Northern Explorers : New Soviet Oil Export Tax Keeps Oxnard Firm Waiting for the Rewards of Its Joint Venture
In a tiny, frozen encampment just south of the Arctic Circle in western Siberia, Clancy Cottman entered a large tepee with 19 members of a local clan of reindeer herders.
Cottman, vice president of business development for Benton Oil and Gas Co., had arranged the January, 1993, meeting to ask the clan for permission to begin drilling for a vast pool of oil resting far beneath the surrounding tundra. Snacking on salted reindeer meat, Cottman assured the clan that the project would not harm fishing streams or damage grazing fields.
When Cottman asked what Benton could offer the clan as compensation, the answer read like an order from L.L. Bean: 10 binoculars with cases, nine hunting knives with sharpening stones, three pairs of heavy-duty gloves, nine Windbreakers, 100 feet of nylon rope, five sets of leather-sewing needles, needle-nose pliers, decorative beads, medical supplies and more.
One month later, Alex Benton, the Russian-born chief executive of the Oxnard company, personally delivered the supplies, and the clan, an indigenous tribe of nomads known as the Nentses, approved the project by unanimous vote.
If only doing business with the Russian government and Boris Yeltsin were so easy.
Like hundreds of U.S. companies, Benton Oil and Gas has ventured into the emerging free-market economy of Russia. The company’s project, a joint venture called Geoilbent Ltd., has often been within reach of what Alex Benton calls “the golden ring.” But every time Benton has seemed close to collecting his bounty, political changes have pushed it another step away.
Benton’s bane has been a $5-per-barrel oil export tax imposed by Yeltsin in July, 1993. That cut Benton’s profit to just pennies per barrel, so he has put full development of the Siberian project on hold. Capable of yielding 100,000 barrels a day, the field is now producing 3,500 barrels a day.
Recent moves by the Russian government have raised hopes that the oil tax could soon be lifted. But meanwhile Benton and his two Russian partners can only wait patiently, certain from the latest seismic analysis that under those reindeer herders are 350 million barrels of crude oil waiting to be pumped out.
Granted, the North Gubkinskoye field is small compared to the world’s largest oil pockets--including a 9-billion-barrel field partly controlled by Chevron in nearby Kazakhstan. But the size of Benton’s project is something oil companies “have . . . dreams about finding in America,” said oil analyst Charles Strain.
As a 34% partner in Geoilbent, Benton’s share of the field would be more than 100 million barrels. If Yeltsin’s tax is lifted and the price of Siberian crude holds steady at the current $15 per barrel, Benton could make $500 million in profit over the next 20 years. If oil prices go up and production costs go down, “We should make $10 per barrel,” Benton said. That could mean $1 billion in profit, and Benton, who owns 1.24 million shares of his company’s stock, would become a very rich man.
Benton Oil’s vast potential has attracted the attention of Ralph Wanger, manager of the highly regarded Acorn Fund in Chicago, which owns 440,000 shares of Benton. Benton’s appeal, Wanger said, is that it is a small company whose stock could soar if the Russian venture takes off. “If Chevron goes over there and does a project it might improve their earnings 3%,” Wanger said. “But for Benton it could be very meaningful.”
A 25-year veteran of the industry, Benton is accustomed to the vicissitudes of the oil business. But to have a project with such enormous potential blocked by something as nettlesome as Yeltsin’s tax is especially infuriating to Benton, who has already invested $17 million in this effort. “It’s rather depressing after you’ve put in several years of work, countless trips to god-awful places, and extremely difficult negotiations with very tough people,” Benton said. “To have it disintegrate in front of your eyes is not a happy feeling.”
Founded in 1989, Benton Oil and Gas has specialized in wringing oil from previously developed fields. Using the latest recovery technology, the company is currently squeezing oil from already-tapped fields in Louisiana and Venezuela. Those projects are considered to have enough potential that the Russian venture isn’t critical to the company’s future. “If nothing happened anywhere else, Venezuela could justify the current price (of Benton’s stock) on its own,” said Herbert E. Hart, an oil analyst with the S.G. Warburg Group.
Still, picking over leftovers hasn’t exactly been a feast. Benton reported $1.15 million in earnings on sales of $8.48 million in the June quarter, but that was the first profitable quarter since 1991. Because of high development costs on its three projects, the company’s losses over the last two years totaled $7.74 million on revenue of $16.4 million.
So Benton’s stock, which peaked at $18 per share in 1991, closed at just under $7 per share Monday. Critics have complained in recent years that Alex Benton has been better at raising hopes than producing oil. But in Russia, Benton could make enough money to silence his critics for decades.
New Russian Prime Minister Victor Chernomirdin recently formed a committee to consider granting exemptions to the oil export tax. If Benton’s application to the committee is approved, the company would be exempt until it makes enough profit to recoup its investment. By the time that happens, Benton said, the tax might be eliminated entirely, or at least reduced.
Analysts on Russian politics place even odds on the lifting of the tax, but Benton said he’s optimistic, and his company is poised to strike quickly with a massive drilling effort that could bring the number of wells from nine currently to about 300 within five years.
Benton, which promised to pay $25 million for its share of the partnership, would swiftly pump in the $8 million it still owes. More financing would come from the operation’s early profits, $50 million in bank loans the company has applied for, and $50 million in bond proceeds that J.P. Morgan & Co. and others are in the process of raising.
Benton, who spent most of his career finding oil for other larger companies including Amoco, is understandably a bit breathless at his company’s prospects. “The fruit is about to be harvested,” he said. But now he must wait a bit longer on a project that has required patience from the very beginning.
Benton was born with the name Alexander Strochenko in 1942 in a Russian village between the Black and Caspian seas. His family fled three weeks later when Nazi troops rolled through the region in pursuit of the Caspian oil fields. After the war, his family emigrated to the Northern California town of Gilroy.
Benton never considered returning to Russia until 1990, when he was asked by the Russian government to take part in a joint venture involving the virgin North Gubkinskoye field. So, accompanied by several of his executives, Benton flew to Moscow in January, 1991.
Check-in at a Moscow hotel took three hours, Benton said, with “endless shouting matches” between hotel managers and Benton’s host, the Russian Ministry of Geology. The toilets at the hotel didn’t work and the beds were so small that the 5-foot-9-inch Benton said his feet dangled over the edge. That night, a drunken brawl erupted in the hotel hallway, and the Americans found broken bottles and blood outside their doors the next morning.
A few hours later, they were the first passengers to board a Russian airplane that quickly filled up like a subway car, with Russians wearing heavy coats and dragging heavier packages. Benton spent the flight sitting on a metal suitcase in the cockpit, the special guest of a pilot who said he had never seen an American traveling to Siberia.
The plane landed in a former gulag town about 2,000 miles northeast of Moscow, where high winds and minus 60-degree temperatures ruled out helicopter flight. After a two-day wait, the Americans boarded a 1 a.m. train for Tarko-Sale, an oil town about 30 miles east of the North Gubkinskoye field.
Benton has since made dozens of trips to Siberia. He prefers the brutal winter cold to the muggy heat of summer, when his workers have to wear beekeeper outfits to fend off clouds of mosquitoes.
Telephone communication with Siberia is extremely unreliable, Benton said, so he uses a satellite service. Now when he calls Russia his voice is bounced off a satellite above the Indian Ocean and into a small dish that field managers in Siberia carry in a suitcase.
Overcoming such obstacles is part of Benton’s job. The company’s Russian partners found the field, furnish much of the equipment and provide many of the 240 workers who pump the oil, but they needed Benton’s cash and expertise to make it a modern operation.
Benton’s proudest accomplishment is a 37-mile pipeline connecting the North Gubkinskoye field to the Soviet-built pipeline network that carries oil to refineries in the Czech Republic, Slovakia and Germany. Benton had the pipes built in Texas but invited bids from Russian companies for their assembly and installation in Siberia. Bids ranged from $3 million to $9 million, and the contract went to the low bidder, a company from Russia’s Volga region, near the Ural mountains.
American supervisors who oversaw the project were impressed by the competence of the Russian crew, Benton said, but could not understand why Russian welders took twice as long to fuse pipes as Americans did. Finally, the Americans realized that the Russian welders’ goggles were so scratched they could hardly see their hands as they worked. Furnished with new welding masks, Benton said, the Russians were as fast as Americans, if not a bit faster.
The pipeline was finished in April, 1993, and Benton seemed poised to take the project to full speed. But his plans were undone just three months later when Yeltsin imposed the oil tax, yanking away tax exemptions that Benton and other companies had been promised because they had invested early in Russian joint ventures.
Analysts say the oil tax is at the center of a political tug-of-war between reformers and protectionists. Though Yeltsin is considered a reformer, he imposed the tax to raise needed revenue and to appease his protectionist foes. He has since issued a decree lifting the tax, but his control of government bureaucrats is weak, experts said, and Yeltsin’s latest decree has not been enforced.
Prime Minister Chernomirdin, formerly head of the Soviet natural gas monopoly, is expected to have greater success because he is a political moderate who has relatively few enemies. And as prime minister, he is in direct control of government agencies. “Chernomirdin can tell the ministry of revenue to collect (the tax) or not,” said Richard B. Anderson, an assistant professor of political science at UCLA.
As the Russian politicians battle on, Alex Benton plans his next trip to Siberia in September. He knows his oil will still be there, he just hopes the tax, and perhaps the mosquitoes, are gone.