Publication: Prism Volume: 4 Issue: 6

Rosneft privatization set to complete the carve-up of the Russian oil industry

By Sergei Kolchin

When he left office in 1996, former Russian fuel and energy minister Yuri Shafranik told an interviewer from Ekspert magazine that, in three years’ time, only about half a dozen large companies would be left in the country’s oil industry. This prediction has already started to come true.

The process of concentration in the oil sector began to accelerate at the end of last year. The catalyst was the upcoming privatization of Rosneft, Russia’s last big oil firm still wholly in state ownership. The Russian government plans to privatize Rosneft in the first half of this year.

The sale has attracted a record number of bidders and is shaping up to be the most fiercely fought battle yet in Russia’s privatization drive. Three alliances have so far been formed to bid for Rosneft, each of which includes the possible participation of foreign capital. These are: (1) LUKoil, Gazprom and Royal Dutch Shell; (2) Oneksimbank and British Petroleum; and (3) Boris Berezovsky’s Sibneft which, together with Mikhail Khodorkovsky’s Yukos, in January formed a new holding company, Yuksi. Berezovsky and Khodorkovsky have not yet announced a foreign partner.

It is now possible to predict that two super-holding-companies are likely to dominate Russia’s oil sector: LUKoil and Yuksi. A short distance behind them are Sidanko (which is controlled by Oneksimbank) and Surgutneftegaz. The rest are doomed either to fall into the leaders’ orbit or to be merged into them. Only the large republic-level oil companies, such as Tatarstan’s Tatneft and Bashkortostan’s Bashneft, are likely to be able to maintain relative independence, and even then, only with reservations (the first has problems with refining; the second, with extraction).

The latest stage of the competition in Russia’s oil industry is characterized by a shift in emphasis toward taking over the positions held by competitors.

The original impulse for this shift was the change in government policy in the second half of 1997. Experiencing difficulties in collecting revenues and having received the first substantial result from the sale of its 38 percent share in the Tyumen Oil Company (about $1 billion), the Russian government accelerated the privatization of the oil industry on a competitive basis. At the end of 1997, packets of shares in the Eastern Oil Company, Norsi-Oil and Slavneft were put up for sale, and serious preparations began for the privatization of Rosneft.

Prime Minister Viktor Chernomyrdin gave his blessing to the concentration of domestic capital with the words, "Russian companies should compete outside Russia but, within Russia, they should come to terms among themselves."

"Coming to terms" proved not to be so easy. The new wave of deal-making which was stimulated by the creation of Yuksi is evidence of that.

But first, a brief digression on the history of the issue. The state-owned company Rosneft was once just as much of a monopolist in the oil industry as Gazprom was in natural gas extraction. Starting in the early nineties, today’s oil companies gradually split off from Rosneft. Now, it occupies only ninth place in oil extraction (more than 13 million tons of oil in 1997). Only one large oil-extraction enterprise — Purneftegaz — remains with the company. The other oil-extraction enterprises which remain within Rosneft are small in terms of the amount of oil extracted and are located in the south of Russia (Dagestan, Stavropol and Krasnodar Krais), and in Sakhalin (Sakhalinmorneftegaz).

However, the fact that Rosneft includes companies that represent territories which promise to contain a lot of oil — Sakhalin and the Timan-Pechora basin (the Arkhangelskgeoldobycha corporation) makes it attractive to any investor. Moreover, as a state enterprise, Rosneft has the status of the "state operator" according to the production-sharing agreements in these new oil- and gas-producing regions.

Rosneft has a widely-branched network of 17 oil marketing organizations all over Russia, from Arkhangelsk Oblast in the north to the Northern Caucasus in the south and Nakhodka in the east. This is another reason why the company is attractive to potential investors. Rosneft has one of the largest networks of gas stations in the country.

The government’s approach toward privatization of this company has changed numerous times, as has the timetable. But in the second half of 1997, the contours of the upcoming privatization grew somewhat clearer. On September 25, 1997, the State Property Commission approved the privatization plan for the company, according to which 96 percent of its shares were to be put up for sale (four percent were to be distributed among the company’s employees). Sixty-three percent of the legal capital was to be sold at special auctions, and 33 percent in an investment tender.

At the beginning of October, an agreement was signed between Rosneft and Sidanko to settle the old lawsuit over Purneftegaz. The signing of this agreement removed the last obstacle in the way of privatizing Rosneft. Oneksimbank explained the renunciation of its claims to Purneftegaz by saying that it was in the national interest. Possibly, it was also calculating that it would thus receive certain advantages when the company was privatized.

Next came the stage where potential purchasers gathered their forces and formed alliances among themselves. On November 17, a tripartite document was signed between Gazprom, LUKoil and the Anglo-Dutch concern Royal Dutch Shell. The strategic goal of the alliance was to take part in the privatization of Rosneft.

Next came the turn of Oneksimbank, which sold British Petroleum ten percent of the shares of Sidanko for $490 million; it intends to use the money and the weight of its western ally in the fight for Rosneft. In order to do so, Oneksim decided to refrain from participating in the competition for the Eastern Oil Company and even to sell the shares that it already had in that company.

As regards the third competitor for Rosneft, Boris Berezovsky’s group, which controls Sibneft, has formed an alliance with other prominent Russian financiers: Mikhail Khodorkovsky (Menatep), Vladimir Gusinsky (Most-Bank), and Aleksandr Smolensky (the SBS-Agro Bank). This group has long been seen as the favorite in the race for Rosneft. The appointment of a number of former Sibneft officials to leadership positions in Rosneft supports this interpretation. Berezovsky’s activity has not gone unnoticed by his competitors. A battle is being waged within Rosneft itself between the president (Yury Bespalov — who is considered to be a supporter of Berezovsky) and the chairman of the board of directors (Aleksandr Putilov — who is supported by a significant portion of the company’s leadership).

In spite of this internal discord, Rosneft succeeded in revaluing its legal capital, increasing it by 90 billion to 4.8 trillion (old) rubles (at the prices which existed before January 1, 1998). The state expects to receive at least $1.5 billion from the sale.

At the end of last year, Fuel and Energy Minister Sergei Kirienko announced that the conditions of the privatization would be changed. Now, it would be a packet of shares equal to 75 percent plus one share which would be sold at the investment competition.

After that, there came followed a number of maneuvers by the competitors for Rosneft and within the government. The central event, without a doubt, was the formation on January 19 of the new super-holding-company Yuksi, an alliance between Yukos and Sibneft. The friendly relations between the two companies and their leaders (Khodorkovsky and Berezovsky) were known beforehand. The new super-holding-company, which also includes the Eastern Oil Company, which had been acquired by Yukos, and the East-Siberian Oil and Gas Company, which is controlled by Berezovsky’s financial group, has a resource base of about 3.2 billion tons of proven oil resources, extracts 65 million tons of oil annually, and refined 43 million tons of oil last year. These indicators move it into first place in the world in oil reserves and third in oil extraction.

Another claimant to Rosneft, LUKoil, has also gotten noticeably stronger recently, winning the competition for developing the Russian part of the Caspian Sea shelf and acquired a controlling packet of shares in the Arkhangelskgeoldobycha corporation which, by the way, is part of Rosneft. This opened the way for LUKoil to become the leader in the Timan-Pechora project. As for oil refining, LUKoil has successfully assimilated the Norsi corporation — so far, without buying a controlling packet of shares — and made a breakthrough in foreign oil refining (in Romania and Lithuania).

Soon after the merger of Sibneft and Yukos, reports appeared of a possible alliance between LUKoil and Sidanko. At the same time, Gazprom head Rem Vyakhirev warned that foreign investors might not be allowed to participate in the privatization of Rosneft and that its shares might be sold in smaller packets.

Gazprom’s partners reacted negatively to reports of possible further changes in the privatization scheme. LUKoil issued a statement saying that the government’s latest scheme, which proposed selling a packet of 50 percent plus one share, would substantially reduce the company’s attractiveness to investors. LUKoil threatened to withdraw from the competition. Shell supported LUKoil’s position. So too did Gazprom, thought the gas giant was more restrained, and urged its allies not to rush into making a final decision on the matter.

It is possible that what stands behind all this is the desire of the Russian oil giants to have the remains of the oil complex divided up in a different way. They may prefer to have Rosneft carved up into individual segments, which could be sold to the existing holding companies.

Purneftegaz, which operates in the Yamal-Nenets Autonomous Okrug, would fit into Gazprom’s sphere of territorial interests. The head of LUKoil, Vagit Alekperov, indicated this when he noted that, in addition to oil fields, the enterprise is also developing enormous gas deposits "where Gazprom’s technology could be actively applied."

The southern oil extraction and refining plants would fit with LUKoil’s sphere of influence, while the Far Eastern bloc — Sakhalinmorneftgaz and the oil refinery in Komsomolsk-na-Amure — would accord with Sidanko’s sphere of influence.

This would apparently leave Yuksi without a share. Purneftegaz’s deposits could however be developed in conjunction with Gazprom (the oil-extraction branch of SibneftNoyabrskneftegaz — is close by, and Vyakhirev has served as the chairman of Sibneft’s board of directors).

After that, all that would be left would be Rosneft’s distribution network, but there is interest in carving this up, too. The upper house of the Russian parliament, the Federation Council, has already asked the government to take over Rosneft’s regional distribution systems, in view of the company’s upcoming privatization. The regions understand that they either have to get a reliable supplier from among the largest oil holding companies, or own the distribution system themselves.

Time will tell whether carving up Rosneft is a realistic alternative. So far, there is no clear evidence that the government is ready for such an approach. It may be that the company will be carved up after it is privatized.

But, as the failure of the competitions and auctions for shares of Norsi, Slavneft and the Eastern Oil Company shows, buyers are not always willing to accept the "rules of the game" as laid down by the government.

Translated by Mark Eckert

Dr. Sergei Kolchin heads the sector of economic statistics and comparative international analysis of the Russian Academy of Sciences’ Institute of International Economic and Political Studies in Moscow.


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