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Russia: Gazprom inherits flagging production at Sibneft

GAZPROM'S $13.7bn acquisition of Sibneft in October marked the culmination of the gas monopoly's long struggle to secure a foothold in the country's lucrative oil business. But Gazprom now faces a battle to prop up production at Sibneft, the only Russian major, except for Yukos, to report a decline in output last year (see p16).

Sibneft was at the forefront of the Russian oil industry's revival in the early part of the decade, clocking up double-digit annual production increases from 2000 to 2003. Growth began to tail off in 2004 when the company's output climbed by 8.3% to 34.04m tonnes. But last year, Sibneft's output sank into decline, dipping by 3% to 33.04m tonnes. A further fall, to 32.01m tonnes, is expected this year.
Sibneft's share of production from Slavneft, a company owned jointly with TNK-BP, improves the outlook somewhat. Slavneft's output is climbing by over 7% a year, in line with the Russian average, and will add some 12m tonnes of oil to Sibneft's balance in 2006.

Sibneft explained its shrinking yields as a natural occurrence, as young fields enter a more mature stage of development. But it is clear that the company invested too little in new projects to compensate for the decline. Sibneft's preference was to pay out generous dividends. The $2.33bn paid to shareholders in 2004 was a record in Russian corporate history. Just who benefited from the dividends was not clear because the company never disclosed its ownership. The firm was controlled by Millhouse Capital, an investment vehicle run by billionaire Roman Abramovich.

Gazprom produces around 12m tonnes a year (t/y) of liquids along with its gas output of 0.547 trillion cubic metres. A plan to merge with Rosneft, the state-owned oil firm, which would have created an 80m t/y giant, collapsed last May after a prolonged behind-doors struggle over who would lead the new entity. Rosneft, which had just tripled its output by bagging Yukos' main production subsidiary, Yuganskneftegaz, at a bankruptcy auction, was in no mood for compromise. Gazprom's acquisition of Sibneft looked like a consolation prize.

But the gas giant has begun to make its mark on Sibneft. Alexei Miller, the firm's chief executive officer, has become chairman of the oil company and his deputy, Alexander Ryazanov, president in place of Eugene Shvidler. Citicorp and McKenzie have been hired as financial advisers to help Gazprom decide whether to keep Sibneft separate from its core business or not. A decision is expected in April or May.

Ryazanov says Sibneft will acquire new fields to help production recover. Even before the Gazprom takeover, Sibneft had begun to diversify the geography of its business beyond the Yamal Nenets area of western Siberia, where its main producer, Noyabrskneftegaz, operates. In 2005, Sibneft set up two new upstream divisions, Sibneft-Khantos, in Khanty-Mansiysk – the main producing area of western Siberia –and Sibneft Vostok, in Tomsk region, further south, on the border of eastern Siberia's Krasnoyarsk province.

Sibneft has participated in recent acreage rounds. Sibneft Khantos picked up the Salym-1, Salym-2 Salym-3 blocks in Khanty-Mansiysk and Zimny in neighbouring Tyumen region. Sibneft Vostock is handling operations at the newly acquired Archinskoye, Urmanskoye and Shinginskoye fields in Tomsk region and at Sibneft's established Krapivinskoye field near Omsk. Sibneft has made some headway in the race to bag acreage in eastern Siberia – a new oil and gas province where Gazprom is determined to play a central role. Sibneft has already won the Khotogo-Murbaisky and Sympuchikansky fields in the Sakha republic and Srednetaimurinsky in Krasnoyarsk region. Competition for blocks in eastern Siberia is fierce, particularly from Rosneft.

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