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. Last Updated: 07/27/2016

Oil Industry to Join Privatization Push

Russia's state-owned oil industry, once thought immune from the country's privatization spree, is to be divided between private shareholders and the government, according to a presidential decree reported in Izvestia.


In a move intended to recapture lost oil production, Rosneftgas -- the state agency primarily responsible for providing Russia with refined fuel -- will be split between private investors and the state.


The arrangement is designed to introduce market reforms into an industry that has been dangerously lagging, and whose total productive output is expected to drop by millions of tons this year.


Steven Sandweiss, manager of the oil and gas division at the consulting firm Arthur Andersen, said that the division would redistribute control of the state's production facilities


between the public and the government, but at a ratio that would still preserve a decisive measure of government control.


"The fact that the government is going to keep 49 percent is a sure sign that it will continue running things", he said.


According to the State Statistics Committee, Russian oil production fell 13 percent in the first eight months of this year compared to the same period in 1991, and the situation is expected to worsen as equipment and resources deteriorate.


Deputy Fuel and Energy Minister Alexander Samusev was quoted in the same report as saying that declining production could only be halted by a rapid privatization of the oil industry.


Samusev called for a division of the industry into a series of vertically integrated companies responsible for all aspects of production -- from wells to refineries and gasoline stations -- that would also be in charge of attracting needed capital investments as a way of upgrading their equipment.


But he said that the government would need to maintain a significant controlling interest in the new shareholding companies to prevent abuses and avoid a disorderly breakup. He said that the process could take as long as three years to complete.


Among the industry's primary concerns, Samusev cited significant foreign investment -- needed, he said, to revitalize the industry's infrastructure and develop new oil fields as a way of boosting exports.


He said that by distributing ownership of the industry between several competitors, no single organization would be able to gain a controlling stake.


Sandweiss also said that a partially privatized oil industry would improve overall efficiency, but only if the sale of shares was conducted fairly.


"I don't know how freely shares will be bought and sold, but from what I understand, enough will be traded to make a difference", he said.


He said that Russia's oil industry was suffering from advanced deterioration of its equipment, a situation that has slowed or stopped production at many otherwise viable wells.


But if the privatization plan was implemented in earnest, even partially, Sandweiss said, Russia's oil industry, second only to Saudi Arabia's, could attract enough new investment to recover much of its lost production.