75% of Slavneft Will Go On Block

The government intends to sell its entire stake in one of the country's most scandal-ridden oil companies, a turnaround that has prompted ferocious bidding ahead of the actual auction.

The move to sell 75 percent of Slavneft, the nation's seventh-largest oil producer, at once for a starting price of $1.3 billion is a departure from the government's earlier plan to sell off the company in chunks.

"The order was sent to the government last week," a Property Ministry spokesman said Wednesday. "We don't expect any revisions. It's just waiting for the signature of [Prime Minister Mikhail] Kasyanov."

If it goes ahead, analysts say the sale, slated to take place by year end, will be marked by intense competition, as domestic companies fight for the dwindling number of lucrative oil assets left in state hands. Foreign companies will be able to participate in the auction, the ministry spokesman said.

This competition should force the selling price up higher than it would be if Slavneft were sold off in parts. Twenty percent of the company was scheduled to be sold this fall.

Before the changes were revealed, industry watchers were placing their bets on Sibneft. And although the firm remains a top contender, its success is now far from assured. The government has whetted the appetites of the other oil majors, who say they will be willing to pay more for full control.

A Surgutneftegaz executive in Khanty-Mansiisk told Interfax that his company was willing to pay $1.5 billion or more for the Slavneft stake. While Slavneft's production is modest -- it accounts for 4.3 percent of Russia's crude output -- its Yaroslavl refinery, with its 14 million tons a year of throughput and its close proximity to the Moscow oil product market, make it an attractive acquisition.

"Slavneft is a well-developed company where everything works," said the Surgutneftegaz executive, who was not identified.

He added that his company, with several billion dollars in cash sitting on its balance sheet, would go it alone. "The only thing we need is complete control," he said.

A likely reason behind the government's change of tactics is an increase in next year's expected debt service payments from $17.3 billion to $17.9 billion.

In addition, extra measures will have to be taken to ensure that there will be enough money in the financial reserve from which debt payments are made, said Deputy Finance Minister Sergei Kolotukhin. Proceeds from the revised Slavneft sale may be used to augment the reserve, he said.

Earlier, Finance Minister Alexei Kudrin said the reserve would hold enough money if the government was able both to float $1.5 billion in Eurobonds this year and sell 6 percent of LUKoil, Russia's largest oil company. Neither of these is likely to happen, analysts say.

Government officials unexpectedly halted the LUKoil float in August, saying the sale price was too low. As a result, the budget didn't receive an expected $660 million to $800 million in privatization revenues. Since then, international market conditions have worsened, giving Russian companies an excuse to focus their energies inward.

Slavneft produced 11.9 million tons of crude in the first nine months of this year. This figured is dwarfed by the 56 million produced by LUKoil and the 50.5 million extracted by No. 2 Yukos.

But 75 percent of Slavneft's oil would be enough for Sibneft, currently No. 5 in production, to edge out No. 4 Tyumen Oil Co., or TNK.

Sibneft, which already holds a minority stake jointly with TNK, is considered the leading contender and has already made inroads at Slavneft.

In April, Kasyanov unceremoniously fired then-Slavneft president Mikhail Gutseriyev, a move Energy Minister Igor Yusufov later explained as a kind of "insurance to make sure the auction went cleanly."

Shareholders elected Yury Sukhanov, a former Sibneft executive, at a May meeting, but the Belarus government, which owns 11 percent of Slavneft, threw its votes behind Gutseriyev.

The power struggle reached its climax in midsummer, when Gutseriyev stormed Slavneft's office with the aid of special police forces. And a resolution to the conflict between the Gutseriyev and Sukhanov camps, which at times had forced Slavneft employees onto the streets, came a few weeks later, when the Interior Ministry dropped criminal charges, believed to be politically motivated, against Sukhanov.

Because former Sibneft managers run Slavneft, Sibneft has a clear advantage over the other oil companies, Troika Dialog said in a research note.

"[Former Sibneft managers] are the best placed to gauge the real value of the company," the note said. "Sibneft is therefore the least likely to overpay."

However, "the chance to gain control of Slavneft in one fell swoop could be expected to swell the list of potential bidders to include all of Russia's oil majors expect Tatneft," it said.

Some analysts speculated that the sale was now so attractive that a foreign strategic investor may join the race, alone or in conjunction with a Russian company.

Many foreign oil companies polled Wednesday said the government's announcement incited internal discussions, but many were concerned about the short timeframe given for the sale.