Russian oil firms Yukos and Sibneft have agreed to merge, creating an entity that will surpass Lukoil to become the country's largest oil and gas company. The move marks the second blockbuster deal to reshape the Russian oil and gas industry this year. Two months ago, BP Plc announced a $6.75-billion investment that would combine TNK and Sidanco to create Russia's third-largest oil company, and give the London-based major a 50% stake in the new firm. A third deal, Marathon Oil Corp.'s acquisition of New York-based Khanty Mansiysk Oil Corp. (KMOC) and its oil production in Siberia, joins the league of new Russian consolidation. The Yukos-Sibneft move also takes off the market the two Russian oil companies that were the most likely targets for any Western oil majors hoping to replicate BP's feat. "My guess is that TNK-BP is an anomaly in Russia, and it was unlikely that anything similar would be allowed to happen again," says Julia Nanay, senior director of Washington-based consulting firm PFC Energy. "While Sibneft and Yukos were the only other two Russian companies that Western partners could have considered, they're both just very different companies from TNK with their own peculiarities that probably would have-and ultimately did-dictate against a merger with a foreign company." YukosSibneft Oil Co. will have total reserves of about 19.4 billion BOE. According to Yukos, that places it just under ExxonMobil and Royal Dutch/Shell, which have more than 20 billion BOE of reserves, each. Oil production would be about 2.3 million bbl. a day, placing the company fourth under BP, ExxonMobil and Shell. In terms of culture, Yukos and Sibneft are similar, Nanay says. The companies have both used Western service companies-especially Schlumberger Ltd.-to drive down production costs and increase volumes, she says. The companies talked about merging five years ago, but couldn't decide who would lead it, Nanay adds. "Now, clearly, Yukos is much stronger than Sibneft, so there is not a question about that." Mikhail Khodorkovsky, head of Yukos, will be responsible for the executive management of YukosSibneft. Eugene Shvidler, head of Sibneft, is the proposed chairman. Currently, Yukos is the second-largest Russian oil company, and Sibneft is the fifth-largest. Under the terms of the deal, core shareholders of Sibneft will sell to Yukos a 20% interest in the company for US$3 billion in cash, and receive 0.36% interest in YukosSibneft per each 1% interest in Sibneft. Even if Western oil companies find it difficult to merge with major Russian firms, there are still plenty of opportunities for them to operate in the country. And production-sharing agreements (PSAs) could allow foreign investment in Russian oil fields, although many Western companies have doubts about the legal and fiscal regimes in the country. Marathon's winning $280-million bid, including debt, for KMOC comes with net production of 14,500 bbl. of oil per day. This is expected to grow to more than 60,000 net bbl. per day within five years. Net proved reserves are 85 million bbl. Based on the purchase price and expected development of 250 million bbl. of proved and probable reserves in the currently producing fields, Marathon expects full-cycle finding and development costs will be under $3 per bbl. Royal Dutch/Shell, which had a 45% stake in KMOC that was gained from its acquisition last year of Enterprise Oil, agreed to the sale.