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Sibneft: Only Straight Forward, No Steps Back

Sibneft is one of Russia?s youngest and most vertically integrated oil companies and has been in existence since 1995. Nominal capital held by Sibneft, of 7226.2 million old Rubles, was generated on the basis of a 38% share of the holdings of "Noyabrskneftegaz JSC" (it was supposed earlier, that it would be integrated in SIDANKO, or in TNK), Omsk NPZ, Omsknefteproduct JSC and Noyabrskneftegazgeophysica JSC, which were all previously state controlled.

Sibneft is one of Russia?s youngest and most vertically integrated oil companies and has been in existence since 1995. Nominal capital held by Sibneft, of 7226.2 million old Rubles, was generated on the basis of a 38% share of the holdings of "Noyabrskneftegaz JSC" (it was supposed earlier, that it would be integrated in SIDANKO, or in TNK), Omsk NPZ, Omsknefteproduct JSC and Noyabrskneftegazgeophysica JSC, which were all previously state controlled.
In December as a result of a state auction, the control of Sibneft passed to a group of applicants comprising of the Capital Bank of Savings and Petroleum Financial Company JSC, which offered to credit the firm the total amount of 100.3 million. This bargain was carried out in the name of Boris Berezovsky and an oil trader Roman Abramovich. In June 1996 Roman Abramovich became a member of directors of Noyabrskneftegaz JSC, and also the head of the Moscow branch of Sibneft.
Then Sins, a firm operated by Boris Berezovsky, won the tender for the Russian Fund of Federal Property (RFFI) on sale the of 19 percent of outstanding Sibneft shares. In October the Roman Abramovich's controlled firm "Refine-oil" won the sale of 15 percent of Sibneft shares, when it promised to invest 35.1 million into the company.

,According to 2001 results from the Ministry for the Power Generating Industry statistics, Sibneft is now the leading Russian petroleum firm in terms of the growth of oil extraction, this leadership excludes non-organic expansion through merger activities. Sibneft?s oil recovery rate in 2001 increased by 20.2 percent to 20,671 million tons or 408 thousand barrels per day this compares with 17,199 million tons in 2000 or 338,000 b/d. In 2001 the company began the recovery of oil from outside its home region of the Jamalo-Nenetsk Autonomous Region. The data for extraction rates includes this new petroleum extracted from the Krapivinsk deposit, in the Omsk Area, and also the petroleum taken by the Sibneft-Jugra JSC.
Sibnef?s total export volume for crude oil has increased to 7,256 million tons or 143,000 b/d, an increase of 30 percent from a rate of 5,587 million tons or 110,000 b/d, in 2000. The average yield of new wells has increased by 52 percent up to 63.2 tons or 456,000 barrels. The average output of wells in general throughout the firm has also increased by 14 percent to 13.6 tons (98,000 barrels) per day, from 11.9 tons (86,000 barrels) per day in 2000.
Drilling levels have also increased by 30 percent to a total of 980,000 metres from 740,000 metres a day. The total volume of oil refining has increased by 6 percent, reaching 13,258 million tons (262,000 b/d) from about 12,555 million tons (247,000 b/d), thus the total volume of gasoline refined in 2001 was 3,237 million tons, diesel fuel refined was 4,525 million tons, black oil production was 1,962 million tons, and air kerosene totaled 615,000 tons.
In October 2001, a group of institutional investors who held 50 percent of total outstanding shares in the Russian Aluminium firm and an 88 percent share of Sibneft created an offshore holding group, Millhouse Capital, to manage actives of the two firms. Millhouse Capital will also operate the various share holdings of the Sibneft group as well as some other companies that concern the directions of the two businesses. These other interests include air transport, electrical power generation, sectors of the motor and timber industry, as well as insurance and banking.
Millhouse Capital is the management company and has no essential actives of its own. The chairman of Board of directors of the company is the Sibneft president Eugeny Shvidler. He has stated that Millhouse Capital activities will promote the perfection of corporate management of one of the largest enterprises in Russia, it will increase of efficiency of management, and attract new investment to the firms.
Generally the reorganization of the management structure will provide far greater transparency of the activities of one of the largest Russian enterprises.
It is necessary to note that many of the negative economic influences felt by Sibneft, such as unreliable economic growth in Russia, and reductions in the world oil price, do not have a huge impact on the Sebneft or Yukos. Main problems are linked to the large volume of operations within Russia, and the high gains that Yukos has seen in extraction in recent years.

,According to the president of Sibneft, Eugeny Shvidler, the company will not reduce investment plans, despite the present fall in the world oil price. Such investment includes the development of petroleum manufacturing facilities and also plans to increase oil recovery activities by about 27 percent, from 20.5 million tons up to 26.1 million tons. The Company will continue its large scale investments in oil extraction which will ensure continued leadership for growth rates of Russian oil firms.
Sibneft will optimize the ratio between the debt capital and share capital. However, speaking of plans by the company miss intentions of the government of the Russian Federation to reduce an oil production and export, Eugeny Shvidler noted, that the Russian government is not able to reduce the rate of oil production because it especially does not have an influence on the process as almost all companies are private.
The oil extraction gains of 2001 were due to investments made one and a half to two years ago, "Therefore it is impossible to change today?s volume of oil extraction, unless there is physical action to stop the process. The growth of one firm is unlikely to affect the market ", he said. Extraction rates have grown basically at only two Russian oil companies, at Yukos and Sibneft. Therefore Shvidler considers that ?the firm is not in a position to change the situation much?. During discussions about the oil price problems any decisions would be accepted, but they would, in the opinion of Shvidler, only affect exports.
On the event of an oil price recovery, it would not have any effects on the plans of the firm. The increase in oil extraction has becomes possible due to a start of production at three new deposits: JArajnersky, New Year's and Romanovsky. The firm also plans to attain the licenses for exploration of sites, adjoining the Krapivinsk deposit (in the Omsk area). The appropriate inquiries have already been sent to the Ministry for Protection of the Environment and Natural Resources. It is planned, that oil extraction from the deposit will commence next year and that the site will produce over 700,000 tons in the first year.
The company is continuing to strengthen its position within the mineral oil market. Modernization Omsk NPZ with the basic purpose of improving of the quality of mineral oil and ensuring its conformity with the world standards will continue. Hence in October on Omsk NPZ there will be a new installation to allow an increase in the production of high octane gasoline and ? 98 offering 12,000 tons per month.
Omsk NPZ is one of the most advanced oil refining plants in Russia, and is first place in Russia. In 2003 at a new installation at the factory a catalytic reforming unit will be mounted: technological furnaces and utilisors will be replaced. With the input of installation in operation the volume of high octane gasoline production should increase further. During the second stage of modernization process, between the years 2005 and 2010, there are plans to carry out reconstruction of the oil refining installations and also to finish construction of a complex LK5- for the initial processing of oil. During the realization of these projects and the modernization of Omsk NPZ, Sibneft plans to continue the escalation of the export of mineral oils, and also to expand regional markets.
The company is the dominant player in the Omsk Area. It is also a large participant in the Novosibirsk, Kemerovo, and Sverdlovsk Areas and Altai territory concern to the basic regions of deliveries. The company has stakes in the market of the Krasnoyarsk Region, Kurgan area and the Autonomous Republic Hakasija. In 2002 the firm plans to strengthen its position in the markets of the Chelyabinsk, Tomsk, Irkutsk and Tyumen Areas. As such it acquired a controlling stake in the Tyumennefteproduct company which owns and operates eighty gas stations and twenty two tank distribution centres. This acquisition allows Sibneft to oversee half of market of the south of the Tyumen area. Recently the company increases its exposure to the market for mineral oil in the Ural region, participating in the management of such companies as Yekaterinburgnefteprodukt and Sverdlovsknefteprodukt, of which it acquired 20 percent stakes in each. Over half of the directors of each organization are now representatives of Sibneft.
The company also plans to continue to develop partnerships with foreign companies. In November 2001, a large contract was signed with the German service group Schlumberger, this let Sibneft contract out a large portion of low profile activities. The three-year contract means Schlumberger will undertake the delivery of a significant proportion of the services in the maintenance of wells, until now such jobs have been undertaken by one of the Sibneft divisions. Schlumberger will collect revenue from the enterprise " Sibneft' - service " lifts KRS (maintenance of wells) big carrying capacity. The majority of the service personnel of this division of Sibneft will be included in the payroll of Schlumberger. The contract signed will allow Schlumberger to expand its range of services over time, to ensure that projects are developed on an integrated basis. In turn this will increase the performance of the strategic tasks of Sibneft, and will also allow the transfer of non basic fields of activity to foreign contractors.
Sibneft plans to increase the value of contracts of the services given to international service companies, from $85 million in 2001 to about $115 million in 2002. "Such contracts will promote an increase in the profitability of Sibneft,? said the president of Sibneft Eugeny Shvidler. ?Sibneft will receive superior services for a lower cost ".
In February 2002, Sibneft also signed an agreement with Halliburton International, whereupon the American company will provide Sibneft with a wide range of services facilities. The Halliburton Company, created in 1919, is one of the largest suppliers of production services to the petroleum and gas industry in the world. Sibneft plans to apply the newest technologies from Halliburton that will increase the working and repair of wells that are standing idle. Halliburton will assume works as soon as spring 2002. At the initial stage the company will engage in services in direct drilling, sharing the second trunks. A joint engineering group for the design and development of chinks will be created. "The work by Halliburton will expand the geography of the activities of the firm in Russia and will increase our total services in the Russian market. Cooperation with Sibneft will allow us to use technologies, which have not yet been applied in the given region? said the president and CEO of Halliburton, Dejv Lezar. President of Sibneft, Eugeny Shvidler noted: "The strategy of Sibneft is to gain maximum use of services of the best service companies possible. The application of unique technologies for Russia, by Halliburton, will promote the preservation of the leading positions that Sibneft has. Besides, the attraction of the new service company is directed toward the development of the market of hi-tech services in Western Siberia, and that has always been the objective of Sibneft".

,In the current year of extraction Sibneft will increase volumes of production substantially. The planned parameter for 2002 makes 26.1 million tons (516,000 b/d), a 26.3 percent rise on the year. The growth of extraction has been caused by the significant investments into the development of new deposits and efficiency gains in activity on the working deposits of the firm. The management of the company plans to provide further transparency of activity of Sibneft, thus raising the investment appeal of the firm. Thus, there are many different areas to consider, but it seems that in the near future the firm will continue to occupy the leading positions among the Russian oil-and-gas companies.

Author: Zhanna Belyaeva

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