• the strong state position as for control of foreign economic relations (access to the main oil pipe lines and to the exportation terminals);
• obligatory oil and oil products deliveries - with regard to the state needs (usually under poor financial responsibility of the state);
• responsibility of the companies for this or other region provision with oil products (regardless of the region's economic and financial abilities);
• burdensome social duties of the oil companies, which are still responsible for the state of affairs in oil digging regions (they remain there practically the sole employers and the main taxpayers to local budgets).

Such the circumstances, naturally, restrict appreciably the economic "freedom" of oil companies.

Towards Rationalization

Market realities have not eliminated existing problems, yet it have given rise to those new. Demand now governs the domestic market and since late 1993 there the phenomenon of oil and oil products overproduction, thoroughly forgotten by the late Soviet economy, was observed in Russia's oil industry. The domestic market for oil and oil products was saturated and not all the surplus could be exported due to infrastructure and technical problems. In early 1994 the first signs of price competition that hasn't worked before in the Russian oil market, have emerged. LUKoil (which includes Langepas-, Ural- and KogalymNefteGaz) froze its prices unilaterally in March, 1994. The LUKoil expansion in Orel province (European Russia), where YUKOS company has been the monopolist, made the latter to reduce its prices by 37% in April, 1994.

As a result, during almost half the last year there practically stable (rouble!) oil prices remained. Along with continuing inflation and the slowed-up, during that period, exchange rate of rouble to hard currencies lowering, - this circumstances aggravated sharply financial-economic state of oil companies. Market "chaos" pressure has soon prompted oil companies to change their behavior stereotypes, made them not only require economic privileges from the state, yet to reconsider their inner structure. A year and a half ago Russian oil-digging enterprises have for the first time appealed on their own initiative to the example remedy - to costs reduction. That is, costs cut programs have been considered by the Directors Counsils of "NijnevartovskNefteGaz", "VarryeganNefteGaz", "YuganskNefteGaz", "SurgutNefteGaz" and other companies. It's noteworthy, that oil companies have in the programs departed from their, earlier declared as paramount goals of "keeping the body of workers" and have come to the decision on unprecedented, by Russian standard, jobs reduction - by 20-30%.

A rationalization of financial accounts was initiated by the newly established "vertically integrated oil companies. LUKoil is founding the LUKoil Financial Co. in order to simplify and accelerate the accounts within its framework. The heart of the new company activity is that it buys a stock of crude oil and along all the production- commercial cycle remains the owner of the product - down to wholesale market. Financial company pays promptly for crude oil deliveries and refinery; money turnover is accelerated considerably, since all the banks, which the members money are deposited in, keep their accounts in the "mutual" bank.

All the same, rationalization attempts didn't eliminate, yet only somewhat slowed down building up financial difficulties. The last year oil-digging enterprises suffered the heaviest losses - for almost trillion roubles, or 55% of all the losses in the fuel and energy sector.

     RosNeft        - 121.3
     LUKoil         - 45
     SurgutNefteGaz - 34.3
     SIDANCO        - 32.8
     YUCOS          - 28.4
     MinTopEnergo (Department of Fuel and Energy)
     total         - 302.4 (338.6 in 1993)

Table 2: oil extraction in Tyumen province, million tons

                             1994             1993

     SurgutNefteGaz        - 34.3              38.1
     YuganskNefteGaz       - 28.5              32.1
     KogalymNefteGaz       - 25.4              25.5
     NijnevartovskNefteGaz - 23.1              25.6
     NoyabrskNefteGaz      - 22.6              25.6
     Tyumen total          - 212.7             233.7

Inner Consolidation

The next step of Siberian oil companies evolution became strengthening of intracorporative links. Late last year the executives of oil companies have started - under the federal authorities moral support - the consolidation of entrusted enterprises. There were two main goals set: the first, oil and oil products sales centralization - through the leading company. The second, concentration of all the profits in the companies.

LUKoil company, perhaps, in the highest degree managed to consolidate its structures and to smooth over the inner contradictions. The matter apparently is that the company has acquired the combination form long before other did - as far back as 1991. In "SurgutNefteGaz" they laid the highest possible strengthening of the extracting company into their strategy foundation. "SurgutNefteGaz" structure is quite unitary: no joint ventures, not a single joint-stock company within its composition, the structure units lack legal independence. In SIDANCO there are no "core" of the company - like large extracting enterprise which might become the center of intracorporative links.

The trends of the inner consolidation of oil companies should be intensified with the long awaited decree of the president of the Russian Federation "On the Urgent Measures on the Improvement of the Oil Companies Activity". The decree will "sum up" the privatization of the oil sector enterprises - with regard to the decree # 1403 of 1992 - and will denote the beginning of the new stage. As it is indicated in the decree in preparation, "the main subject of economic activity and the object of the state control in the oil sector are oil companies, established by means of consolidation of the state owned shares of joint-stock companies..." In other words, the state, in opinion of authors of the draft decree (mainly employees of Russian Federation RosNeft and MinTopEnergo), will "build up" its relations - as far as exports, taxes, licensing, etc. are concerned - with the similar companies only. The main document, defining the relation, will become "The Exemplary Production Contract" of MinTopEnergo and an oil company.

The particular place within the state system of the oil sector control and regulation is allotted to the newly founded RosNeft company. They endeavor here to combine the company specific functions of centralized control, related to the state share of crude oil managing through the contracts on product division - with those commercial (oil extraction and refinery, products sales). Time will tell, how effective this combination turns out.