In early November President Boris Yeltsin signed a decree that allows foreigners to acquire complete control of Russia's oil companies. And First Deputy Prime Minister Boris Nemtsov, who also served as Minister of Fuel and Energy at the time the decree became law, said foreigners could now own up to 100% of domestic oil companies instead of the 15% cap on allocations of domestic oil firms to foreigner buyers.

While the decree may sound sensational, analysts and industry sources are agreed that its impact is unlikely to be very significant. Russia's oil majors are already largely privatised, or scheduled for privatisation within weeks, predominately to buyers dominated by domestic banks and Russian consortia.

And although lots of foreign companies hold stakes in Russian oil majors, these stakes are small enough to stay on the safe side in Russia's risky economic environment. The situation on global financial markets remains uncertain and may well prevent many potential investors from rushing into Russia in the near future. Privatisation of the oil sector is also a key political issue. The State Duma, Russia's opposition-led and predominantly xenophobic lower chamber of parliament, likes to question any privatisation deal, especially those involving foreigners.

"I don't think we will see any big rush [by foreigners], at least in the near term," Jukka Viinanen, chief executive of Finnish oil group Neste, told Reuters. "The West is still taking a cautious view of Russia."

Deputy fuel and energy minister Yevgeny Morozov appears not to disagree. There would be "no surprises or revolutionary changes" in terms of foreign investment in the energy sector, he said.

The government's motivation to privatise is clear-to raise more cash to cut big gaps in the budget caused by poor levels of tax collection. It is no surprise the decree was signed right after the International Monetary Fund decided to postpone its regular quarterly US$ 700 million tranche to Russia. "The government's fiscal problems were the key factor behind the decision," said Christopher Granville, head of research with United City Bank.

"Privatisation is an increasing part of the revenue base. It has been this year, and will continue to be so next year."

Russia, which controls 5% of the world's oil reserves, accounts for 10% of the world's annual oil production, and takes almost three-quarters of its hard currency earnings from oil exports, is certainly seen as an attractive investment opportunity. "Will Western oil companies be interested in buying Russian oil companies? Of course they will," a top Western industry source told Reuters. "Whether they choose to participate is another matter."

Even if foreigners had the will to buy major oil stakes in November's auctions they would not have been able to do so. The auctions of state holdings in oil companies, all announced before the date of the decree, were not subject to it, said Maxim Boiko, Minister for State Property at the time. He was referring to auctions of stakes in Tyumen Oil (TNK) and Eastern Oil.
"We don't have the right to make any changes in the conditions of auctions and tenders while they are being carried out, or to change the rules of the game announced earlier," Boiko said.

But foreigners are likely to be able to apply the decree to later auctions of stakes in LUKOil and Slavneft, said Vladimir Malin, deputy chairman of the Federal Property Fund. "The documents have been handed to the government. As soon as they are confirmed we can look at the issue of whether we will succeed or not," said Malin, adding that the fund had welcomed the long-awaited decree.

"Unfortunately it came out a bit late," he said, referring to the fact that foreign investors had little or no time to prepare seriously for the auctions. "We are holding a commercial tender for 15% of LUKOil, and expect to sell 0.96 % of LUKOil at a cash auction for about US$ 150 million," Malin said. "By the end of the year we could have sold 19% of Slavneft."

Rosneft, which is fully owned by the state, is soon to be auctioned too, with several foreign companies planning to bid. "The decree will open up bidding for Rosneft quite considerably," Julian Lee of the Centre for Global Energy Studies told Reuters.

The Duma - busy fighting First Deputy Prime Minister Anatoly Chubais on many issues, including privatisation, and pondering whether to debate the 1998 draft budget in its first reading - has shown little interest in Yeltsin's decree so far. But analysts suggested that when slow-minded deputies find time to take a closer look at the oil decree it could cause storms of protest over foreign ownership of Russia's most important sector. "It will be contentious," Lee said. "It's difficult to say whether it will stand the passage of time."

2. First oil flows from Azerbaijan
Azerbaijan International Operating Company (AIOC), which is developing the country's offshore Caspian Sea fields, began pumping its first oil in November. The US $8 billion valued AIOC originally scheduled its first output for 28 August but moved the target several times. The first crude flow of 1,000 tonnes per day came from a platform in the Chiraq field, one of three under development by AIOC. Output at the well is expected to total 7,500 barrels per day.

Crude from the platform is delivered through a pipeline to a shore-side storage and pumping facility. A day after AIOC started delivering the first crude through the pipeline, Russian and Chechen officials officially opened the Chechen section of a 1,000-km international oil pipeline linking Azerbaijan's offshore Caspian fields to Russia's Black Sea port of Novorossiisk.

While Chechen and Russian negotiators reached a deal to transport 200,000 tonnes of Azeri oil to Novorossiisk by the end of 1997, the two sides remain divided over long-term transit fees.

The Azerbaijan State Oil Company, SOCAR, and AIOC will pay US$ 15.67 per tonne in transit fees to Russia's pipeline monopoly, Transneft. AIOC said it planned to ship 120,000 tonnes of crude via this route, which passes through Chechnya, by the end of the year. Another pipeline to Georgia's Black Sea outlet at Supsa is being refurbished and will be ready to handle AIOC crude by the end of 1998, AIOC said.

Meanwhile, Azerbaijan plans to start loading crude onto its first tanker at Novorossiisk in mid-December, a spokesman for Transneft said. The spokesman said that by mid-November Azeri crude had already reached the Chechen sector of the pipeline.

"Starting this week Transneft will pump Russia's Urals oil into the pipeline at the Tikhoretsk intersection where several pipelines meet. Urals oil will meet Azeri crude in the pipeline. Then the crude mixture will flow to Novorossiisk. That's why Azerbaijan will receive the crude mixture at Novorossiisk."

AIOC is led by an alliance of British Petroleum and Norway's Statoil. BP has a 17.13% share in the project, and Statoil 8.56%. Other participants are Amoco with 17.01%, Exxon with 8%, Unocal with 10.05%, Pennzoil with 4.82%, Britain's Ramco with 2.08%, Russia's LUKOil with 10%, Turkey's TPAO with 6.75%, Saudi's Delta Nimir with 1.68%, and Japan's Itochu with 3.92%. SOCAR has a 10% share.

The deals, if fully implemented, are worth US$ 30 billion in total long-term investment in Azerbaijan which will receive about 80% of the proceeds from a planned 30-year project. The three fields are estimated by AIOC to contain at least 650 million tonnes of recoverable reserves. Output is expected to reach 700,000-800,000 barrels per day by 2007-2010.

3. Yeltsin appoints new energy minister in a government shake-up
In an apparent move to avoid political turmoil and pacify parliament ahead of discussions on the 1998 budget, Russia's President Boris Yeltsin sacked two reformist politicians - First Deputy Prime Ministers Anatoly Chubais and Boris Nemtsov - from their respective jobs at the finance and energy ministries.

Yeltsin was forced to sack Chubais as finance minister on 20 November, but tempered the blow by retaining him as Deputy Prime Minister after the opposition-dominated parliament called for his dismissal over a US$ 450,000 fee that Chubais and four other government members reportedly received for an as-yet unpublished book on privatisation.

Chubais stepped down to give way to State Duma deputy Mikhail Zadornov, a former member of the liberal Yabloko faction and head of parliament's budget committee. During his four years in parliament Zadornov has built good relations with both government and opposition.

Nemtsov was not directly linked to the scandal over the book, but was forced to resign as Minister of Fuel and Energy in line with a Presidential Decree which prohibits deputy Prime Ministers from holding ministry jobs along with their governmental responsibilities.

Nemtsov's successor is his First Deputy, Sergei Kiriyenko, the former head of Norsi Oil, who is widely expected to continue Nemtsov's policy of structural reforms in the industry.

Industry insiders said Nemtsov was never accepted as a true oil or gas professional, but was generally regarded as a competent manager and a useful tool for lobbying on behalf of the interests of the energy sector.

"Nemtsov's departure from the fuel and energy ministry won't be a big loss, especially now that we have Kiriyenko in his place," an oil analyst said. Other analysts agree that Yeltsin's decision was designed to pacify the Communist-dominated parliament, which has already turned down the second draft reading of the new federal Tax Code and has put off discussion of the draft 1998 budget until early December.

Zadornov had already been offered the job, in August 1996, following Yeltsin's re-election as President, but turned down the offer when Prime Minister Chernomyrdin reportedly refused to sack corrupt officials from the ministry.

While Zadornov is generally valued as a good signing to handle the government's argument with the Duma on monetary policy and fiscal matters, his appointment is seen primarily as restoring Chernomyrdin's leverage over the White House. Zadornov is rumoured to have taken the job on condition that he would report to the more conservative Chernomyrdin rather than his liberal deputy Chubais.

Zadornov also supported in parliament Yabloko's criticism of the draft Tax Code, which the government hoped would reduce pressure on the economy and lead to economic growth. Although he has formally quit the party, it is not clear whether Zadornov would unequivocally support the proposed tax changes.

As a leader of parliament's conciliation commission that worked on the draft budget for 1998, Zadornov is also known to have endorsed a proposal from deputies to add RR 27 trillion (US$ 4.6 billion) to the government's draft, which could lead to a rise in existing tax rates, or the introduction of new taxes

Experts warned that slackening of the government's spending policy could undermine Russia's efforts to climb out of crisis. "In a bad scenario, if the budget is not fixed, Russia could lose its stability in terms of exchange policy and stock market rates," said Simon Johnson of the Russian-European Centre for Economic Policy.

While analysts agree Zadornov is a dark horse in the government, the new energy minister, Kiriyenko, indicated at his installation ceremony that he would follow up the course laid down by forerunner and close ally Nemtsov.

Kiriyenko voiced support for Nemtsov's policy of attracting foreign investment in the Russian energy sector through open and fair privatisation of the state oil holding Rosneft and indicated Moscow was keen to keep its grip on the Azeri oil. The new energy minister also signalled his support for reducing the tax burden on the oil and gas sector to make the industry competitive.

Business & Finance
1. BP buys 10% stake in Sidanco
British Petroleum has acquired 10% stake in Russia's sixth largest oil company, Sidanco. The purchase from Russia's Uneximbank, Sidanco's majority shareholder, was completed in mid-November.

The Sidanco purchase, worth US$ 571 million, would be BP's first major investment in Russian crude oil operations. BP has already moved into the downstream side of the business by setting up filling stations in Russia.

Along with 10% of Sidanco's shares, BP gets one seat on the board and 20% of the voting rights. BP committed an additional US$ 172 million investment in Sidanco's projects. BP plans an involvement in developing East Siberia's Kovyktinskoye gas field, operated by Rusia Petroleum, which is in turn 34% owned by Sidanco.

BP has been negotiating the agreement for several months. A BP official said that the Kovyktinskoye gas field was one of the major goals of the deal. "It will be the first big upstream project BP operates in Russia," he said.

2. Gazprom secures a US$ 3 billion loan
Gazprom has signed a US$ 3 billion eight-year financing deal with banks Credit Lyonnais and Dresdner Kleinwort Benson, and a group of 12 co-arrangers. The deal includes a three year grace period, while the repayment rate was fixed at six-month LIBOR+1.75%.

The loan was secured against the receivables from an existing gas supply contract between Gazprom, Gaz de France and Neste subsidiary Gasum OY.Gazprom's president, Rem Vyakhirev, said the loan was oversubscribed by US$ 1.6 billion, which lead banks to subscribe for US$ 313 million each, instead of the US$ 600 million initially agreed. The 12 co-arrangers signed for US$ 210 million instead of the originally planned US$ 300 million.

According to Vyakhirev, Gazprom was unable to find the money at home, because domestic banks were able to supply only around US$ 400 million in loans.Among the subscribing banks are Banco Santander, Bankers Trust, Bayerische Hypotekenund Wechsel-Bank and its partner Bayerische Vereinsbank, Bayerische Landesbank, Citybank, Commertzbank, Deutsche Bank, IMI, ING, Kreditanstalt fur Wiederaufbau and Societe Generale.

According to Gazprom, part of the US$ 3 billion will replace a bridging loan of US$ 1.2 billion arranged by Credit Lyonnais and Dresdner Bank in June. The balance will help to finance a 4,000 km trunk gas pipeline that would link Gazprom's vast reserves in Yamal peninsula in Russia's Far North, with Europe.

Vyakhirev said earlier that the total cost of the project was estimated at between US$ 24 and US$ 40 billion. When construction is completed in 2007, Gazprom will be able to boost its production for export by an annual 67 billion cubic metres.

3. AIOC approves preliminary 1998 budget
Azerbaijan International Operating Company (AIOC), the international consortium that develops Azerbaijan's offshore Caspian oil fields, has approved its preliminary 1998 budget, which is expected to total US$ 207 million, said SOCAR vice president Akhmed Zeinalov.

According to the budget, AIOC's capital investment next year would amount to US$ 82.3 million, and US$ 124.9 million would be invested in the company's operating programme. Zeinalov said the 1998 programme included drilling nine oil wells in the Chirag field.

"The construction of Georgia's pipeline, which is to be used for Azeri crude exports, has not been included in the programme. It includes only the contractor's preparatory works in the field," said Zeinalov.

4. CPC delays 1998 budget vote
Caspian Pipeline Consortium (CPC) has decided to consider its 1998 budget on 17-18 December, rather than at the shareholders' meeting held on 4-5 November, a consortium official said. Meanwhile, shareholders approved a US$ 25.8 million budget for the final quarter of 1997.

The official said disagreements among CPC's shareholders over the level of the budget had prevented them from approving the 1998 allocation, which is expected to total around US$ 600 million. The official also said that in 1998 the Russian government's stake in CPC was likely to remain in trust with Deputy Minister of Fuel and Energy Viktor Ott.

CPC is to build a US$ 2.5 billion pipeline from West Kazakhstan's Tengiz oil field to Russia's Black Sea port of Novorossiisk. The consortium's shareholders include Russia with 24%, Kazakhstan with 19%, Oman with 7%, Chevron with 15%, the Russian-US joint venture LukArco with 12.5%, Mobil with 7.5%, an alliance of Russia's Rosneft with Shell, 7.5%, Agip with 2%, British Gas with 2%, Oryx of the US with 1.75%, and Kazakhoil and Amoco's joint venture with 1.75%.

5. LUKoil launches syndicated loan
Chase Investment Bank is inviting banks to commit as co-arrangers to the US$ 100 million debut syndicated loan facility for Russian oil producer LUKoil. LUKoil has guaranteed the facility and is using its domestic funding affiliate Bank Imperial as the borrowing entity. The 364-day term loan is priced at 270 basis points (bps) over LIBOR. Co-arrangers are being invited to commit US$ 10 million apiece and are being offered a flat fee of 50 bps.

Syndication is expected to be completed at the co-arranging stage and therefore the deal is unlikely to be launched into general syndication. The transaction is only the third unsecured loan to be arranged for a Russian corporate to date.

In May the European Bank for Reconstruction and Development co-financed a US$ 300 million loan for Gazprom, US$ 200 million of which was syndicated to commercial banks. That three-and-a-half year facility was priced at 300 bps over LIBOR.

Upstream Oil
1. Russia grants Chechnya extra oil export quota
Russia's Ministry of Fuel and Energy has granted an extra, 34,000-tonne oil quota to the break-away republic of Chechnya to be applied by the end of 1997, a senior official at the ministry said.

The official said that Chechnya now was allowed to export 68,000 tonnes of oil by the end of 1997 via Novorossiisk. A source at Russia's pipeline monopoly, Transneft, said Chechnya might have difficulties exporting oil through the Russian customs because the quota was given to Chechnya's Yunko company, which was earlier dissolved by Chechnya's president Aslan Maskhadov.

"Chechnya should appoint Yunko's successor to avoid problems with customs and delays in crude export," the Transneft official said. Despite possible problems with customs Yunko said it was optimistic that Chechnya's new oil transportation company would be in charge of all Chechen oil exports.

2. Sibneft boosts reserves, reports first half profit
Sibneft's first half net profit totalled US$ 13.7 million in accordance with US Generally Accepted Accounting Principles, the company said. Sibneft's total revenues were US$ 1.5 billion for the half-year to 30 June.

The company's total assets amounted to US$ 7.9 billion in the same period. The company also said that its oil reserves were updated on 15 September to 4.11 billion barrels, 100 million barrels up on April. The data came from Miller & Lents which recently carried out an audit of the company's oil reserves.

Sibneft's main oil producing subsidiary, Noyabrskneftegaz, produced 10.5 million tonnes of oil in H1 1997, while another Sibneft subsidiary, Omsk refinery, processed 7.5 million tonnes of oil during the six months. Sibneft said the figures compared with oil production of 18.6 million tonnes for the 1996 fiscal year and a refining throughput of 15.6 million tonnes.

Sibneft said audited GAAP accounts showed it made a net loss of US$ 2.35 million for the whole of 1996, compared to a net loss of US$ 206.70 million in 1995, expressed in unaudited GAAP accounts.

3. Texaco set to explore KazakhOil venture
Texaco said it agreed to pursue establishment of a joint upstream development company in Kazakhstan with KazakhOil, the state oil and gas company. Texaco said the agreement was reached during Kazakhstan President Nursultan Nazarbayev's visit to the US where bilateral agreements were signed between the two governments, along with agreements with industry to develop Kazakhstan's vast oil and gas reserves.

Under the proposed agreement, the new company would hold selected upstream assets in Kazakhstan and provide KazakhOil with the opportunity to participate with Texaco in selected international exploration and production activities.

"Our agreement to jointly consider the establishment of an alliance with KazakhOil represents a significant advancement in our strategy to build a strong operational presence in the Caspian Region," said Texaco's chief executive, Peter Bijur. "Texaco would consider a substantial equity position in this proposed venture in addition to providing technology and management expertise.

4. Russian crude output up in October
Russian crude oil production totalled 26.1 million tonnes in October, up 0.9 million tonnes on the previous month, according to preliminary data received from Russia's Ministry of Fuel and Energy.

Lukoil's output increased to 4.5 million tonnes from 4.4 million tonnes and Yukos' production rose to 3 million tonnes from 2.9 million tonnes the previous month. Surgutneftegas produced 2.9 million tonnes following 2.8 million tonnes and Tatneft produced 2.1 million tonnes, from 2.0 million tonnes.

Tyumen Oil's production rose to 1.9 million tonnes from 1.7 million tonnes. Sidanco's production rose to 1.7 million tonnes from 1.6 million tonnes.

Sibneft's crude production went up to 1.6 million tonnes from 1.5 million tonnes. The total output of crude produced by other oil companies rose to a combined 8.4 million tonnes from 8.3 million tonnes.

5. Azerbaijan oil output to end-October dips
Azerbaijan produced 7.5 million tonnes of oil in January-October 1997, 0.9% down from the same period 1996, an official with the Azerbaijan State Oil Company, Socar, said.

The official said that oil output in October totalled 772,000 tonnes. Azerbaijan also produced 497.5 million cubic metres of gas in October. Output from Azerbaijan's offshore Caspian fields amounted to 6.2 million tonnes in January-October.

6. Azeris ratify Apsheron contract with Chevron
Azerbaijan parliament has ratified a contract signed August 1 between Azerbaijan State Oil Company, SOCAR and the US Chevron to develop the Apsheron oil field in the Azeri sector of the Caspian Sea.

Under the contract Chevron is to provide US $4 billion during a 25-year development period. Chevron which is the operator of the project holds a 30% stake in the project, Socar 50% and France's Total 20%. Estimated reserves at the field are 120 million tonnes of oil and 400 billion cubic meters of gas.

1. Gazprom may join Turkmen gas project

Gazprom is likely to be involved in the construction of a gas pipeline that will run from Turkmenistan to Pakistan across Afghanistan, if the project's safety is guaranteed, said a spokesman for Gazprom.

In late October a multinational consortium to build the US$ 2 billion pipeline was formally set up in Turkmenistan. The spokesman said Gazprom had preliminary agreements with Turkmenistan on its participation in the project: "Several years ago we signed a protocol of intent with TurkmenGazprom, which outlined the basic principles behind Gazprom's joining the project. The situation has changed and we need additional guarantees about the project's safety to start negotiations on our participation," he said.

The multinational consortium Gazprom plans to join includes Unocal of the US, Saudi Arabia's Delta, Japan's Itochu and Inpex, Pakistan's Crescent Group, South Korea's Hyundai, and Turkmenistan's Ministry of Oil and Gas.

"Gazprom is likely to sign a new protocol with Turkmenistan once the project's research is complete and it obtains all the required data on the pipeline's construction," the Gazprom spokesman said.

Meanwhile, Tchary Niyazov, Turkmenistan's ambassador to France, said his country was studying four other routes to export its gas. These include: a route through Kazakhstan to markets in the CIS; a link under the Caspian Sea; a route through Kazakhstan to China and, eventually, Japan; and a line running through Iran to Turkey and on to Europe.

In early November a spokesman for Turkmenistan's oil and gas ministry said his country would deliver four billion cubic metres of gas direct to Iran in 1998 through a new 200-km pipeline linking the two neighbouring states. The link is to be opened by the Turkmen and Iranian presidents in mid-December.

2. Kazakhstan to pay debts to Hungary with gas
Kazakhstan said it would supply Hungary with 900 million cubic metres of natural gas to settle some of its debts dating back to Soviet times. After meeting Hungarian President Arpad Goncz in Almaty, Kazakh President Nursultan Nazarbayev said the debts date back to the late 1980s and early 1990s, when Hungarian construction firms worked on the giant Tengiz oil field in Western Kazakhstan.

Nazarbayev said the gas could be delivered to Hungarian consumers through Russian pipelines, but did not say when. In 1992 both countries agreed that Kazakhstan would clear some of its debts to Hungary by deliveries of its natural gas, and Nazarbayev said that Hungary was ready to receive annually more than 1 billion cubic metres of the fuel.

1. Azeris ratify PSA deal with Exxon

Azerbaijan's parliament has ratified a production sharing deal with Exxon to develop the Nakhchivan oil deposit in the Azerbaijan sector of the Caspian Sea. The contract was signed in August.

The parties hold equal equity in the project and, now that the Azeri parliament has ratified the deal, it becomes valid. Under the agreement Exxon is to pay a first US$ 10 million tranche of the production sharing bonus within 30 days. The second tranche,US$ 1 million for each 100 million barrels produced, will be paid if reserves are proved.

2. Oil trader wins Vietnam offshore tender
Russian oil trader Zarubezhneft has won an international tender to develop the 09-3 oil block on Vietnam's southern shelf, the company's general director, Oleg Popov, said.

According to the terms of the tender, the block will be developed under a production-sharing agreement. Vietnam's oil company, PetroVietnam, will hold a 50% stake in the project. Zarubezhneft's stake has not been decided.

Popov said that Russia and Vietnam would in future probably set up a consortium including other foreign oil companies. The 09-3 block borders the contract territory of the Russian-Vietnamese joint venture VietSovPetro, a company that is operating the White Tiger and Dragon oil fields on the Vietnamese shelf.

3. Russian October crude oil exports up
Russian crude oil exports totalled 9.25 million tonnes in October, up 0.59 million tonnes from 8.66 million tonnes in September, according to preliminary data received from the Ministry of Fuel and Energy.

Russian crude exports under government quotas (mainly by trading companies) totalled 0.3 million tonnes, compared with 1.14 million tonnes the previous month. Exports from foreign joint venture operators were 0.9 million tonnes compared with 0.6 million tonnes the previous month.

Exports from major oil producers totalled 6.97 million tonnes compared with 6.15 million tonnes the previous month. Small oil producers and Gazprom exported an additional 1.08 million tonnes, up from 0.77 million tonnes the previous month. Exports through the four main loading ports reached 4.98 tonnes, from 4.8 million tonnes in September.

Russia's oil supplies to Ukraine, Kazakhstan and Belarus in October declined to 1.86 million tonnes from 1.89 million tonnes in September. Russia's October oil supplies to Ukraine totalled 0.86 million tonnes versus 0.77 million tonnes in September.

Belarus received 0.99 million tonnes of oil, compared with 0.87 million tonnes of crude in September. Kazakhstan's oil imports from Russia were nil, compared with 0.25 million tonnes the previous month.

1. LUKoil gets smart on fuel retail

LUKOil plans to boost its fuel and lubricants sales with the launch of a joint programme with its strategic partner Imperial bank to install smart card payment systems at its growing chain of filling stations in Russia and abroad.

Vagit Sharifov, LUKOil's vice president in charge of fuel retailing operations, said the company planned to introduce the card payment system, which employs SmartCity off-line authorisation technology, at most of its outlets by 2003. Private cardholders would enjoy a 3 -7% discount on fuel and lubricants.

Sharifov also said LUKOil planned to export the technology to the US, where the company wants to invest US$ 240 million over the next three years towards building a fuel retail network of 2,000 outlets by 2003.

More than 100 LUKOil filling stations in eight regions across Russia are already fitted with SmartCity terminals. The equipment is scheduled to arrive in Moscow, Kirov and Lithuania by the end of 1997.

A separate processing company, LICard, will develop and oversee the day-to-day operation of the system. The company currently has seven processing centres across Russia and plans to open new centres in Moscow, Lithuania, Belarus and Kazakhstan in the near future.

Boris Lezner, head of LICard, said the company would employ smart cards manufactured by French supplier Gemplus Card International. Card processing equipment would also come from Gemplus and VeriFone of the US, Crypto AG of Switzerland and DataCard of the US.

According to Sharifov, LUKOil will also introduce smart card payment in a chain of filling stations the company plans to build on roads linking Moscow with Azerbaijan's capital, Baku, and with St Petersburg.

LUKOil's fuel retailing programme includes the construction of 320 new filling stations in Russia by 2000, through an overall investment estimated at RR 1 trillion.

Sharifov said that LUKOil increased the proportion of its own fuel and lubricants sold at its stations by 9.5 % to 93 % of their total sales in the nine months of this year.

2. Bashkortostan lures crude suppliers to boost home refiners
Russia's autonomous republic of Bashkortostan is seeking to build a steady flow of crude to the region to keep its vast oil refining industry running at full capacity by offering tax privileges to oil companies and traders that would supply crude to the region's refineries.

President of Bashkortostan, Murtaza Rakhimov, signed a decree on Nov 11 offering exemptions on taxes levied into regional budget and local budgets, like the road tax, to companies and traders that would supply crude to the republic's four refineries - Novo-Ufimsky, Ufimsky, Ufaneftekhim and Salavatnefteorgsintez - currently running below their total capacity of over 1m b/d.

Vassily Melnichuk, head of Bashkortostan's fuel and energy department, said crude supplies from Russian oil majors and traders under the proposed scheme could begin my mid-December. The companies include LUKOil, Surgutneftegaz, Tyumen Oil Company and Moscow-based fuel traders Alfa-Eko, Sovinkom, Korus-Trading and MPKA, now part of the Central Fuel Company.

Melnichuk said Russia's second biggest oil company Yukos was not invited, but refused to elaborate on the reasons.While the decree stipulates that only companies resident in Bashkortostan are entitled to tax benefits, Melnichuk said that the oil majors would be able to bypass this clause by setting up representative or front companies in the republic.

1. E. Europe makes its case for Azeri exports

As the first oil from Azerbaijan flows to the Russian seaport of Novorossiisk, more countries are joining the political battles surrounding the issue of Azeri oil exports to Western markets.

While the current Russian route seems to be the most efficient, it is not necessarily the safest and most reliable. It may also lack throughput capacity when peak oil production at Azeri fields is reached in 2004-2007.

Lately, Bulgaria and Romania have offered their territories as possible export routes. In late October Romania's President Emil Constantinescu said his country was the most reliable route for bringing oil from the Caspian region to Europe. "Oil is best sent through routes in countries where conditions are stable," Constantinescu said.

Romanian officials suggested that tankers could bring oil from the Georgian port of Poti across the Black Sea to Constanta, where there is a lot of unused port capacity. Bulgaria's Minister for Foreign Affairs, Nadezhda Mikhailova, discussed the issue with Azerbaijan's President Geidar Aliyev when she visited Baku in November.

Mikhailova said Bulgaria wanted to join the existing trilateral agreement on Azeri crude transit between Azerbaijan, Georgia and Ukraine. She said that the new, Western-orientated Bulgarian government was also looking for alternative ways of importing crude. At present Bulgaria imports its crude from Russia.

Mikhailova said Bulgaria's Black Sea port at Burgas was likely to be used for loading Caspian crude. "The US and Japan agreed to finance the terminal's renovation and upgrading," she said. Meanwhile a spokesman for Azerbaijan's State Oil Company, SOCAR, said that Azerbaijan would hold negotiations with all countries that suggested export routes.

Earlier, Azeri officials had indicated that the government was seriously considering two routes - the Russian and Turkish links. US Energy Secretary Frederico Pena, who visited the celebrations in Azerbaijan when early oil started to flow in November, said the US would back construction of an oil export pipeline from Azerbaijan to Turkey's Mediterranean port of Ceyhan. Pena also said that the US would back the construction of a pipeline crossing Armenia, which is in conflict with Azerbaijan over the Nagorno-Karabakh territory.

"A pipeline from Azerbaijan to Turkey via Armenia may be the most efficient export route for Caspian crude if the conflict between Azerbaijan and Armenia is resolved," Pena said.

Russian officials said Azerbaijan should not be pressured politically but should chose the most economically sound and profitable export route. In November Russian Prime Minister Viktor Chernomyrdin said that the pipeline from Azerbaijan to Novorossiisk was the most efficient export route for delivering peak crude volumes from Caspian offshore oil fields

Hydrocarbon markets & trading
1. Parliament slaps tax on fuel imports

Russia's lower house of parliament, the State Duma, has approved the first reading of a draft bill that slaps a 25% tax on all fuel and lubricant imports.The tax is the latest stage of a government campaign announced by Prime Minister Viktor Chernomyrdin to protect the domestic refining industry against cheap imported petrol, primarily high octane RON 95 fuel.

According to the State Customs Committee, Russia last year imported 1.3 million tonnes of petrol, against 6.6 million tonnes produced by domestic companies. Private fuel traders warned that the new tax, if it comes into force, will lead to higher retail prices, which have already climbed by 10-15% this year.

Privatisation, Auctions & Tenders
1. Russian majors look to the West as contest for Rosneft sell-off heats up

The Royal Dutch/Shell group, Russian gas giant Gazprom and oil leader LUKOil have joined forces to take part in next year's privatisation of the last remaining lucrative piece of property in the energy sector, the state-owned oil holding Rosneft.

Gazprom's president, Rem Vyakhirev, said the alliance was set up to offset another powerful coalition in the struggle for Rosneft - the alliance between BP and Russia's fourth biggest oil company, Sidanko which is in turn controlled by financial heavyweight Uneximbank.

"The Uneximbank guys are quite serious about buying Rosneft, so we are going to work on that," said Vyakhirev. "We will buy all the shares they put into the auction." BP and Sidanko announced in November the launch of their strategic alliance over the planned Rosneft sell-off. The agreement was sealed in London by BP president John Brown and Uneximbank's head, Vladimir Potanin, in the presence of British Prime Minister Tony Blair and Russian First Deputy Prime Minister Anatoly Chubais. Under the terms of the deal, BP pledged to buy a 10% stake in Sidanko for US$ 571 million until the end of this year.

BP will also take a seat on Sidanko's board and is expected to have some leverage - naming new executives, for instance - in the day-to-day running of the company. The involvement of foreign majors in the Rosneft sale became possible when President Boris Yeltsin signed a decree in early November that lifts an earlier, 1992 ruling that prohibited non-residents from owing more than 15% of Russian oil firms.

Rosneft is at the heart of bitter rivalry between Russian financial tycoons Boris Berezovsky, owner of mini-major Sibneft, and Uneximbank's Potanin, both of them looking to expand their business empires.

Potanin needs Rosneft to be able to recapture a jewel oil producer, Purneftegaz, after Sidanko formally surrendered the former Sidanko subsidiary in court in early November, following two years of bitter disputes to wrestle it from Rosneft.

Under the original privatisation plan approved by the Russian government, 1.6% of the preferred shares in Rosneft should be distributed free among company employees until the end of this year. A 0.48% stake of ordinary shares will also be distributed to employees free before year end.

The company's management will receive a 1.67% stake based on ordinary shares before the end of 1997. A specialised cash auction for 63% of the ordinary shares in the company has been delayed until a date to be announced in 1998. The remaining 33.25% of the company's ordinary shares will be sold at a commercial tender, also to take place in 1998.

According to Vyakhirev, Gazprom also stands to gain from its alliance with Shell by winning access to foreign markets and to expert advice on how to run Rosneft. "The alliance will serve the interests of the entire country, not just Gazprom's," he said.

The first fruits of the Shell-Gazprom alliance will be development of the Zapolyarnoye gas and gas condensate field in Western Siberia. Production is due to start in 2003. The partners are also highlighting future deals that would feature development of the Asian gas market, including a transportation project involving Turkey.

There is a framework agreement in place between Turkey and Gazprom to lay a 360 km pipeline under the Black Sea to supply Russian natural gas. The pipeline would run at depths of up to 2 km from Tuapse on Russia's Black Sea coast to Samsun on the Turkish shore, and could carry an annual 8 billion cubuc metres (bcm) of natural gas by 2000, rising to 16 bcm by 2003.

Gas is also an important factor in the BP-Sidanko coalition. Sidanko now owns a controlling stake in a regional gas company, Russiya Petroleum, which hold an exploration license for the Kovykta field in Siberia.

Russia has pledged to supply an annual 25 bcm of natural gas to its neighbour China under a deal signed between the Russian Ministry of Fuel and Energy and the Chinese Petroleum Corporation.

The project, worth an estimated US$ 5-7 billion, includes construction of a gas trunk pipeline with an annual capacity of up to 30 bcm that will carry the fuel from the Kovyktino gas field in Western Siberia to China via Mongolia. The contract was signed at the end of June during a visit to China by a Russian delegation headed by Prime Minister Viktor Chernomyrdin.

Kovyktino gas field in Irkutsk region is estimated to hold approximately one trillion cubic metres of gas and condensate. The initial stages of the project are expected to cost some US$ 750 million and a total of US$ 480 million has been invested in the exploration of Kovyktino gas deposit this year. BP has plans to invest US$ 172 million in exploration of the field.

As part of its agreement, Shell pledged itself to invest in Gazprom's forthcoming issue of convertible bonds. Gazprom had decided to delay issuing a US$ 1 billion convertible bond in November, but claimed this was unrelated to a threat of sanctions by the US over the company's role in an Iranian gas project. Instead, Gazprom said, the bond issue was postponed until the first quarter of next year when the stock market is expected to stabilise.

Under the 1996 Iran-Libya Sanctions Act, US can punish companies that invest more than US$ 20 million in Iran's energy industry. Gazprom is a member of a US$ 2 billion international consortium, headed by France's Total, which aims to develop the Southern Pars gas field in the Iranian sector of the Persian Gulf.

The field's reserves are around 8000 bcm of natural gas. The third member of the consortium is Malaysia's oil and gas corporation, Petronas. Total has a 40% stake in the venture, and Gazprom and Petronas hold 30% each.

US officials have been reportedly contemplating sanctions against the company's plans for the US$ 1 billion convertible bond issue and against its American underwriter, Goldman Sachs.

Although Gazprom insisted the decision to put off the bonds issue was a result mainly of a slide of more than 30% on the Russian stock market, most analysts agreed the delay probably eased wider anxieties in Washington.

Gazprom's involvement in Iran is putting US diplomacy to the test. How far is the White House prepared to go to punish European or Russian companies? The US Congress has already started hearings on how it could punish Goldman Sachs for non-compliance and is also rumoured to have recommended that EximBank should put on hold any credits to Gazprom.

Russia's former Minister of Fuel and Energy, Boris Nemtsov, who recently met Iranian oil minister Bijan Namdar Zanganeh in Moscow, said Russia would defend Gazprom's interests in developing Tehran's vast oil and gas reserves. Nemtsov also predicted a greater involvement of Russian oil companies in Iranian energy deals following Gazprom's swift move into the region.

2. Russia cuts short privatisation campaign
Russia's giant privatisation campaign ground to a halt in late November when officials called off two major auctions within a week, so endangering the government's hopes of meeting its budget targets with their proceeds.

On 24 November the Federal Property Fund cancelled the commercial tender for a 34% stake in Eastern Oil Company (VNK) when one of the bidders withdrew. This setback came less than a week after a cash auction for a 48.68% stake in Tyumen Oil (TNK) was suspended.

The fund said it cancelled the VNK tender because a company affiliated with Inkombank withdrew its bid. That left only one contender in the running, a group representing the Menatep banking group and its industrial affiliate, Rosprom-Yukos. Under Russian law, there must be at least two bidders in the tender. The next round of the VNK sale can not now take place before next February.

Rosprom, which reportedly approached a consortium of Western banks to collect the US$ 1 billion it needed for the auction, said it was upset by the decision and would challenge it in court. Rosprom's chairman, Mikhail Khodorkovsky, said the company could also challenge an earlier auction for 50% minus one share in VNK, in which it also took part.

That auction, which closed earlier in November, attracted total bids worth RR12.66 trillion (US$ 2.13 billion), said the Federal Property Fund. The fund received a total of 3,741 bids from individuals and companies, and its results, which could produce several winners, will be announced by 5 December.

Foreign bidding in both rounds of the VNK sale was limited to 15% ownership of the company. This is because the oil company was scheduled for privatisation before 4 November when President Boris Yeltsin signed a decree lifting the 15% limit on foreigners in future auctions, Rosneft's for instance.

VNK, whose only production unit is Tomskneft, said earlier that its crude output for the first half of this year was 111,960 barrels per day. Its crude production target for the whole of 1997 was set at 224,000 barrels per day.

Fuel & energy minister Sergei Kiriyenko said the delay in TNK's auction arose from a legal complaint filed by one of the bidders, which claimed that the property fund had illegally turned down its application to take part.

The company, identified as Treffold, was reportedly backed by TNK's dissident subsidiary, Nizhnevartovskneftegaz, and its director Viktor Pali, who claims the July auction for a 40% stake in the oil holding was rigged in favour of the bank, with the help of senior privatisation officials. TNK produced 21.3 million tonnes of crude in 1996.

As CIS Oil & Gas Report went to press, the Federal Property Fund announced that there would be a new investment tender for 34% of Eastern Oil on January 20 . Bids will be accepted until 15 January, and deposits also will be accepted until the same date. All other conditions are the same as in the postponed auction. Meanwhile, further details of the bid fiasco surrounding the sell-off emerged.

The only bid came from a company called Opus, which represents the interests of the Rosprom-Yukos group, while the other potential bidder, Inkombank, reportedly failed to transfer the required sum to support its bid. The envelope with the bid from Opus was not opened and the offered sum remains unknown. The results of the auction would have been televised live for the first time.

3. Norsi Oil public offering opens
Russia's State Property Fund has opened a public offering for a 14.9% state stake in Norsi Oil. A fund official said the issue price is set at RR 3,140 per share for 89,245,040 shares, or a total of US$ 45.5 million.

The official said bids would be accepted between 5 November and 19 December. It is not clear whether there will be restrictions on foreign bidding in the special cash auction which divides the stake among a number of bidders and has no investment requirements. The results of the auction are likely to be announced on 16 January.

4. Govt begins Slavneft privatisation
The first stage in the privatisation of Russian-Belarussian oil company Slavneft saw a 2.14% stake in the company sold at a special cash auction for US$ 0.38 per share - a four-fold increase on the original starting price.A total 2.17% stake in the company was put up for sale at the auction.

The Russian Federal Property Fund will now sell a further 19.68% stake in Slavneft in an investment tender, which started on 12 November and closes for bids on 17 December. The starting price for the 19.68% share package is RR 1.993 trillion (US$ 337 million). The successful buyers will be required to invest a further RR 540 billion in the company.

Both rounds of Slavneft's privatisation are open to full foreign participation.Slavneft, whose main production unit is Megionneftegaz, produced 248,000 barrels of oil per day in the first half of 1997, down 5% on the equivalent figure for 1996.

5. Nemtsov calms fears on Rosneft sale
Russia's First Deputy Prime Minister Boris Nemtsov promised that the privatisation of Rosneft oil company will go ahead as planned despite setbacks. He said that the government will do its best to ensure that the declared auctions for the sale of shares in Rosneft would take place in the near future.

Noting that the recent tender to sell shares in the Eastern Oil Company had to be cancelled because there was only one bid, he said a new auction would nonetheless be held soon. Regarding the Tyumen Oil Company, he said a number of arbitration disputes had arisen which were preventing large scale capital from being attracted. Nemtsov said it was crucial to go ahead with privatisation if the state was to meet its wage obligations. "Without attracting money via the sale of stock in Russian companies, we will not cope with the task of repaying overdue debts to employees of budget-financed organisations which has been set by the President," Nemtsov said.