Mr Gutseriev Goes Abroad

Oil and Gas Company RussNeft comprises 30 producing entities, developing fields with net effective pay of over 600 mln tons, two oil refineries – Orsknefteorgsintez and Krasnodareconeft (total capacity – around 10 mln tons of oil annually), 300 gasoline filling stations in five Russian regions, a lube oil plant in the Orenburg region and two transporting entities. In 2005 the company produced 16 mln tons of oil. The consolidated revenue for 2005 according to RAS -100 bln rubles, net profit – 6.49 bln rubles. 100% of RussNeft is controlled by Company’s President Mikhail Gutseriev and his family.

About a year ago Mr. Gutseriev promised to make RussNeft a major company, producing 100 mln tons annually. At that, in Russia RussNeft would produce just a quarter of the amount, according to Mr. Gutseriev’s plan. However, it has not got international assets up to now. On last Friday in Baku, Mr. Gutseriev and President of SOCAR Rovnag Abdullaev signed a 25 year agreement on rehabilitation, development and production sharing for the Zykh and Govsany block of oil fields. Russain company’s share in the project is 75%, Azerbaijan’s one is 25%. SOCAR estimates the investment needed for the oil fields is up to $180 mln. However, as the head of RussNeft put it after the signing of the contract, they may limit to $100-150 mln, at that, 10-15% of the amount would be allocated to ecological measures.

Zykh and Govsany oil fields are situated in the southern part of the Apsheron peninsula and occupy the territory of 65 square kilometers, RussNeft and SOCAR’s joint press release says. Preliminary data runs, the amount of residue recoverable reserves amounts to 12 mln tons of oil. The first of the oil fields was discovered and put into operation in 1935, the second – in 1948. Currently, 285 tons of oil and 110 000 cubic meters of gas are being produced on a daily basis at the fields.

A central problem of the fields is ecological rehabilitation of the territories, which will involve fundamental investment. Particularly, the Zykh lake and the underground waters are highly contaminated, there are a lot of bog covered areas, the soil is polluted with oil. This was the very reason Lukoil had to step out of the project, a party to which it had been up to 2004. Ecological expenditure then were estimated around $100 at $250-300 mln total cost of the project; Lukoil considered under these parameters they would fail to meet a 15% internal profitability index approved by the company. Mr Gutseriev plans to spend on ecological issues less. Probably that is because as Azerbaijan mass media reported earlier with reference to SOCAR sources, the contractual territory RussNeft has been holding negotiations on is less than former Lukoil’s one. RussNeft refused to comment on the issue and Vedomosti did not manage to get in touch with SOCAR.

According to IFC Solid’s Denis Borisov, project expenses will be around $2 per barrel produced. ‘Under the current oil price it is a quite acceptable level for an investor, - he says, - If we had the same price back in 2004, probably Lukoil would not have stepped out of the project’. Nevertheless, the project remains risky, Mr. Borisov adds – oil economic activity may slow down; the outcome of old fields rehabilitation is hard to forecast. The expert points it out that RussNeft is the second Russian company after Lukoil that managed to secure a footing in Azerbaijan. ‘I think it is somehow connected with Mr. Gutseriev’s character; it took him only three years to set up quite a major company from scratch’, - Mr. Borisov concludes.