Global Insight Perspective | |
Significance | Marathon has been frustrated in its efforts to use the KMOC assets as traction to expand its operations in Russia, so the U.S. mid-major clearly decided to cash out and focus its attention elsewhere. |
Implications | Spooked by the Yukos affair and threatened with the loss of its licences, Marathon was feeling squeezed in Russia. Unable to strike a deal with a local partner, the company's deal with LUKoil is an ideal exit strategy, even as it serves to reinforce the growing notion that foreign investment (particularly in the energy sector) is not entirely welcome in President Vladimir Putin's Russia. |
Outlook | Marathon said it will retain a retain a business development office in the Russian capital, Moscow, but the U.S. company's experience in Russia is likely to serve as a disincentive to re-invest the profits from the sale of its assets back into the country, serving as another reminder that the prospects for foreign energy companies in Russia are increasingly limited. |
Marathon Buys, Then Sells
When U.S.-based Marathon Oil, the fourth-largest U.S. oil company, acquired the Khanty-Mansiysk Oil Company (KMOC) in April 2003 for US$275 million to add to its small existing Russian holdings, the transaction flew in somewhat under the radar in the Russian oil industry. Announced on the same day that former Yukos chief executive officer (CEO) Mikhail Khodorkovsky trumpeted a deal to merge with Sibneft and create the first Russian "supermajor", the Marathon-KMOC deal was clearly a runner-up in the news category in comparison to the Yukos-Sibneft tie-up (see Related Articles below). While the Yukos-Sibneft merger plan has long been dead - with Khodorkovsky subsequently jailed and convicted of fraud, Yukos broken up and soon to be bankrupted, and Sibneft later acquired by Gazprom - the Marathon-KMOC deal appears to have run its course now as well. Marathon and LUKoil, the top Russian oil company, announced a deal late on Monday (15 May) in which the U.S. mid-major will sell KMOC and associated assets in western Siberia to LUKoil for US$787 million.
The assets being transferred under the deal, which is expected to close by mid-July pending regulatory approval, operate nine production licences on either side of the Ob River in the Khanty-Mansiysk Autonomous Region of Russia. The licence areas - Vostochno-Kamenny, Potanai-Kartopyinskiy, Paitykhsky, Galyanovskiy, Sredne-Nazymskiy, Aprelskiy, Olkhovskiy, Bolshoy ,and Tsentralniy - hold total recoverable reserves of about 257 million tonnes (1.88 billion barrels) of ABC1+C2 reserves as of end-2005, according to LUKoil (although Marathon takes a more conservative estimate of the reserves). The properties produced about 1.3 million tonnes (26,000 b/d) of oil in 2005, up 68% from 2004, with output thus far in 2006 averaging around 30,000 b/d - double the average production when Marathon bought the assets in 2003. LUKoil, which said it hoped to realise significant synergies from the acquisition through joint operation of the new assets with its existing western Siberian production units and infrastructure in the region, said that it expects to raise production from the acquired assets by over 2.5 times.
Marathon Not in for the Long Haul
For Marathon, the sale of the Russian assets to LUKoil is something of a golden parachute, as the U.S. company was clearly trying to figure out an exit strategy. After acquiring KMOC in 2003, Marathon pursued an aggressive investment approach, committing more money to an investment programme than it actually paid for the assets in the first place. However, Marathon was clearly spooked by the spate of back tax bills assessed to oil companies in Russia in 2004-2005, while the government's campaign to destroy Yukos and prosecute Khodorkovsky on fraud and embezzlement charges prompted Marathon to openly rethink its plans for expanding its activities in Russia. At the same time, the company was unable to truly consummate a joint venture with state-owned Rosneft.
Nevertheless, Marathon soldiered on, even as its opportunities in Russia continued to be limited. The company was rebuffed in its efforts to acquire the Saratovneftegaz from TNK-BP (which sold the production unit to Russneft) and ran up against the proverbial glass ceiling in its attempts to use the western Siberian assets as leverage and employ KMOC as a base to expand its activities. The final straw for Marathon in Russia may have come earlier this year, when Russian news reports suggested that the U.S. company could have its licences revoked for failing to comply to the exact specifications of its licence agreements. With Marathon making a triumphant return to Libya at the end of last year and the company's operations in West Africa progressing, Marathon's Russian operations were clearly stuck in neutral. Thus, with LUKoil keen to add incremental production and reserves in its extended acquisition spree, Marathon was more than a willing seller.
Outlook and Implications
Marathon president and CEO Clarence P. Cazalot, Jr, said that the company is "continuing to evaluate other attractive opportunities in the Russian Federation", but we are unlikely to see any speedy Marathon moves in Russia any time soon. Although the company will continue to operate a business development office in Moscow, the Russian capital, Marathon is unlikely to make a quick return to Russia after its KMOC experience. Rather than re-invest the profits from the sale in Russia, Marathon is likely to plough the money into Libya, West Africa, or its planned expansion of the 180,000-b/d-capacity Garyville (Louisiana, U.S.) refinery. The tidy profit from the LUKoil sale deal should allow Marathon to reduce its global exposure risks while supplementing the company's US$3.4-billion investment programme for this year.
The loser in the Marathon-LUKoil deal is really the Russian government, which loses another foreign investor in the energy sector. Although the Kremlin (Russia's presidential administration) has often repeated the refrain that it welcomes foreign investment, in practice the state has done little to give encouragement to IOCs seeking opportunities in Russia. Since the aborted Yukos-Sibneft merger and the dismantling of Yukos, state-run Rosneft and majority state-owned Gazprom have increasingly dominated the Russian oil and gas sectors, with IOCs pushed to the margins of the industry and limited to 'niche' projects on Sakhalin Island. Coincidence or not, there is no escaping the fact that the slowdown in Russian oil production over the past 18 months has occurred at the same time that the Russian government has inserted itself in the business affairs of the energy sector, to the exclusion of foreign investors. Yes, foreign investors can now own Gazprom stock directly, but for every move forward to the benefit of IOCs and outside investors, the Russians take one step backward in creating new barriers to foreign investment. The departure of a U.S. mid-major such as Marathon, with relatively minor assets, from the Russian oil scene may be unimportant in the overall picture of the industry, but the message it sends to other IOCs is that they are far from welcome in Russia; on the bright side, things could definitely have turned out worse for Marathon in Russia - the company needs only look at what happened to Yukos after its own announced acquisition on that fateful day in April 2003.
Related Articles
- United States: 28 April 2006: Mid-Majors Report Higher Q1 Earnings Across the Board in U.S.
- United States: 11 April 2006: U.S. Mid-Majors - Predators or Prey? Part One
- United States: 18 April 2006: U.S. Mid-Majors - Predators or Prey? Part Two
- Russia: 21 February 2006:Newspaper Claims Marathon's Russian Oil Assets Under Threat
- United States: 3 February 2006: Marathon Announces US3.4-bil. 2006 Investment Programme
- United States: 30 January 2006: Marathon Trebles Q4 Net Income to US$1.27 bil.
- United States: 11 October 2005: TNK-BP Reportedly Selling Saratovneftegaz Production Unit
- Russia: 20 July 2004: Rosneft, Marathon Postpone Talks on Western Siberian JV
- Russia: 30 May 2003: Marathon Oil to Invest US$378m in Khanty-Mansiysk Oil Co.
- Russia: 23 April 2003: Marathon to Buy Khanty-Mansiysk Oil Company for US$275m