Free Khodorkovsky to Find Oil Industry Back in State Control

As Mikhail Khodorkovsky ends more than a decade in prison, the man who built Russia’s largest oil company following the collapse of communism will find an industry where the state dominates once again.

Kremlin-run OAO Rosneft has replaced Khodorkovsky’s OAO Yukos Oil Co. as Russia’s biggest producer, pumping from many of the fields the former billionaire once controlled. Headed by Igor Sechin, the ally of President Vladimir Putin who Khodorkovsky says orchestrated his fall, Rosneft now produces about 5 percent of the world’s crude.

Putin’s decision to pardon Khodorkovsky yesterday shows government confidence that it’s back in charge of Russia’s largest industry, said Cliff Kupchan, an analyst at Eurasia Group in New York. About a decade after the fall of the Soviet Union, private investors controlled 80 percent of Russian oil output. Today it’s less than half.

“The energy industry in Russia was shaped by Yukos until 2003,” said Richard Sakwa, an associate fellow at Chatham House in London who is writing a book about Khodorkovsky. “A lot has moved on with the creation of national champions that were built on the bones of Yukos.”

Putin has signed a decree pardoning Khodorkovsky, the Kremlin said. He left prison today, the penal service said.

Siberian Arrest

Khodorkovsky, 50, was arrested on the taxiway of a Siberian airport in 2003 and convicted of tax evasion, money-laundering and oil embezzlement. Yukos was dismantled and sold at auction to cover tens in billions in back tax that Putin’s government said the company owed. Many of the assets, including Yukos’s largest field, Yugansk, became part of Rosneft.

Before his demise, Khodorkovsky was recognized as the most successful of the oligarchs who revived Russia’s oil industry after the post-Soviet mayhem of the early 1990s. Under his stewardship, production from Yukos’s fields in western Siberia increased and financial discipline improved. He imported drilling techniques pioneered outside Russia.

It’s a strategy that Sechin has embraced at Rosneft, a company that was once a quarter of Yukos’s size, bringing in foreign managers and expertise. He’s crafted partnerships with international oil companies, signing a global alliance with Exxon Mobil Corp. and selling a minority stake to BP Plc.

Yukos Model

“Sechin has built Rosneft according to the model put in place by Khodorkovsky for Yukos,” said Thomas Gomart at the French Institute of International Relations in Paris in an interview. “Rosneft is a vertically integrated company that has grown rapidly and acquired expertise from the oil majors.”

Khodorkovsky, a chemical engineer noted for his aviator shades and leather jacket, knew nothing about the oil business when he took over Yukos in 1993, according to Thane Gustafson’s book Wheel of Fortune: the Battle for Oil and Power in Russia. He reorganized the company, using teams of ex-security officers to assert control over oil fields and refineries and stop cash bleeding from the organization, Gustafson said.

Later on, he brought in a U.S. petroleum engineer from oil services company Schlumberger Ltd. to revive production with modern drilling processes. Between 1993 and 2002, the average flow rates from Yukos’s wells more than doubled.

“Their very success, and the methods by which they achieved it, became one of the causes of the destruction of the company,” Gustafson wrote. “Their increased production and their fabulous profits excited envy and greed.”

Foreign Investment

In the months after Yukos’s seizure, some in the international oil industry said Putin’s actions might dissuade them from investing in Russia, which vies with Saudi Arabia as the world’s largest oil producer.

Exxon’s then chief executive officer, Lee Raymond, said at the time he’d be reluctant to put more capital in Russia because of Yukos. In 2011, his successor, Rex Tillerson, signed an alliance with Rosneft and next year the two companies start drilling prospects in Russia’s Arctic seas.

Khodorkovsky’s release may improve Russia’s investment climate further, said Mattias Westman, CEO of Prosperity Capital Management, which manages about $4 billion in Russian securities.

“If this well-known case will go away, it will increase people’s attention to Russia,” Westman said in a phone interview. “It will be helpful to dispel some of the misconceptions about Russia. There are companies doing well, dividend yields and valuations are increasing.”

In many respects, the Russian oil industry Khodorkovsky helped create is thriving. Crude production reached a post-Soviet record of 10.6 million barrels a day in November and exploration of offshore deposits and shale fields is increasing along with foreign investment. That’s partly down to Yukos’s legacy, according to Eurasia’s Kupchan.

“Khodorkovsky left a mark on the energy sector, on improving performance of companies,” Kupchan said. “He left a mark even on Rosneft.”

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