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Russian Oil Giants to Merge, Hold Largest Proven Reserves

Energy: Yukos and Sibneft's union will create world giant. About $9 billion will be invested over five years.


MOSCOW — Russian oil giants Yukos and Sibneft said Monday they are merging to create a conglomerate with the greatest proven reserves in the world and to be better positioned to buy up the last attractive oil assets as Russia nears the end of privatization.

The deal will also represent a pooling of the financial and political clout of two of Russia's biggest industrialists, Mikhail B. Khodorkovsky of the Menatep banking group that holds Yukos, and former Deputy National Security Chief Boris A. Berezovsky, whose vast interests include Sibneft.

Khodorkovsky, 34, who will be president of the oil conglomerate--to be called Yuksi--said that at least $9 billion will be invested in the venture over the next five years.

Prime Minister Viktor S. Chernomyrdin declared the merger "a landmark event" in Russia's economic development. He said it will be in keeping with the government's aim of consolidating the country's oil might in a handful of powerful conglomerates better able to compete on the international scene.

Yukos and Sibneft, with combined proven reserves put at 16.5 billion barrels, last year produced about 475 million barrels of crude oil, or about 1.3 million barrels a day. That represented about 22% of all Russian production, and Khodorkovsky predicted that Yuksi's share will rise to a third of national output within a few years as a result of efficiencies allowed by the merger.

In proven reserves, the merger will create the world's biggest oil company, followed by Royal Dutch Shell of Britain, Exxon Corp., Russia's Lukoil, and British Petroleum, according to data from the brokerages Goldman Sachs and Merrill Lynch.

"Geographically, the business combination places the five refineries and four active producing regions all within close proximity of each other, creating the potential for significant cost savings and economies in production," Khodorkovsky said, conceding that "close" in the Siberian context could still mean hundreds of miles.

Yukos brings to the partnership two oil-exploration and production companies, three refineries and nine distribution and marketing companies. Sibneft's subsidiaries include exploration and production facilities and Russia's most modern refinery, in Omsk.

Khodorkovsky hinted that more mergers or cooperative ventures are likely to follow as Yuksi positions itself to compete in the globalized 21st century.

"The merger reflects a tendency toward consolidation in the Russian oil sector aimed at establishing a smaller number of better capitalized and more globally competitive Russian oil companies," the billionaire industrialist said.

The directors of the new holding company made no secret of their intent to challenge another of Russia's powerful financial barons, Vladimir O. Potanin of financial-industrial complex Uneximbank, for control of the Rosneft oil conglomerate to be sold off by the state later this year.

Uneximbank recently joined forces with British Petroleum to muster more resources for its planned bid for Rosneft, and two other Russian energy heavyweights, Lukoil and Gazprom, are also believed to be in the competition.

Shares in Rosneft were to have been auctioned off last year, but the global stock market crises discouraged the government from holding the sell-off because bids were sharply lower than predicted. Analysts, however, predict that the cash-strapped government will have to sell Rosneft by spring to prevent Russia's cash-flow problems from reaching catastrophic proportions.

Khodorkovsky also left open the possibility that Yuksi would press a legal challenge of the government's decision to put rival Lukoil in control of development of Russian interests in the northern Caspian Sea.

By combining to create a more powerful company, the youthful magnate said, Yukos and Sibneft will be able to attract larger capital and on better terms as the new venture plunges into the international oil arena.

Financial and other mechanics of the merger were not released.

"The way it will actually happen I cannot exactly say, because it will take time," a Yukos spokesman said. "A new company will be made that will have its own share and be a consolidated structure. That is, all shares will be swapped for a single share--Sibneft and Yukos."


Reuters was used in compiling this report.

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