On October 25, 2003, the Russian government arrested Mikhail Khodorkovsky, the CEO of Yukos, Russias top Oil producer, on charges of fraud and tax evasion. Since that time, the Russian government has arrested numerous other shareholders and top-level executives in the company for similar reasons. The government sought to recoup the cost of some of the allegedly questionable tax schemes used by Yukos by auctioning off 76.8 percent of the companys prime asset, Yuganskneftegaz, in late 2004. The subsidiary, which produces approximately 1 percent of the worlds oil supply and 11 percent of Russias oil supply, was auctioned off to an unknown company called Baikal Finans Group (BFG). A week later Rosneft, the state oil company, announced it would buy BFG for $9.35 billion (with a loan partly financed by Chinese National Petroleum Corporation). Financial analysts concluded this price was far less than the units fair market value.
Another merger in the Russian energy industry introduced the participation of a new major Western oil company. In September 2004, ConocoPhillips announced a $2.0 billion strategic alliance with OAO Lukoil, under which ConocoPhillips will buy a 7.6 percent stake in the Russian oil company and get a share in joint projects. Through stock purchases, ConocoPhillips increased its share of the company to 10 percent by November 2004, enough for it to receive one seat on the 11-member board of directors of Lukoil. The deal will provide ConocoPhillips access to Russias oil and Natural Gas reserves and opens a possible avenue for it to become the first Western petroleum producer to return to Iraq. Under the strategic alliance, ConocoPhillips can opt to raise its stake to 20 percent within two to three years, which would cost about $3 billion at current prices.
The combination of Gazproms acquisition of Sibneft and Rosnefts acquisition of Yuganskneftegaz puts approximately 25 percent of Russias oil production into state hands.