State Company Demands 50% in Major Oil Deal

One of the largest potential foreign investments in Russia's energy sector, the Timan-Pechora project, has hit a snag over a local company's demand to take a 50 percent stake, company officials said Monday.


Negotiations came to a standstill late Friday as state oil exploration company Arkhangelskgeologiya refused to drop its claim to an equity stake in the Timan Pechora Company L.L.C., a joint venture set up earlier this year to exploit the oilfields, said Tom Hazen, president of the Timan-Pechora Company.


In an interview Tuesday, Hazen called Arkhangelskgeologiya's proposal "outrageous" and said it was "totally unacceptable" for the company.


Arkhangelskgeologiya's demand, if realized, would mean that the four Western oil giants that established the Timan-Pechora Company -- Texaco, Amoco, Exxon and Norsk Hydro -- would be left with less than 25 percent of revenues.


"Some Russian company must participate in the project," said Yury Tyustkin, deputy general director of Arkhangelskgeologiya, in a telephone interview from the company's headquarters in Arkhangelsk. "We are not some kind of Indonesia or Angola -- we don't need to give such a project entirely to foreigners."


The breakdown of negotiations comes on the eve of a visit by U.S. Vice President Al Gore, who some observers expected would finalize the Timan-Pechora deal this week during a meeting with Prime Minister Viktor Chernomyrdin.


The project -- worth up to $15 billion over the next 10 to 12 years -- would be one of the largest ever in the former Soviet Union, along with the $20 billion Tengizchevroil venture in Kazakhstan and the $10 billion Sakhalin-2 oil and gas deal signed between Russia and a Western consortium earlier this year.


The Sakhalin deal, however, is on hold until the Russian parliament passes a law on production sharing, while Russian control of key oil pipelines has handicapped the Chevron project.


The Timan-Pechora Company and the Russian government have been in talks on the project since April, but the question about Arkhangelskgeologiya's stake only appeared five weeks ago, Hazen said. According to Tyustkin, Arkhangelskgeologiya has already been guaranteed 15 percent of the whole investment as the main contractor on the project, with the exclusive right to drill 45 wells. Under a preliminary agreement on profit-sharing, reached by the Western consortium and the Russian government in November, Russia would get more than 50 percent of cash inflow from exports.


A 50 percent equity stake in the Timan-Pechora Company would bring Arkhangelskgeologiya half of the remaining revenues, said Tyustkin. At present, Texaco and Exxon each have a 30 percent stake in the Timan-Pechora Company, while Amoco and Norsk Hydro split the remaining 40 percent.


Hazen said Arkhangelskgeologiya simply does not have enough money to cover its share of the $10 billion to $15 billion investment that he estimated the project will require over the next 10 to 12 years.


"We do not think they have enough finance qualification," Hazen said, adding that the Timan-Pechora Company had already sunk $50 million into the project. "We have no interest on behalf of our shareholders" to give Arkhangelskgeologiya an equity stake.


Tyustkin, however, was more optimistic about his company's ability to finance its share of the deal.


"Neither Arkhangelskgeologiya nor the consortium have the money," he said. "But once the Timan-Pechora Company obtains a license to develop oilfields, it will get a bank loan."


The government has not yet granted the Timan-Pechora Company a license to develop the projected 400 million tons of oil deposited in the region. Arkhangelskgeologiya only has a license to do geological research.


Tyustkin said Arkhangelskgeologiya's proposal to take an equity stake had the support of the local administration, which stands to reap extra tax revenues if the Russian company becomes a partner in the Timan-Pechora Company.