Alert observers were justifiably
confused by two events that occurred in Russia this past winter. First, the
State Duma voted to lift the 20 percent limit on direct foreign ownership of
shares in Gazprom, the world’s largest natural gas producer. Then, President
Vladimir Putin rattled the whole of the European Union with his brief embargo of
gas supplies to Ukraine. These headline-grabbing events did little to calm
investor anxieties that have lingered since the arrest and conviction of Mikhail
Khordokovsky and the breakup of his company, Yukos. But, in reality, a great
many small and midsize oil and gas companies, as well as large multinationals,
have learned to thrive in Russia.
 Our 4-year-old company–run by two of us Russian-born émigrés
and a natural-born American–is exploring for oil in western Siberia along the
Kazakhstan border. The past four years have shown us that in this harsh region
of the world, both opportunities and obstacles abound.
To start, what makes Siberian exploration attractive is that
the reservoirs are shallow and yield oil easily and cheaply. Petroleum and
mineral reserves can be purchased at 10 percent or even 5 percent of prices
found elsewhere in the world. Wage rates trail by a similar amount, yet the
workforce is highly educated. But Russia’s market suffers from excess supply
that depresses domestic crude prices to roughly 66 percent of those commonly
found elsewhere.
Russia’s oil market also suffers from a crying need for export
infrastructure. There are two large pipelines under construction in Siberia,
where most of Russia’s oil lies, leading to China and other parts of Asia. But
Siberia also needs direct links to Western Europe and North America. Rail
transport is significantly more expensive.
We set out to create a company that would use Western
technology and capital to access Russia’s inexpensive resources at a time when
Russia had many small oil companies on the auction block. These we avoided
entirely. Too many buyers learn who the target company’s true owners are only
after signing the papers, sometimes leaving the buyers stuck with tax debts or a
company associated with criminals. Instead, we bought licenses for mineral
exploration at auction from the Ministry of Natural Resources. We now own
exploration rights to more than 630,000 acres in western Siberia and will enter
seven more auctions to acquire another 700,000 acres.
Navigating the Waters
It is still difficult to obtain capital, primarily because
investors are concerned about political intervention. Their fears are not
unfounded, but there are ways to navigate the system. We did it by establishing
ourselves as a publicly traded, U.S.-based company with 100 percent of its
assets in Russia. We are looking into listing the company on London’s
Alternative Investment Market or AMEX to take advantage of the greater liquidity
and interest in natural resource companies there.
Any company in Russia, whether foreign or domestic, needs
political support, yet it must manage to keep its nose out of the political
process. If Khordokovsky had played a lesser role in government affairs, he
would probably still be CEO of Yukos. Putin certainly knew that his arrest would
make foreign investors nervous. But he saw it as a risk worth taking in order to
stop Khordokovsky and other oligarchs from gaining enough power to dictate the
terms under which Yukos would produce oil.
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