Oil & gas: Crowning of the undisputed frontier king - 18 May

Lot Ten, a bunch of assets owned by the bankrupt Russian oil major Yukos that was sold at an auction in early May, was a ready-made east Siberian oil empire.

Nefte Aktiv, an agent for Rosneft, Russia’s state oil company, paid $6.5bn to bag two oil producers, several refineries and a network of petrol stations serving a huge swathe of east Siberia.

Rosneft was an active player in east Siberia before the auction. But, says Valery Nesterov, an oil analyst at Troika Dialog, the acquisition of Lot Ten “established the state company as the undisputed king of Russia’s last oil frontier”.

Yukos’s remote east Siberian projects looked speculative when the company began investing in the late 1990s. Little exploration had been undertaken, oil prices were low and there was no pipeline to export markets.

In business terms, Yukos’s smart move was to hook energy hungry China to east Siberian oil delivered by railway from its Angarsk refinery. Mikhail Khodorkovsky, the former chief executive of Yukos, who heard about the sale in an east Siberian jail where he is serving a 10-year jail sentence for fraud and tax evasion, negotiated a 25-year oil supply deal with the Chinese coupled with joint plans to build a pipeline linking east Siberia with Daqing, in northern China.

But politically, the Chinese deals were foolhardy. President Vladimir Putin had warned Russian business oligarchs not to stray into areas traditionally managed by the state.

Mr Khodorkovsky – who many think is the victim of a politically-motivated attack – was arrested at an east Siberian airport in October 2003 and has been in custody ever since.

Meanwhile, the development of the east Siberian oil industry has taken off. The Kremlin has been talking about opening up the region for more than two decades. Government app­roval in 2005 of a plan to build a 4,000km pipeline across the region to the Pacific Ocean was a signal that the grandiose endeavour was at last happening.

East Siberian oil projects are being kept under close state control. Transneft, the government’s oil pipeline monopoly, will own and operate the export system.

State-owned companies or those loyal to the Kremlin are involved in all big oilfield developments underway in east Siberia including Vankor, Verkhnechonsk and Talakan.

In a rare move, the government has introduced tax incentives to encourage investment in the dauntingly remote area.

Rosneft has conducted a successful exploration programme at Vankor in the north of Krasnoyarsk region. Reserves there are now estimated to amount to more than 491m tonnes.

Evgeny Popov, general director of Vankorneft, says: “This is one of the largest oil and gas assets in Russia.”

Rosneft expects to invest $6bn in developing Vankor by 2010. A 640km pipeline will be built to link the field with the new east Siberian export pipeline.

Rosneft is also a partner in a venture led by TNK-BP, the Russo-British oil major, developing the Verkhnechonsk field in the north of Irkutsk region. Verkhnechonsk oil, together with production from the nearby Talakan field, will also be exported via Transneft’s new pipeline.

Talakan is the first oilfield development undertaken outside west Siberia by Surgutneftegaz, a Russian oil major known for its loyalty to the government.

Eventually, the combined output from these three fields is expected to top 1m barrels a day. But it will take time for production to build to significant levels.

Lot Ten brings to Rosneft’s portfolio an immediate source of oil on the threshold of east Siberia. Tomskneft produces more than 200,000 barrels of oil per day and has potential to yield much more. Viktor Kress, the governor of Tomsk province, believes oil output in the region could more than double. East Siberian Oil and Gas Company, also included in Lot Ten, holds licences in the highly prospective, although geologically complicated Yurubchon-Tokhomskoye zone in the south of Krasnoyarsk region.

Rosneft has also acquired Yukos’s two east Siberian refineries at Achinsk and Angarsk. These plants monopolise oil product markets in the Krasnoyarsk Altai and Irkutsk regions. Rapid economic growth in Russia has stimulated demand for oil products, particularly petrol, and prices have risen.

High taxes on crude exports have incentivised oil companies to sell refined products instead.

Mr Nesterov says: “There has been such a substantial improvement in refinery margins that nowadays it is considered wasteful to export only crude oil.”

More oil discoveries will be required in east Siberia if Transneft’s planned pipeline to the Pacific is to be filled.

Geologists are sceptical about prospects for any huge finds in the area although it is likely that a large number of small to medium sized fields lie scattered over the huge territory.

Troika Dialog estimates that it will cost up to $10 to add a single tonne of oil reserves in east Siberia, far more than in west Siberia, Russia’s biggest oil province.

However, Dmitry Loukashov, a senior analyst at Alfa Capital, says: “Thanks to the recent introduction of tax holidays, east Siberia now offers the most attractive investment opportunities in the Russian upstream.”