Global Insight Perspective | |
Significance | Chevron declined to confirm or deny the announcement, saying that it "continues to look at long-term investment opportunities in Russia's energy sector". |
Implications | The U.S. supermajor's potential participation in the bidding for Yukos assets could be a bold move to inspire investors about Chevron's growth potential, but it would also provide a veneer of legitimacy to the Russian government's final dismantling of Yukos. |
Outlook | Even if Chevron participates in the auctioning-off of Yukos's assets, the U.S. supermajor appears unlikely to be successful, with Gazprom and Rosneft widely tipped to come away the big winners. |
Opportunism or Desperation?
As the Russian government moves closer to the final liquidation of assets held by bankrupt Russian oil company Yukos, potential suitors are beginning to come out of the shadows. Russian-British oil major TNK-BP, while not confirming that it will bid on any Yukos assets, has refused to rule out a bid categorically. Italy's Eni is taking the indirect approach, hinting at plans to bid on Yukos's gas assets but in the context of a minority partner in a Russian-led consortium. Last week, Russian gas giant Gazprom claimed that several U.S. companies were also interested in bidding, leading to an announcement on Friday (9 February) by Nikolai Lashkevich, the spokesman for Yukos receiver Eduard Rebgun, which said that Rebgun had "received a letter from Chevron and a number of other big international companies about their interest in buying some of Yukos's assets".
The announcement, on the face of it, appears to throw wide open the expected bidding for Yukos assets. Chevron, the number-two U.S. oil company, is known to be interested in expanding its operations in Russia, but the company refused to confirm Lashkevich's announcement. However, neither did it deny the report. Chevron has a stake in the Russia-led Caspian Pipeline Consortium, the operator of the Tengiz-Novorossiisk pipeline, but is otherwise noticeably absent from the Russian energy sector. Company spokeswoman Irina Rybalchenko told Reuters that "Chevron continues to be engaged and is looking at long-term investment opportunities in Russia's energy sector. As such we consider a wide range of possibilities. However, Chevron's policy is not to comment on discussions concerning merger and acquisition activities."
Chevron's refusal to confirm or deny the report suggests implicitly that the company is contemplating participating in the potential sale of Yukos assets, most likely its upstream production units, Tomskneft and Samaraneftegaz. Chevron, of course, was originally looking at a potential acquisition of a stake in Yukos back in October 2003, competing with ExxonMobil, but Chevron's negotiations with then-Yukos chief executive officer (CEO) and core shareholder Mikhail Khodorkovsky came to an abrupt halt when Khodorkovsky was arrested on fraud and tax evasion charges. Chevron subsequently saw its exploration rights at the Sakhalin-3 project in Russia's Far East nullified in January 2004, and Khodorkovsky was eventually convicted and sentenced to eight years in prison.
A Chevron bid for Yukos's upstream assets would be a bold move, given the continuing legal issues swirling around the latter, which has promised a "lifetime of litigation" for companies that participate in the asset sales. Lawyers for Yukos are gearing up for further legal challenges in the coming auctions, and a long-delayed hearing on a Yukos lawsuit to annul the December 2004 sale of its former main production subsidiary, Yuganskneftegaz, is slated to be heard on 16 February by the Moscow Arbitration Court. The May 2005 lawsuit filed by Yukos has been repeatedly delayed, and its chances for success seem remote, but the lawsuit may serve as a reminder of the legal toxicity that continues to emanate from the bankrupt oil company.
Furthermore, the U.S. government has repeatedly criticised Russia's handling of the "Yukos affair", so Chevron's potential participation in the auctioning-off of Yukos assets could undermine the official U.S. view. However, after a disappointing fourth quarter, Chevron may yet deem that the risks of participating in the Yukos asset auctions are outweighed by the potential benefits, particularly as an acquisition of an upstream position in Russia would give the U.S. supermajor a foot in the door that it has long coveted. Considering Chevron's operational problems in places such as Venezuela and Nigeria, the legal issues in Russia may not be nearly so problematic, especially if an acquisition of a producing asset in Russia helps boost the U.S. company's oil production growth. Acquiring a Yukos upstream subsidiary would also bolster Chevron's oil reserves and its reserve replacement ratio.
Legitimacy for a Dismantling
Chevron's possible participation in the Yukos asset auctions may be seen as an opportunistic attempt to secure oil reserves in an increasingly competitive global oil industry, but it also would appear to smack of an element of desperation, given the legal controversy over Yukos's downfall. From the Russian viewpoint, however, Chevron's participation in the auctions can only be beneficial, since it provides a veneer of legitimacy to the whole process. With Khodorkovsky now hit with new money-laundering charges and facing up to another 10 years in prison, the possibility that a U.S. oil company could join in the bidding for Yukos assets would take some of the heat off the Kremlin (the Russian presidential administration) while taking the teeth out of the U.S. government criticism of Russia.
Even if Chevron breaks with the U.S. government stance and participates in the auctions, however, in all likelihood the U.S. supermajor is unlikely to come away successful. With state-owned Rosneft and Gazprom widely expected to benefit from the final dismantling of Yukos, Chevron's participation would likely only serve as window dressing, allowing the Russian government to point out that the auctions—and, more importantly, the results of the auctions—were fair and transparent, even as the winners have evidently been decided in advance.
Outlook and Implications
A confirmation by Chevron of its intent on bidding for Yukos's upstream assets could bring other international oil companies (IOCs) out of the shadows and into the limelight, further eroding criticism of the Russian government's handling of the Yukos affair while legitimising the final destruction of the company. Chevron could still back away with a denial of its interest in the Yukos assets, of course, and considering that the U.S. Congress went to bat for Chevron in 2005—effectively blocking a rival Chinese bid for Unocal, allowing Chevron to buy the California oil firm—the U.S. number-two oil company may be loath to be seen to contradict the U.S. government.
Still, Chevron could put itself on the line, subjecting itself to criticism and potential legal action from Yukos's shareholders in exchange for a potential payoff in Russia. Chevron's dalliance with a bid for Yukos assets could actually be part of a larger deal, with the U.S. supermajor bidding in conjunction with Gazprom or Rosneft or merely playing the foil to allow one of the state-run Russian companies to be seen as winning a legitimate auction. Since Rosneft and Gazprom have long been seen as the expected beneficiaries of the Yukos auctions, causing other companies to decide against even bothering to bid, the Russian government has the problem of ensuring sufficient bidders to make the auctions appear legitimate. Chevron, perhaps in a deal that would give the company access to other Russian oil and gas projects, could thus play the role of "false bidder" in order to pave the way for Rosneft or Gazprom to walk away with the assets. Cynical, yes, but certainly possible, particularly if it absolves Chevron of legal liabilities from acquiring Yukos upstream assets but opens the door for the company to secure access to other Russian oil and gas projects.
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