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Winners and losers in the Kremlin’s grab for oil wealth
http://www.gulf-news.com/Article...eID=191398
By Arkady Ostrovsky, Financial Times
Russia’s two best-known oligarchs have just got their rewards. Roman Abramovich was last month paid $13 billion by Gazprom, the state gas monopoly, for Sibneft, an oil company that the publicityshybillionaire had controlled with a group of unnamed partners.
In the week the money landed in Abramovich’s offshore bank
account, Mikhail Khodorkovsky, formerly the main shareholder in
Yukos, once the largest oil company in Russia, arrived in
Chita one of the most remote and harsh Siberian prison camps.
Just over two years ago, the two men planned to create one of the
largest oil groups in the world. As a result of the biggest merger
in Russian history, Yukos and Sibneft would have accounted for almost a third of Russia’s total output. A significant part of the new
Page 3 of 6 ©Michael Bolser, LLC company was to be sold to ExxonMobil or ChevronTexaco.
But the Kremlin turned the tables. Today, it controls most of Yukos and Sibneft while Khodorkovsky serves an eight-year sentence for fraud and tax evasion.
In the past two years the most important sector of Russian economy oil and gas has undergone the most fundamental changes since the mid-1990s privatisation responsible for the creation of the country’s powerful oligarchs.
Oil assets that were privatised at knockdown prices are moving back under state control.
The new order in the energy sector was achieved principally through three deals.
First, the government dismantled Yukos and through a series of legally dubious machinations sold the largest part of it to Rosneft, the state oil company run by people close to the Kremlin.
Second, it spent $7.5 billion on increasing its stake in Gazprom, Russia’s largest company, to 51 per cent.
Third, it allowed Gazprom to buy Sibneft, the country’s fifth-biggest oil company, in the largest deal in Russian corporate history.
The result: the state has majority control of Gazprom, which last year produced 20 per cent of the world’s gas. It has tripled the size of Rosneft and directly controls 30 per cent of Russian oil output. In addition, the state controls oil and gas infrastructure.
Given Russia’s dependence on natural resources energy accounts for 40 per cent of gross domestic product these changes, together with tighter restrictions on foreign ownership of resources, have enormous and potentially negative implications for Russia’s economy. But it is not just a domestic
issue.
Russia is the world’s second largest producer of oil, after Saudi Arabia, and the biggest exporter of natural gas. Russia supplies 30 per cent of all oil demand in Europe and a quarter of its gas. Any
fluctuation in Russian oil production has an impact on world oil prices.
Roger Munnings, chairman of KPMG’s global energy and natural resources unit, says: “These hydrocarbons are of significant importance to the world’s economic development. Being a reliable partner in the supply of energy is seen by Russia as one tool for re-establishing its geopolitical importance and, thereby, national pride. The fact that Russia wants to have control over strategic assets
is entirely understandable.”
Russia is particularly keen to show its importance to the world as it prepares to take over the rotating presidency of the Group of Eight leading industrial nations next year. Moscow has chosen to put energy security at the top of its agenda and is currently trying to flesh it out.
“Russia has looked at Saudi Arabia and decided that it likes the model. Nobody criticises the Saudis they are too important as a supplier,” says Christopher Weafer, chief strategist at Alfa Bank, Russia’s
largest private bank. So who are the winners and losers in the growing state presence in energy?
Foreign companies have never had a particularly easy ride in the Russian oil sector, but conditions are becoming tougher, if also clearer, for them.
When BP bought a 50 per cent stake two years ago in TNK, a Russian oil company, it was supposed to
pave the way for more foreign investment in the sector. Two years on, the 50/50 partnership remains an exception rather than the rule. Last year ConocoPhillips was allowed to buy an 8 per cent stake in
Lukoil. It has the right to increase its holding, but only to 20 per cent.
Moreover, Moscow is about to introduce restrictions on foreign companies’ rights to explore oil and gas fields that the government considers “strategic”. Under a proposed subsoil law no company with foreign participation of over 50 per cent would be allowed to bid for a field which has more than 1
billion barrels of reserves or is situated near sensitive defence sites.
Earlier this year the government cancelled the auction for two large fields to prevent TNK-BP from bidding for them.
These fields Trebs and Titov have now been deemed “strategic” and potentially out of reach for TNKBP.
The joint venture also has foreign minority investors who could tip the total foreign holding in the company over 50 per cent.
Yuri Trutnev, Russia’s natural resources minister, says that if that is the case, TNK-BP would be allowed to bid for new licences only by forming a joint venture with a Russian company. Given the size of the projects and the scale of investment they require, it is unlikely that Russian companies could
go it alone.
They could invite foreign companies in as partners but one thing is almost certain: any foreign participation will be limited to a minority stake and will be on Russian terms.
“In the past, Russian oil companies were squeezed in terms of their financial capabilities and their technology. But the times have changed. Today, Russia companies have the same access to capital markets and can buy the best western technology. They are happy to bring in foreign companies to
reduce risks, but on their terms,” says Sergei Oganesyan, head of the Russian federal energy agency.
The same rules apply to the gas sector. “If you have a gas project, you have to work a deal with Gazprom for access to the pipeline. Otherwise you will end up with a very bright gas flare and a very uncommercial project,” says Weafer.
TNK-BP is a case in point. It has a licence to develop the giant Kovykta gas field but the $15 billion project depends entirely on Gazprom’s participation. Gazprom demanded that it should have a majority stake in a joint venture with TNK-BP and be in charge of exporting gas from the site. TNK-BP had
little choice but to agree. Even so, Gazprom, which has other priorities, has put the project on the back burner. “Even though Gazprom does not have a licence for this field, it treats it as one of its own,” says one person familiar with the situation. Foreign companies are not the only ones concerned about the
state companies muscling in. The few remaining private Russian oil companies are equally worried.
“If a chairman of a state company calls someone powerful before the auction saying this licence should go to his company, it will have a very distorting impact on the market,” one oil company executive
says. Given Russia’s recent history of applying administrative pressure on private companies, this fear is real. Weafer says: “The Russian state will be a direct competitor for the licences it itself awards.”
Moreover, economists say apart from distorting competition, the growing state presence in the oil sector could damage the Russian economy.
Andrei Illarionov, the outspoken economic adviser to Putin, has warned that Russia is repeating the mistakes Venezuela made in the late 1950s when it nationalised its oil and gas industry and as a result
suffered a steady decline in its per-capita gross domestic product. The evidence in Russia is so far not encouraging.
The growth in Russian oil output and investment one of the main contributors to the country’s economic expansion over the past five years has already been affected. After five years of increasing on average at 9 per cent a year, oil production growth started to slow over the past year and is likely to
drop to below three per cent.
Vladimir Milov, head of the Energy Policy Institute, an independent think-tank, says the growth of oil production in Russia is being held back by various forms of administrative pressure. He argues that the
punitive tax system, where the state skims almost all revenues over $25 a barrel, and a shortage of pipelines renders the much-needed development of new fields senseless.
Most of Russia’s growth in oil over the past five years was driven by private companies. The Organisation for Economic Co-operation and Development estimates that Russia’s private oil companies directly accounted for between one-fifth and one-quarter of gross domestic product growth in 2000-03.
The contribution of state-controlled oil companies was negligible. “It is unlikely that Russia’s private oil companies could have achieved the growth of the last few years if they had remained under state control,” the OECD concluded.
Illarionov says the latest action by the government causes a redistribution of resources from efficient owners such as Yukos in favor of less efficient ones. Gazprom, for all its size, remains one of the least efficient companies. Last year its staff costs went up by more than 30 per cent, while its net revenues
increased only by 24.2 per cent.
Gazprom’s market capitalisation per barrel of reserves is one of the lowest in the industry. Rosneft’s average annual production from 2000 to 2004 increased only by 3 per cent, compared with 26 per cent growth at Sibneft.
Both Gazprom and Rosneft have a lower return on total assets than Russian and most international peers. But if neither foreign companies nor the Russian economy benefit from recent changes in the energy sector, who does?
Some observers say that the latest changes in the oil industry have been driven by something less high-minded than the interests of the state.
Milov says: “It is laughable to talk about nationalisation of the oil industry. A nationalisation is the transfer of private property into public ownership. What we are seeing is the transfer of assets from the
state to people close to the Kremlin.”
Rosneft, one of the least transparent companies, is chaired by Igor Sechin, a deputy head of the Kremlin administration and widely believed to be behind the attack on Yukos and Khodorkovsky. The chairman of Gazprom is Dmitry Medvedev, Putin’s chief of staff.
Some suspect that Putin himself might fancy a job at the helm of Gazprom once his second and, according to the constitution, final presidential term ends in 2008. “We are seeing the birth of a new oligarchy in Russia. The old oligarchs simply had political connections in the Kremlin. The new ones
are actually in the Kremlin,” Milov says.
Putin rejects this view. In a recent meeting with foreign journalists, he argued that there was nothing unusual in the fact that a member of the presidential administration sits on the board of a statecontrolled company.
However, some Russian observers say a partial privatisation of a state-owned company could create a mechanism that would turn a state-employed manager into a shareholder of a company.
Rosneft has announced its plans to offer 49 per cent of its shares in an initial public offering a move that seemingly contradicts the general trend towards greater state control over strategic part of the
economy.
“An IPO is a way of creating liquid shares that would allow the managers [of Rosneft] to legitimise their ownership,” says one powerful Russian businessman. “Over the next few years we shall witness a smooth transition of assets from private businessmen into semi-state ownership and back into private
hands but different ones. They need to do this fast, before the 2008 presidential elections, and it is a race against time,” he adds. END
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