Yukos has since the turn of the millennium been the clear leader among Russian oil firms, both operationally and from an investment point of view. Since a massive PR drive a few years ago eventually succeeded in transforming the company from pariah to prince, the company has been ahead of the pack in technological innovation and output growth.

A planned increase of 11% in the firm’s output in 2004 – on the back of 16% growth last year – would put production at 1.8 mil b/d and stretch the company’s lead over Lukoil, which sits in second place in Russia’s output league. It would also take Yukos back to the output levels it saw before the collapse of the Soviet Union – as the money ran dry in the ‘nineties production slumped steadily, until by 1999 it had fallen by some 50%. Privately-owned business in Russia does not come much bigger than Yukos - the company makes up 6% of Russia’s GDP, and contributes 5% of federal budget revenue – as Khodorkovsky again pointed out in court at the end of last week.

And with Priobskoye in particular enjoying heady growth, there is plenty more where all that is coming from, according to Joe Mach, first vice-president of Yukos’s exploration and production business. “We could double Yukos’ production now, in six months,” he said last month.

Such an increase could not happen in practice, since Russia’s pipeline network would not be able to handle the extra crude. But Mach said the potential of Yukos – and at low cost – is substantial. That doubling of output could come from “enhancement” work on just 2,000 of the company’s wells, he says. And Yukos’ “activation” costs, for each new barrel of oil per day that it brings onstream, is just $3,000, a figure Mach contrasts with a global average that he puts at around $20,000. The firm’s probable reserves amounted to 11.8 bil barrels at the end of 2003, on an SEC basis.

Yukos’ two other producing subsidiaries – Tomskneft in western Siberia, which pumps around 320,000 b/d and Samaraneftegaz in central European Russia, where output is around 250,000 barrel/day. Tomskneft has huge potential and could see its output almost double in the future, according to Mach. Samaraneftegaz is less attractive as an upstream business, but is located close to Yukos’ central Russian refineries at Kuibyshev, Novokuibyshev and Syzran.

The explosive growth and improved efficiency demonstrated by Yukos in the last four years – with output climbing from 0.8-bil b/d to 1.75-mil b/d, at the same time as the company has sought to cut costs by shutting in half its 14,000 wells – is put down to “know-how” by the firm’s upstream executives. “Everyone has access to the technology, but not everyone has the know-how,” is Mach’s mantra, along with his assertion that Yukos gives the same amount of training to engineers as “the top five technical universities in America”.

If Yukos is taken to the breakers yard, Russia is not going to lose upstream assets such as Priobskoye. But it would, the Yukos argument runs, lose the potential for further dramatic and efficient growth that could come from a combination of such world-class assets with the firm’s know-how and its proprietary techniques.

Another immediate casualty would be the communities in which it works, Yukos argues. Any drop in output would inevitably, and ironically, reduce its tax obligations to the state. The firm is fond of pointing out that the R160-bil it is already due to pay for 2003 is equivalent to the country’s combined spending on culture, science and higher education.

Created: July 21, 2004