Though it previously targeted foreign energy companies, the Kremlin's most recent campaign is taking aim at domestic producers. The move against LUKoil is a warning, as no final decisions have been made, but the company is facing considerable pressure to follow Moscow's policies.


The Russian Federal Service for the Oversight of Natural Resources on Oct. 13 demanded the revocation of several production licenses belonging to Russian private oil company LUKoil in two Western Siberian regions. Numerous reported or supposed violations of environmental regulations in the Khanty-Mansi Autonomous Area and the Komi Republic have jeopardized 20 license agreements.

This move against LUKoil indicates the Russian Ministry of Natural Resources has expanded its campaign against foreign energy companies to include a private domestic producer. Unlike Russian energy giants Gazprom and Rosneft, LUKoil is not under state control, but it is nevertheless friendly to the Kremlin -- a requirement for any large company that wants to operate in Russia. The Russian government has always had pressure mechanisms for private companies, but this threat against LUKoil is out of the ordinary. Moscow is acting as if it wants LUKoil to maintain its production in Russia while it tries to give Kremlin-controlled Rosneft an advantage.

LUKoil's production is based in Western Siberia. The company has been generally successful in Russia and abroad; its projected production for 2006 is 1.9 million barrels per day. The Kremlin's current goal is to exert maximum control over industries it deems strategic -- with energy at the top of its list. However, LUKoil has been investing and shifting its operations abroad. The Kremlin could be using LUKoil's recent moves abroad as rationale for weakening the company.

Moscow also wants Kremlin-controlled Rosneft to have more control over assets in Western Siberia. Recent staff changes in the neighboring Nenets region, where LUKoil is also active, have been at least partially motivated by that desire. If LUKoil does not comply with the latest demands to the Kremlin's satisfaction, Rosneft will stand to benefit from LUKoil's loss.

Oleg Mitvol, deputy director of the environmental watchdog agency, visited the Komi Republic on Oct. 12 for an inspection of the LUKoil sites, accompanied by representatives from Greenpeace. The inspection reportedly revealed that the company's facilities are polluting the region's rivers and prompted Mitvol to name LUKoil subsidiaries KhantyMansiiskNefteGasGeologia and NazymGeoDobycha as having violated environmental regulations. Mitvol called for 12 licenses in Komi and eight in the Khanty-Mansi Autonomous Area to be revoked.

The ministry’s latest tactics in Western Siberia are intended to pressure LUKoil into tighter compliance with regulations, cost estimates and timelines. This was one of the techniques used against now-bankrupt Russian oil giant Yukos, presenting a legitimate front for the Kremlin move against it. However, the announcement is not the actual revocation of the licenses and should not be seen as an outright attack. Behind-the-scenes negotiations between the Kremlin and LUKoil are likely already taking place, and the company has quickly replied with promises to rectify any violations within the allotted three- to six-month grace period.

Nevertheless, the warning should be taken seriously. LUKoil is likely to heed the demands for whatever reform or modifications the Ministry of Natural Resources names in order to maintain its status in the Russian industry.