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05.09.07
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Building A Super-giant?
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By Ivor Crotty
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Consolidations in the Oil Sector Increase Speculations
In the run-up to the opening of election season the tectonic plates upon which great swathes of Russia's burgeoning economy are founded continued to shift inexorably and without mercy. During August, the Moscow exchanges suffered in the wake of the sub-prime mortgage crisis in the United States. Though not overexposed, the RTS dropped 2.36 percent on Aug. 16 – compared with a 4.1 percent drop on the London FTSE – and the so-called market correction was evidence of increasing sensitivity in Russia to international peaks and troughs, and proof that Russian share prices, even those of national champions, cannot be protected from global sentiments, no matter what the Kremlin says.
The story of the summer, however, was the attempted acquisition of Russneft by Oleg Deripaska's Basic Element for $3 billion, which Kommersant reported on Aug. 29 had been deposited in the bank account of former Russneft owner Mikhail Gutseriyev three weeks before it became known that he had left Moscow after a warrant was issued for his arrest on tax evasion charges by a local court. The case sent familiar shock waves throughout the investment and finance community and brought critical scowls from the Russian media.
Gutseriyev was the head of Russian-Belarusian oil company Slavneft, 75 percent of which was sold in December 2002 to a Sibneft/TNK joint venture for $1.86 billion, which prompted Finance Minister Alexei Kudrin to comment at the time, “its a shame Slavneft has been sold at such prices.” Roman Abramovich later sold Sibneft to Gazprom for $13 billion. Russneft emerged somewhat nebulously from the remains of Slavneft. Between 2002 and 2004, Russneft spent 19.1 billion rubles ($745.3 million) on acquisitions, financed by Gutseriyev’s own BIN-Bank. Financing also came from BNP Paribas and Glencore, the Switzerland-based trading company that previously handled Slavneft sales.
Founded in 2002, Russneft posted output growth of 216 percent in 2004 and 253 percent in 2005, eventually producing 330,000 barrels per day and controlling 300 retail gas stations across Russia – including 9 percent of the Moscow market. The company also owned refineries in Orsk and Krasnodar. In February 2006, the company bought a 49 percent stake plus management control in Slovak pipeline operator Transpetrol in a spin-off auction of former YUKOS assets. Transpetrol controlled the Slovak section of the Druzhba pipeline transporting oil to Germany and many suspect it was this very deal that brought Russneft into conflict with the power vertical. Despite the company’s reputation as an exemplary modern Russian oil company, on July 31 a Moscow local court ordered that 100 percent of the company be seized. On Aug. 10, a Moscow arbitration court upheld a 17 billion ruble ($666.7 million) tax evasion claim, adding to the 3.4 billion ruble ($133.3 million) claim upheld in July that prompted the seizure order.
On Aug. 30, Basic Element applied to the Federal Anti-Monopoly Service to sanction the purchase of six offshore companies controlled by Russneft. Basic Element could conceivably pick up Russneft, with recoverable reserves of more than 630 million metric tons (4.6 billion barrels), for less than half its estimated market value. Before the state closed in, a deal of about $9 billion had been speculated, but RIA Novosti reported on Aug. 31 that Gutseriyev would receive about $3 billion, while the buyer would repay the company's $2.8 billion debt to Sberbank and Glencore, and cover the back tax claim levied against it, costs that could possibly total some 20 billion rubles ($780 million). The Federal Anti-Monopoly Service initially rejected Basic Element’s application due to an error in paperwork, but the group has since reapplied.
However it is highly unlikely Gutseriyev will return to Russia to sign and finalize the Basic Element deal, given the outstanding warrant for his arrest. This leaves a rudderless Russneft to be eventually absorbed by the state and reinforces the notion that the company was the subject of competing interests within the Kremlin, while Deripaska seeks to further his energy holdings elsewhere with an audacious bid for TGK-1, a supplier of power to St. Petersburg. Finnish power conglomerate Fortum’s bid for TGK-1 was refused because supplying power to Russia’s second city is a strategic responsibility and as such, foreign companies are excluded from holding a stake in the firm, at least without clearance from an FSB committee.
A Super-Giant Emerges?
Russneft’s “incorporation” triggered wider speculation on the possibility of power-vertical-related restructuring in the oil sector, with industry analysts discussing the possibility that Rosneftegaz would form the basis of a new super-oil holding to rival Gazprom’s dominance of the gas sector. Industry publication Nefte Kompass reported “Rosneftegaz, which is 100 percent owned by the Federal Property Management Agency, and established as a technical special purpose vehicle to enable the Russian government to directly control Gazprom, still exists, and owns 75.2 percent of Rosneft’s shares and 10.7 percent of Gazprom’s shares.” This formed the basis for speculation that Rosneftegaz stakes in Rosneft and Gazprom would be consolidated with Surgutneftegaz and Zarubezhneft into an oil company with a projected 2008 production of 3.75 million barrels per day. In order to achieve this the government would reduce its shareholding in Rosneft to a 50 percent+1 share and use the revenue (approximately $23 billion) to buy a controlling 50 percent+1 stake in Surgutneftegaz ($20 billion at current market prices).
Given that power blocks are consolidating at present, the Nefte Kompass article provoked a thoughtful response Deutsche UFG analysts Pavel Kushnir and Olga Danilenko, who commented, “If the plan does indeed exist, we believe it may be backed by a political group standing behind Rosneft-Surgutneftegaz-Zarubezhneft. While Rosneft has the status of Russian oil champion, it continues to lag behind Gazprom in terms of reserves, production, cash flows and, therefore, political power. While it is not possible to catch up with Gazprom, the new larger oil structure would benefit from expanded powers.”
The tremors were felt elsewhere in Russia’s notoriously confined oil sector. Lukoil CEO Vagit Alekperov told Reuters at the end of August, “The growing strength of state companies is a concern; we do not want there to be a divide between private and state companies. I think that all companies should be national companies.” Unlike Russneft however, Lukoil is seen as a safe and relatively independent actor in Russia’s oil sector, having stayed clear of politics, successfully attracted major international business partners – 20 percent of the company is owned by U.S-based ConocoPhillips – and diversified its technological base to a greater extent than its counterparts.
The proposed Rosneftegaz consolidation would create an oil holding with a market capitalization of $160 billion – within shouting distance of “rival” Gazprom’s $230 billion market capitalization – even without the possible addition of Russneft. The consolidation would hopefully satisfy, if only for a while, the desires of those strategists behind the proposal. It remains close to nationalization, however, and the emergence of back-tax claims against Russneft has reminded all parties of the desperate need for a clearer separation of powers in Russia’s body politic, provoking even state information service RIA Novosti to repeatedly refer to Mikhail Khordokovsky and the dismantling of YUKOS by state agencies. |
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