexaco or Royal Dutch/Shell. Rosneft is Yukos reloaded. The once modest state enterprise could but only distinguish itself after taking over the Yukos group, which was forced into ruin by state pressure. The transition from private to state sector is – at least from the point of view of the Kremlin – a success story. Not least because Rosneft is sticking to the strategy begun by Yukos of buying western technology for the exploration and development of oil fields. For the industry as a whole, however, state intervention – which ranges from an extremely high taxation to encroachment on private property – is harmful. The Supervision Principle Mikhail Ivashatkin, 27, is one of the front-men involved in the Siberian project. The engineer from Rosneft subsidiary Vankorneft monitors subcontractors such as the U.S. companies Schlumberger and Halliburton, which are tapping these fields for Rosneft. “They don’t like to have people looking at their cards. I can understand. It’s about trade secrets,” he says. He is “about 80 percent” satisfied with their performance. Ivashatkin stands on one of the decrepit oil rig and watches the drill bit rotate. The Americans have driven the well down to 3,100 metres. 200 metres still remain. Theirs is an art which few in Russia master: They carry out horizontal drilling. First, they go deep, then the well takes a turn quasi. In this way, it is possible to exploit every nook and cranny of reservoirs containing oil. Vankor is a showcase project for the Russian oil industry. Thus, a large part of the 200 plus wells in Vankor are to be drilled horizontally. Some 60 percent of the wells are “smart wells”, which means: computer-aided sensors monitor the flow of oil. East-West Ivashatkin flies to Vankor from his hometown Kranoyarsk, which lies 1,300 km to the south. He works there for 30 days, sleeping in a tin container, before going home again for another 30 days. Those who are employed at Vankor belong to Russia’s better-paid workers. A well worker receives 80,000 roubles per month (€2,320). Last year, Ivashatkin experienced temperatures of minus 60 degrees Celsius. The minus 10 degrees and icy north wind which mark our visit are “like summer vacation camp”. Only at minus 44 degrees Celsius is work suspended. Rosneft will invest US$6 billion in Vankor. Every screw must be flown in or, in winter, brought to Vankor over a steamrolled road. The first oil is due to flow in September 2008. From 2012 to 2016, Vankor, with an annual output of 22 million tons (which corresponds to about 4.5 percent of present Russian production), will have reached its peak. TNK-BP, Surgutneftegaz and Gazprom could also produce oil nearby. An enormous oil-producing area could come into existence around Vankor. Since the end of the Soviet era, only a few new reserves have been developed in Russia. An Energy Information Administration analysis states that, by 2020, Russia must derive at least half of its oil from new oil fields in order to compensate for the phasing out of old fields. The Cash Cow Rosneft can afford this virgin territory project, because the state has granted tax exemptions for eastern Siberia, and because the group has a cash cow. Rosneft subsidiary Yuganskneftegaz produces oil in western Siberia, where the Ob river meanders towards the north, and where it is only marginally warmer than in Vankor. In December 2004, a letterbox company purchased by auction a majority of shares in Yuganskneftegaz for around €7 billion. The letterbox company probably belonged to Rosneft. No oil company has been sold so cheaply since the wild 1990s. Yuganskneftegaz lay at the heart of the Yukos empire. Today, under state trusteeship, it accounts for more than two-thirds of Rosneft’s output. That’s not all though: Yuganskneftegaz also brought the new owner a borrower’s note against Yukos in the amount of 263 billion roubles (€7.6 billion). That comes in handy in the Yukos bankruptcy. Old Colours, New Owner In Nefteyugansk, the capital of Yuganskneftegaz, little has changed since the changing of the guards from the private to state sector. Even the Yukos colours of yellow and green are still to be found on some walls and on one oil worker’s overalls. Those who once received their wages from Khodorkovsky now receive them from Rosneft’s main office, which is located just across from the Kremlin. Sergei Kudryashov, previously general director at Yuganskneftegaz, has made his way into Rosneft headquarters, a stately property from the 19th century. Kudryashov, vice president for production, is the highest-ranking former Yukos man there. The Rosneft research centre is led by Mars Khasanov, who held the same job for Yukos. Not far from Moscow’s Gorky Park, Khasanov and his 90 co-workers – most of them used worked for Yukos – puzzle over how oil can be pumped from the ground more cheaply. If engineer Ivashatkin out in Vankor has problems with the angle of a well, he can call Khasanov four time zones to the west. Sell Out That Khodorkovsky built up an ingenuous petroleum group is demonstrated by the fact that oil companies from around the world are interested in those Yukos holdings which yet to be auctioned off. Five refineries, the two production companies Tomskneft and Samaraneftegaz, 193 companies in all, are up for sell. Assets worth US$26 billion are at stake, according to the bankruptcy trustee. Rosneft has by way of precaution borrowed US$22 billion, in order to have a financial cushion thick enough for acquisitions. One competitor for these assets should be Gazprom, the world’s largest natural gas monopoly. Today, Rosneft has a Kremlin lobby comparable to that of Gazprom. In any event, the head of Rosneft’s board of directors, Igor Sechin, who also serves as deputy chief of staff in the Kremlin, has been able to keep Gazprom from incorporating Rosneft. “With great probability, Rosneft will emerge as the initiator for a further consolidation of the industry. Rosneft is becoming the basis of a new state mega-group,” the Moscow business magazine Profil speculates. “Why Rosneft? That is the only chance it has to remain independent of Gazprom.” Rosneft must grow extremely quickly: “So quick that a monster such as Gazprom cannot swallow and digest the group.” By means of a gigantic investment programme, Rosneft is to be made fit for the future. That is how the investment plan for 2007 foresees an increase in expenditures of 45 percent vis-à-vis the previous year to 174 Billion roubles (€5 billion). Rosneft has already accumulated commitments of around US$12 billion. With the aforementioned US$22 billion, the mountain of debt is becoming menacing. Soviet Bureaucracy Decision making in a state company takes incomparably longer than in a private economy. Rosneft managers confirm this. “The bureaucracy is more strongly pronounced. You are frequently busy with collecting signatures and papers,” says one person at the highest level Rosneft who was previously with Yukos. Intervention from the Kremlin regarding Rosneft’s strategic direction – for example, which partners it has to work with – interferes as well. Thus, the private oil company Lukoil, comparable with Rosneft in terms of size, is clearly more profitable. The stock market is indifferent to this, however. For it, the “Kremlin factor” is decisive. Rosneft can get an okay from the Kremlin for acquisitions and licences more easily. Lukoil shows a market capitalisation of only US$71 billion, Rosneft US$89 billion. After a phase of extensive growth, Rosneft must try to prove that a state giant can also manage efficiently. The example of Yuganskneftegaz has stirred hope. In any event, Vladimir Milov, president of the Institute for Energy Policy in Moscow and one of the leading opponents of Putin’s policy of nationalisation, sees in Yuganskneftegaz the “successful continuation of the former owner’s work”. He adds: “While the intervention of the state usually chokes any kind of growth, this is a pleasant exception.” A glance at the stock market prospectus from last year makes clear that even the group’s top managers have their doubts about the economic rationale of their Kremlin masters. There, it is said: “The interests of the Russian government do not have to correspond with those of the other shareholders…, which can lead to Rosneft choosing practices which do not serve to maximize shareholder value.”