Oil prices rocket as Yukos says it might have to stop exporting

Power struggle with Kremlin rattles international markets

July 29, 2004|By NEW YORK TIMES NEWS SERVICE

MOSCOW -- Russia's biggest oil producer warned yesterday that it might have to stop exporting oil, as the brinksmanship between the company, Yukos, and the Kremlin escalated. The warning rattled world oil markets, driving the price of crude to its highest level in 21 years.

Russian officials, who are seeking billions of dollars in back taxes from Yukos and might ultimately confiscate its major assets, sought to dispel worries about supply, saying that crude oil shipments would not be disrupted. And the company continues to pump and ship oil.

But even the remote prospect of the loss of the more than 1.6 million barrels of oil that Yukos produces every day was enough to rattle oil traders at a time when demand is high and the Organization of the Petroleum Exporting Countries is pumping near its capacity.

The surge in prices yesterday highlighted the importance of Russia -- the second-biggest oil exporter after Saudi Arabia -- as an alternative to the Middle East and all its uncertainty.

Yukos accounts for a fifth of Russia's oil production.

"I think Yukos is the background noise," said Gary N. Ross, chief executive of PIRA Energy Group, an international energy consultant. "Yukos is just adding to the fear and trepidation of tight supplies."

In New York, the price of a barrel of crude oil for September delivery settled up 2.5 percent, at $42.90, after hitting $43.05 -- the highest price since the futures contract began trading on the New York Mercantile Exchange in 1983. Crude oil is up 32 percent so far this year and has quadrupled since the deep price slump of late 1998.

Yukos said that its three main production subsidiaries -- Yuganskneftegas, Samaraneftegas and Tomskneft -- had received letters from court bailiffs forbidding them from selling assets. While Yukos had already been forbidden from selling any assets but crude oil, the letters suggested that it would no longer to be able to do that either, the company said.

Yukos' American chief executive, Steven M. Theede, told reporters at Nizhnevartovsk in western Siberia yesterday, "We are seeking clarification."

"There's no choice -- we must comply with the bailiffs," he said. "But it isn't logical to stop Russia from producing 1.6 million barrels of crude a day."

Still, Yukos is producing oil.

"We're supplying oil to China by rail today," Theede said at Tomskneft, the second-largest oil-producing unit of Yukos, in Nizhnevartovsk, a swampy, oil-rich city. "Of course it would be more efficient to deliver it by pipeline, but ultimately the construction and the timing are a government prerogative."

Theede said Yukos was in talks with court officials to clear up the details of the letters. The company has also told the Justice Ministry that it would not be able to operate normally without access to its bank accounts, which "will lead to the unemployment of 15,000 employees of the companies."

Theede said the company had already paid for rail shipments, which carry a quarter of the company's oil output, until the end of next week.

"We've paid pipeline tariffs through August, rail through the first week of August," he said. "If we don't get access to the accounts, the rail shipments will be affected." If its production must go into inventories, that will fill up in about three days.

Theede, 52, was named chief executive of Yukos last year, replacing founder Mikhail B. Khodorkovsky after his arrest in October. Khodorkovsky is in jail; his trial on charges of fraud and tax evasion resumes today.

The cases against Khodorkovsky, Russia's richest man, and his company, are widely seen as a Kremlin-backed campaign to remove Khodorkovsky as a political threat. Khodorkovsky has financed independent political parties and advocated that the state-owned oil pipelines be privatized.

Justice Minister Yury Chaika dismissed Yukos' concerns yesterday. "I am officially announcing that the company will have no problems, including with paying wages, as a result of a freeze of its accounts," Russian news agencies quoted him as saying.

And court officials denied their actions could paralyze the business operations.

The tax case against Yukos is grinding slowly and confusingly, and analysts contend Yukos will continue producing oil but might have to fight for control over how it is exported from Russia and over the funds earned from crude oil sales.

The conflicting statements yesterday were typical of the standoff between Yukos and the government.

"So far, the bailiffs have not shown any flexibility in favor of Yukos, although in this situation it would be sensible to allow the company to access its accounts to avoid halting production," said Steven Dashevsky of Aton Capital, an investment bank in Moscow.

Still, even if court bailiffs give Yukos access to its bank accounts, "the main concern still stands: that is, the sale of Yukos' core asset to pay the $3.4 billion tax bill for 2000 is still pending," he said.

The crackdown against Yukos has so far had little effect on how foreign investors view Russia. This week, the chief executive of oil giant BP, Lord John Browne, praised his company's joint venture in Russia, TNK-BP, saying that "BP's presence is decidedly welcome in Russia."

A U.S. oil company, ConocoPhillips, meanwhile, is expected to bid for the state's 7.59 percent stake in Lukoil, Russia's No. 2 oil producer.

While oil market analysts said that the news about Yukos did help push the price of oil higher yesterday, many said that they believed any Yukos disruption would be temporary. In addition, they said that strong demand, tight supplies of low-sulfur crude oil and concerns about oil production from Venezuela, Nigeria, Iraq and Saudi Arabia are having a far bigger impact on the price of oil.

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