Foreigners Flocking to Yukos Carve-Up?

The assets of the Russian oil companylong besieged by the Kremlinare said to interest Chevron and Italy's ENI. But any deal will require Moscow's approval

On Feb. 22, creditors of the bankrupt Russian oil company Yukos formally announced the forthcoming sell-off of the company's remaining assets. In a series of auctions scheduled to commence in late March Russia's state property fund will sell off some 200 assets, organized into 50 to 60 lots, which state-appointed receivers have initially valued at some $22 billion. The news represents the start of the closing chapter in the Yukos saga, a tale of business and political intrigue that will surely be remembered as the defining business event of Vladimir Putin's presidency.

When the Russian government began its legal crackdown against Yukos in 2003—throwing its owner and chief executive officer Mikhail Khodorkovsky in jail, and hitting the company with nearly $30 billion in back-tax claims—it seemed to many foreign investors in Russia at the time that the sky was falling. Capital fled the country, the Russian stock market took a dive, and commentators predicted dire things for Russia's investment climate. The attack on the company also scotched any hope of a hook-up, widely rumored at the time, between Yukos and a U.S. oil major.

It's ironic, then, that foreign investors are now rumored to be among those getting in lining to take part in the final carve-up of Yukos. In early February, a spokesman for the Yukos bankruptcy committee let slip that U.S. oil major Chevron (CVX) was among several "large international companies" which had "expressed an interest in Yukos assets." Italian energy concern ENI (E) is also among foreign investors reported to be eyeing the forthcoming sales.

Choice Assets For Sale

Potential investors will be tempted by some choice assets. Yukos has been a shell of its former self since December, 2004, when the government confiscated its largest production unit, Yuganskneftegaz. But it retained significant property. Indeed, according to the former Yukos management as well as many independent analysts, those assets were actually worth more than the $27 billion in debts, mainly to the tax service, that Yukos still has to pay.

But that didn't stop a Russian court from finally declaring Yukos bankrupt last year, paving the way for the sale of its remaining property. Items now on the block include two major oil production units, Samaraneftegaz and Tomskneft; minority stakes in Rosneft and JSC Gazprom Neft; five refineries; 1,100 gas stations; and a 49% stake in Slovakian pipeline operator Transpetrol. The first lot, Yukos's 9.44% minority stake in Rosneft, will go on the block on Mar. 27, with an initial starting tag of $6.87 billion.

Not surprisingly, the decision to sell the assets has been slammed by Yukos's former management. In a statement, Claire Davidson, a spokeswoman for ex-management, said, "As with Yuganskneftegaz, the present 'auctioneers' are not about maximizing value for 'creditors' but about dividing the spoils of a trumped-up expropriation for the optimum benefit to state-owned corporations, friends of the government, and the Kremlin." The former Yukos shareholders have threatened to sue companies that participate in the auctions.

Controled By the Kremlin

Such threats are unlikely to act as a major deterrent. After all, it's not the first time former Yukos assets have been up for sale, with foreign investors willing to buy them in defiance of legal threats from former Yukos owners. Last July, British Petroleum (BP), Malaysia's Petronas, and China's CNPC were among the foreign investors that bought shares during the $11 billion initial public offering of state oil company Rosneft, which owes most of its value to the former Yukos field Yuganskneftegaz (see, 6/14/06, "Rosneft IPO: Less Than Meets the Eye"). Attempts by former Yukos shareholders to block the offering in Western courts proved fruitless.

As with the Rosneft deal, any foreign participation in the Yukos sell-down is likely to be tightly controlled by the Kremlin. On paper the auctions will be open to everyone. But no one is expecting foreign investors to go head to head with Russia's two state energy giants, Gazprom and Rosneft, which are the clear favorites to pick up the juiciest morsels. Without genuine competition Yukos's assets are likely to be sold cheaply, providing a further incentive for investors to brave the legal risks.

Making Nice with Gazprom

Foreign investors in Russian energy have already learned the painful lesson that only investments with the direct blessing of the Kremlin have a hope of success. That's likely to favor investments in tandem with either Gazprom or Rosneft. That message was sent loud and clear in December when, under heavy pressure from the Russian government, Royal Dutch Shell RDSA was forced to surrender a controlling stake in Sakhalin II, Russia's largest energy project, to Gazprom (see, 12/14/06, "Cold Snap for Russian Investing?").

Chevron and ENI have already been busy cementing partnerships with Gazprom. In November ENI signed a broad partnership agreement with Gazprom under which the two companies pledged to work together on joint projects in and out of Russia. In January Chevron formed a joint venture with Gazprom to develop Severnaya Taiga, an oil field in northern Russia.

Such deals are a sign that, despite the international furor caused by the Russian government's controversial energy policies, there's still no shortage of foreign investors willing to play by the Kremlin's rules. It won't be too surprising, then, if some of these investors don't shy from participating in the final carving up of Yukos.