Interview with Sibneft president Eugene Shvidler

Interview with Sibneft president Eugene Shvidler, published in Vedomosti on June 30, 2003 (translated from Russian).


Sibneft CEO Eugene Shvidler does not enjoy giving interviews. He gave Vedomosti an exclusive interview about the way the owners of his company negotiated the YUKOS deal and sold Aeroflot. Shvidler believes that the capitalization of the holding company created by the merger of Sibneft and YUKOS will, in time, reach $100 billion, and in the end a western oil giant like ChevronTexaco could end up owning the company.

Vedomosti: Why was the deal closed right now and why did Sibneft’s owners decide to sell their shares in the company specifically to YUKOS?

Eugene Shvidler: We never sold Sibneft. The core of the deal is different: the two companies consolidate their assets into a new holding where the core Sibneft owners will control a little over 26%. We remain in the oil business.

- Why was YUKOS chosen as your partner? They say you had other offers from Total and Shell as well.

- YUKOS, Sibneft and TNK had a number of possibilities to choose from, as the market is rather good at the moment. We considered the deal with YUKOS to be the best in terms of price and feasibility. We have known the owners of YUKOS for a long time. We share a correct understanding of each other and our business goals are practically the same.

- How long did it take to negotiate the deal with YUKOS?

- On the whole, we had just two or three meetings. We used to work hand in hand over the years, so it didn’t take much time.

- Who suggested the deal?

- At one point we agreed with YUKOS’ owners that, if one of us arrived at a serious decision concerning our companies, we would negotiate it again. So, it happened.

- You made one attempt at founding YUKSI, which turned out to be a failure. Why do you think that this time it is going to work?

- Because now the deal is at the point of no return.

- But the agreement provides for compensation in the amount of $ 1 billion should one of the parties decide to cancel the deal. So a certain probability of a break-up still exists.

- The deal has been completed and all documents, including the main agreement and a number of supplementary agreements, have been signed. Of course, there is always a possibility that one goes and takes the shares away from somebody even after all of the formalities are over. In this sense, no deal can be ever considered closed. But with YUKOS and us this is not the case.

- When will Sibneft’s minority shareholders be offered a chance to sell their shares? Will they be able to get their 2002 dividends at least by the end of the current year?

- I cannot comment on the first part of the question, as the offer to the minorities is YUKOS’s matter. As far as the terms of dividend payment are concerned, they are determined by the company’s charter, i. e. by 15 May 2004.

- After the consolidated company is established, will Sibneft’s owners be disclosed?

- We are prepared to do this if the law requires it or if it would result in an increase in priced for shares of the merged company. I do not see any other reason for disclosing Sibneft’s owners. There is no point in disclosure just for the sake of disclosure.

- Is this true that Roman Abramovich owns over half of Sibneft shares and the company managers own the rest?

- On the whole, this is true.

- Which options for dividing up Slavneft are under discussion with your project partner TNK?

- Oil fields and gas stations will be divided fifty-fifty. Yaroslavnefteorgsintez (YaNOS) will remain under unified management and will be loaded with oil delivered by both companies under processing terms.

- Is it possible that one of the partners buys out YaNOS or swap shares in it for a share in the Moscow Refinery?

- So far we have not discussed anything of the kind. First we divide the assets and after this we can discuss different options.

- There is a certain energy company mentioned in Sibneft Financial US GAAP Reports for 2002, 35% of which is controlled by the group. Could you confirm that the company in question is Irkutskenergo?

- No, I could not.

- Mikhail Khodorkovsky said that the subject of your deal includes all Sibneft assets reported under US GAAP standards. Does this mean that the above mentioned energy company will be sold to YUKOS as well?

- There will be no energy assets in Sibneft by the time of the merger.

- Do Sibneft and its owners control any other energy assets including RAO UES shares?

- Sibneft does not control any energy assets; as for its owners – I have no information on this issue.

- Will Sibneft managers move to YUKOS?

- It will be a joint company, YukosSibneft. That means that every single person working here will be working for the new company as well.

- Is that to say that YUKOS and Sibneft owners will run the company jointly? Have you agreed on the way appointments will be divided?

- The structure will be different from what we used to have in YUKSI, when Sibneft managers were, for instance, in charge of sales and marketing and YUKOS managers – in charge of finance. That was the wrong path. Now there will be only one chief operating officer and he will build the management team.

- Am I right in thinking that there will be an independent person engaged as a manager who does not belong to either YUKOS or Sibneft? That this is going to be an independent director who will take over executive functions, and Mikhail Khodorkovsky will remain president of the consolidated company and will sign only external documents?

- Wrong. Mikhail Khodorkovsky will be in charge of management. As far as strategic decisions are concerned, they will be made by the Board of Directors.

- What do you personally plan to do besides becoming chairman of board of directors in YukosSibneft?

- I will still be running Millhouse Capital, which is my primary work.

- Under which brand will the oil products produced by the consolidated company be sold? Will gas stations with a YukosSibneft logo appear in Russia?

- For now, both the YUKOS and Sibneft brands will remain. There is no sense in repainting gas stations, as in certain regions this brand or the other is already widely known and is earning a profit. We also possess Slavneft as a third brand, but investment in it will soon be cut.

- Should one of the companies acquire additional assets, can any of the deal patterns change?

- No, all new assets from now on will be acquired in the name of the new company and entered into on a consolidated balance. At the same time we will be searching for optimal financing options.

- Is there a possibility of selling part of Millhouse’s share in YukosSibneft? Will this need to be approved by current YUKOS owners?

- Sure, both we and YUKOS’ owners can sell our shares. In such cases, we have a symmetrical agreement defining the sales mechanism.

- Does your agreement stipulate a moratorium on selling out within a particular timeframe, as is provided for in TNK/BP deal?

- The structure of our deal is entirely different. TNK-BP is a nonpublic company, while we put almost a blocking stake in the company into free float. Of course, there are certain terms governing the way we should act if we want to sell our shares, because in this case our joint stock in YukosSibneft would turn out smaller than the limit of 75% or 51%. Whoever gets out, this will affect the second partner. At the same time, it’s not necessary that Millhouse sell its block of shares. Several alternative are possible. It is possible that YUKOS owners will keep a blocking stock and we will have 51%.

- Do YukosSibneft owners plan to place the company’s shares on the western markets or sell them to a strategic partner?

- Sure, both are possible. Everything will depend on the specific situation in the market. So far, the company is undervalued and we are going to correct it. At the moment, YukosSibneft costs $42 billion and we want to get up to the level of $100 billion. There are certain algorithms to do it – to enlarge the company in size, or evaluate using western market ratios and not Russian. That’s the simple idea.

- Do you think it is possible that other alliances equal to yours could appear in oil industry?

- I think that it is unlikely among Russian companies, as the remaining companies are too different.

- To what extent has the interest of foreign companies in the Russian oil industry grown after the deal between TNK and BP?

- Any investor keeps an eye on what his neighbor is doing. But personally I think that with western companies herd instincts do not prevail over anything else. When it comes time to pay, everybody counts money. No one would start a deal only for the sake of not falling behind BP. Nevertheless, I think that a deal with one of the western oil giants like ExxonMobil, ChevronTexaco, Shell or Total is quite possible. They always keep a close eye on Russia, regardless of what BP is doing.

- Do you think an unfriendly merger with Surgutneftegas is possible?

- Vladimir Leonidovich Bogdanov is a good friend of mine and I would not want to comment on this. In any case, Millhouse will not be dealing with it.

- Into which projects does Millhouse intend to invest the $3 billion from the Sibneft share sale?

- There are no special plans for the money. Millhouse is constantly receiving offers on various projects through company managers, shareholders and from outside. All of the offers go to one and the same table, where they are evaluated under standard criteria. We look, for instance, at the project size, its profitability and its terms.

- Which project size would interest Millhouse?

- There is no specific amount. I would appreciate if anybody could come up with any offers and wouldn’t think that if the projects costs less than $500 million Millhouse would have nothing to do with it. Also, for decision-making, it is important which management resources we have at our disposal at any given moment. But in general, we don’t have any universal rules for project selection; everything is built on concrete evaluations and impressions.

- Is Millhouse interested in retail investing?

- In principle, retail is a perspective trend, but I don’t think that for us it is the most attractive sector. The thing is that there are a lot of specialized players in this market at the moment – Metro, Auchan and other well-known names, which are very experienced in this business. We do not have any competitive advantages over them in business.

- Are you interested in the insurance business?

- This is not our priority at the moment.

- Then which projects does Millhouse want to invest in? And which sectors will become attractive in the nearest future – gas or nuclear power, etc.?

- I am not sure what will come into fashion next. Any sector where assets can be consolidated and a company with the return of at least $ 1 billion can be established is certainly of interest for us. There are plenty of theses kinds of industries. It can be done even in match production or hairdressing services.

- What is your relationship with Millhouse’s partner in Russian Aluminum, Oleg Deripaska?

- Excellent.

- It is rumored that Millhouse plans to buy out his RusAl share?

- Never heard of that. We are not aiming at remaining the only Russian Aluminum shareholder, though everything depends on the price. Should [Deripaska’s holding company Base Element, or BasEl,] sell its block of shares at a low price, we would, of course, try to buy it. So far there have been no offers of the sort made.

- But many experts note that RusAl’s joint owners have different approaches to business. Millhouse clearly plans to gain profits in the short term, while BasEl may choose a project according to other principles.

- All of us differ. RusAl has independent management, which is not concerned with any of the owners. At board of directors meetings, shareholders tell what they want to get from the company, while the task of the management is to turn it into reality. It is the very lesson we learned while attempting to create YUKSI – management consisting of two parts does not work, it should be a unified whole.

- But you must agree that if two shareholders approach their business differently it will be rather hard for the management to satisfy the demands of both.

- That’s right, and therefore the company government procedure is formalized to the maximum. All discrepancies between the shareholders are discussed at the board of directors meetings. As for the management, its members get clear instructions on which results should be achieved and in what way. Therefore, employees do not have to guess what the will of the company owners is. If the shareholders have disagreements of opinion on any item, the decision will not be made.

- What was the reason for buying a blocking stock in Aeroflot and why, in the end, was it decided to sell it?

- Initially, Millhouse was assembling its Aeroflot stake to resell it. We had a concrete buyer, but the deal didn’t come about due to number of reasons. We were trying to improve the company and succeeded in it to a certain extent. But our block of shares never went off the market and as soon as we saw a proper offer, we accepted it.

- Why did Millhouse decide to sell its share in Ruspromavto?

- These are the words of Konstantin Remchukov (a BasEl representative). We never authorized him to make such a statement.

- But it is true, isn’t it?

- I have said many times that all our positions are always ready to be sold. It is just our principle for doing business. The Ruspromavto stake is no exception and we definitely would sell it under proper conditions. That is all I have to say for the moment.

- Do you think that automobile production is a business with potential?

- Ruspromavto is not involved only in automobile production. It also manufactures buses, road-machines, engines and spare parts. Each of the branches is more or less perspective. To produce a ready Volga-type care is not easy, of course, and the prospects for such a project are somewhat relative. If compared with the oil industry, my preferences would lie in oil, and not in cars. But tastes differ. Today, the Ruspromavto project is profitable and will remain profitable in the future, as we see it. The return on investment is fairly good and corresponds with our criteria absolutely.

- Have you got any arrangements with BasEl, according to which you cannot drop out from the Ruspromavto project separately?

- We work under common corporate principles, which define the way we should act towards each other should one of us want to drop out.

- Are there any similar arrangements with RusAl?

- There are.

- Do Sibneft owners plan to openly support any parliamentary or presidential candidates in the election?

- Sure, like all citizens the company shareholders have this constitutional right.

- Your partner Khodorkovsky speaks outright that he supports Yabloko and that a party like this is essential in this country.

- That’s his choice as a citizen, which we undoubtedly respect. But his political position is not related to the consolidated company’s operations. The company will work hard and we hope that this will result in an improvement in the general climate of the country. Sibneft was the first Russian company to report its financial results under US GAAP standards. Now, practically all companies do it. YUKOS and Sibneft were the first to decide that service companies should be contracted from outside by way of tenders. Nobody believed it then, but now the practice has become common. We started investing considerable amounts into science and education, because we are focused on long-term project development and the formation of intellectual resources. There are plenty of other examples like this. So we need to work, work and still work, then our lives will gradually get right.

Biography: Evgeny Markovich Shvidler was born in 1964. He graduated from the I. M. Gubkin Oil and Gas Institute with a specialization in applied mathematics. After graduation, he earned a master’s degree in business administration in the area of finance and international taxation from Fordham University in 1991. From 1992 until 1994, he worked in the international taxation department of the New York office of Deloitte & Touche. Beginning in 1996, he served as Sibneft first vice president and from July 1998 until the present, as president of Sibneft. He has been a member of the Sibneft board of directors since 1997.

Company: Sibneft was founded in 1995. 92% of shares are controlled by Millhouse Capital, which represents the concerns of Chukotka Governor Roman Abramovich. The remaining 8% of shares are placed in free float on the market, including shares placed in the form of ADRs. Early in 2003, Sibneft reported a record dividend payment for Russia: the shareholders were promised to get almost all of profits for 2002, which amounts to $ 1.09 billion. By Miller & Lents’s estimates, as of year-end 2002, Sibneft had reserves of 4.718 bln. barrels of oil equivalent by SPE standards, or 2.197 bln. barrels of oil equivalent by SEC standards.