The Oilman Is a Teacher

By Paul Starobin

Swat! It's nearly summer in Western Siberia--and that means mosquitos, and lots of them. Tyumen Oil Co. president and CEO Simon G. Kukes last month shifted his base of operations from corporate headquarters in Moscow to this unforgiving region, endlessly flat and dotted with insect-friendly marshes and spindly birches.

He made the move after firing his chief of production and exploration for what Kukes calls his "very totalitarian" manner. With nobody else fit for the job, Kukes grabbed a suitcase and took it on himself. Now he's living out of a company-owned hotel in the Tyumen-dominated oil town of Nizhnevartovsk.

So it goes at Tyumen, one of Russia's fastest growing oil companies. Since Kukes arrived in Jan. 1998, the company has tripled its sales--expected to reach $4.3 billion this year--and more than doubled its production; it now stands at 822,547 barrels a day. Pre-tax profits are on track to reach $1.4 billion for this year--down from $1.7 billion in 2000 but still more than double earnings in 1998. And the breakneck pace continues: Tyumen is now negotiating for a controlling stake in Russian oil major Sidanco, an acquisition that would make it Russia's third largest oil producer. It is also seeking to expand into the gas business with a bid to take over producer Rospan.

Tyumen's owners, a private group of investors led by Moscow-based Alfa Group, are committed to rapid growth. Their strategy is to boost the market capitalization of the company through acquisitions and good management, then sell it off to a Western oil major in three to five years. "We want to create a really big company," says Alfa Group Chairman Mikhail M. Fridman, who believes investors will pay a premium for added production capacity.

So while the owners are busy scouting for new acquisitions, Kukes has his hands full trying to absorb them. It would be a demanding management job under any conditions--and it is an especially tough task at a company that is still steeped in Soviet-style practices.

Typical of their brethren at Russian oil companies, Tyumen's local managers tend to gum up decision-making because they are reluctant to delegate, and they often value production as a primary goal in itself, without regard to cost--a mindset that made sense under the Soviet system, with its mania for Stakhanovite production targets, but that doesn't work in the post-communist era.

Kukes is a Russian native--but one with a decidedly outward-looking bent. For one thing, he is of Jewish extraction, and that made him an outsider to begin with in Russian society. For another, he has spent much of his business life in the United States. And after 17 years of experience at U.S.-based Phillips Petroleum Co. and Amoco, Kukes is trying to implant Western business practices at Tyumen. He's a decision maker cum teacher--and one of his basic lessons is that deputies should not be afraid of their boss. A typical Russian executive, Kukes says, is a man who demands slavish deference from his staff and whose approach to solving a management problem is to "yell, scream, and try to find someone to punish."

I recently spent a few days with Kukes in Nizhnevartovsk to see how things were going. The evening of my arrival began casually enough--Kukes organized a small dinner party of a dozen-plus Tyumen executives to celebrate one of their birthdays. The table was laid out with specialties of the region--including a lake fish, frozen raw, cut into thin sushi-like slices, and served with lemons and onions--and bottles of wine, beer, and vodka. Kukes ditched his suit jacket and tie, sipped from a glass of red wine, and joined in the toasts. Certainly no hint of a slavedriver there--although the group was careful to observe Kukes' ukase against smoking cigarettes, a rarity in tobacco-saturated Russia.

The next morning the same group convened to discuss routine business--and Kukes, magic marker in hand, stood at his customary station: a white plastic drawing board. He seldom resists an opportunity to instruct, and this meeting was no exception. A junior executive complained at length about a lack of financing for an order of pipes but didn't tell Kukes precisely how much money was required to complete the purchase. Not good. Don't just bring us a problem, Kukes lectured the increasingly red-faced fellow--arrive with a solution. Asked later about the episode, Kukes acknowledges his patience has limits: "Sometimes I want to take a chair and hit a guy." As part of his shift to Western-style practices, Kukes, who emigrated to the U.S. in 1977 after training as a chemical engineer in Moscow, pays bonuses to Tyumen's best-performing workers. Still, Western multinationals remain "many years ahead" of Russia in their business cultures. "We are getting too big to be managed by a Russian staff, even if it is very bright," he says.

Seeking help, Kukes has installed at Nizhnevartovsk a 300-plus-member contractor team from Dallas-based Halliburton Co. to improve the productivity of the aging Samotlor field, from which Tyumen is obtaining nearly half its current crude production. Halliburton's work is being financed by a $560 million credit from the U.S. Export-Import bank.

Downstream, Texaco Inc. is jointly producing lubricants with Tyumen at the company's Ryazan refinery, as well as developing Texaco Star Mart gas station/convenience stores around Moscow and Kiev. Before Texaco announced its merger with Chevron Corp. last October, Texaco talked about taking a stake in Tyumen. Such talks could be resumed, Kukes says, once the Chevron merger is completed.

Another potential partner is BP Amoco. True, relations between Tyumen and BP Amoco have been bumpy--BP, a 10% shareholder in Sidanco, was very unhappy after Tyumen two years ago purchased a valuable Sidanco subsidiary in a controversial bankruptcy auction. But Kukes says he has a good personal relationship with BP Chairman John Browne. The two men exchanged condolences on the deaths of each of their mothers within the last year. If Tyumen does end up taking a controlling stake in Sidanco, Kukes says he expects Tyumen to keep the current Sidanco management team, led by BP executive Robert A. Sheppard. "I would like BP to come and take a bigger role" at Tyumen, he says.

Kukes plans to leave Tyumen once the owners are able to sell their shares to a strategic investor. (He doesn't himself own any shares, although the owners this past February gave him stock options that can be exercised in three years.) But, he adds, don't expect him to be departing anytime soon. For now, it's back to the plastic drawing board--and, (swat), the mosquitos.

Paul Starobin covers Russian affairs from Moscow.

Edited by George Foy

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