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Russia's Gazprom to Bid For Yukos Oil's Top Unit

Analysts Expect No Serious Competition

By Alex Nicholson
Associated Press
Wednesday, December 1, 2004; Page E02

MOSCOW -- The nascent petroleum division of natural gas monopoly Gazprom will bid for the top production unit of the battered Yukos oil empire, its chief said Tuesday -- a widely anticipated move that could put the heart of the company into Kremlin-friendly hands.

If state-controlled Gazprom succeeds in buying the Yuganskneftegaz unit in a Dec. 19 auction, the world's biggest producer of natural gas would be propelled into the ranks of international oil giants. The sale of Yuganskneftegaz -- a collection of fields that produces 1 million barrels of oil per day -- would also redress the state's lost dominance in the lucrative and politically powerful oil sector.

As Yukos shipments continue, Russia's state-owned natural gas firm plans to bid for most of the embattled company. (Sergei Karpukhin -- Reuters)

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The bid is to come from Gazpromneft, a subsidiary created by the merger of Gazprom's oil assets with state oil company Rosneft. "Gazprom management made a decision today to participate in the auction for Yuganskneftegaz," Russian news agencies quoted Rosneft chief executive Sergei Bogdanchikov as saying.

Bogdanchikov, who will eventually head Gazpromneft, predicted that after the purchase of Yuganskneftegaz, Gazpromneft could pump about 1.7 million barrels per day by next year, or about 18 percent of Russia's total output.

Yuganskneftegaz is being sold against $24.5 billion in back taxes and fines owed by its parent company and carries a starting price of $8.6 billion. Yukos, which claims it is being politically persecuted, has slammed the sale as "state-sponsored theft," contending that the government has no right to put a subsidiary that pumps 60 percent of the company's crude on the auction block.

The tax case against Yukos and the trial of its jailed chief executive, billionaire Mikhail Khodorkovsky, are seen as an attempt to wrest control of the company from its owners and limit its growing clout.

President Vladimir Putin has maintained that the case, which began in July of last year, is a legitimate probe into shady business practices and tax optimization schemes.

Analysts doubted that that Gazpromneft would face serious competition in the pending auction, suggesting it would have Kremlin support for the purchase.

"If anyone else puts in a bid, then they haven't seen the writing on the wall," said Ronald Smith, of Moscow investment bank Renaissance Capital.

It was not immediately clear from news reports whether Gazpromneft would participate in the auction on its own or in conjunction with foreign energy giants. The company announced that it would tap into international capital markets to finance its bid, Interfax reported.

In an interview yesterday with Washington Post reporters and editors, Yukos's chief executive, Steven M. Theede, said the liquidation of Yukos would be "absolutely ridiculous" and unjustified. He said Western companies would be unlikely to bid on Yuganskneftegaz for fear of getting tied up in years of litigation.

The investment holding company through which Khodorkovsky controls Yukos reiterated its promise of legal action against any buyer of Yuganskneftegaz. Menatep Group director Tim Osbourne said it would immediately call on any buyer to repay a $1.6 billion loan the investment group had provided to Yukos, Interfax reported. Menatep Group controls about 60 percent of Yukos.

"We will certainly call in this credit after the sale of Yuganskneftegaz, and the new buyer will have to pay," Osbourne said.

Yukos shares closed down more than 7 percent on Moscow's RTS exchange, at $1.

Washington Post staff writer Justin Blum contributed to this report.

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