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. Last Updated: 07/27/2016

Who'll Grab Rosneft Prize?

Don't be fooled. The sale of Svyazinvest may be the jackpot event for the government this year, but it is not the year's highlight. Only 25 percent of the company is on the block, and no matter who pays the $1.2 billion for the property, the government will retain the driver's seat in this telecom superholding. By far the greatest privatization drama this year will be centered on who grabs control of Rosneft, the best of the last government-owned integrated oil companies.


Now that Gazprom has paid its arrears and had its shareholder meeting, Rosneft has become the talk of the industry -- a striking fact considering the company doesn't even have a privatization plan. Rosneft possesses controlling interest in an eclectic range of assets that are spread across Russia from Krasnodar to Sakhalin. Both its upstream and downstream activities are so widely dispersed that managers probably spend more time in the air than on the ground. Rosneft has six oil-producing subsidiaries (by comparison, most Russian oil companies have one or two), the main one of which is Purneftegaz; four refineries (none of which are anything to be proud of); and a host of distribution companies from Murmansk to Nakhodka. In addition, as the government's representative in international oil deals, Rosneft has its hand in such promising ventures as pumping oil out of Iraq under a United Nations' sanction.


But Rosneft's true charm is in a handful of assets that will kick in at the beginning of next century. These include participation in projects to build pipelines from the Caspian Sea and across the Baltics, an interest in the construction of an oil refinery in Germany and stakes in three major production-sharing deals off Sakhalin and in the Timan-Pechora basin in Arkhangelsk. Total investment potential of these projects exceeds $40 billion. So despite its size, the future for Rosneft looks brighter than in some of Russia's largest integrated oil companies. Rosneft is an oil company of the 21st century.


This fact hasn't been lost on Russia's leading entrepreneurs. Imperial Bank and Uneximbank, among other leading banks, approached the company in the past with proposals for cooperation. But Vladimir Putilov, chairman of the board at Rosneft, stuck to his philosophy of independent development and self-financing for the company's grand projects. Where possible, finance through a foreign partner (for example, Shell in the Caspian Sea, Exxon on Sakhalin) is given preference.


But if the government sticks to its schedule and starts privatizing Rosneft this year, the million-dollar question is who will come out as Rosneft's landlord. Although the government will keep 51 percent, the unanimous opinion among analysts is that the front-runner is Sibneft, the oil company controlled by companies associated by financier and politician Boris Berezovsky. Another likely candidate is the irrepressible Uneximbank, whose shot at taking over Sibneft two months ago was thwarted on a technicality.


As politics would have it, the intensity of the struggle without the company has also affected it within. Rosneft's curator Putilov defended the company's interests admirably against forces that would like to strip it one asset at a time until nothing remained but a gas station in Krasnodar. At the same time he made no secret about his vision for Rosneft: An independent, fully integrated oil major free from the shackles of a financial-industrial group. On several occasions, Putilov expressed doubt as to the efficacy of the crude-cash combination in such marriages as Yukos-Menatep or Sidanko-Uneximbank, and was poised to fight for Rosneft's independent development.


When Putilov refused to yield from this position, he was suddenly sacked by Prime Minister Viktor Chernomyrdin in a murky set of circumstances in April. In his stead came a bureaucrat from the Industry Ministry, Yury Bespalov. When Rosneft managers protested Putilov's removal and demanded a meeting with First Deputy Prime Minister Boris Nemtsov, the government (read: Chernomyrdin) caved in and arranged Putilov to stay on as chairman of the board. During the last couple weeks, however, Bespalov has brought on board a new vice president to Rosneft, who also just happens to be from the Industry Ministry. The managerial shuffle has begun, and infighting is around the corner.


But the jackpot grows even bigger as one comprehends what's at stake here. Yevgeny Leskin, president of KomiTEK, another integrated oil company, has always considered Rosneft to be KomiTEK's strategic partner. Earlier this year two unknown Moscow companies, backed up by guarantees from National Reserve Bank, bought 38 and 29 percent stakes in KomiTEK. National Reserve, as known, is largely controlled by Gazprom. Gazprom's Rem Vyakhirev is chairman of the board at Berezovsky-controlled Sibneft.


Confused? Most people are. The underlying trend here is the possible emergence of a Gazprom-Sibneft-KomiTEK triad that would find its ultimate perfection in the acquisition of Rosneft. An outright merger is out of the question, but centralized control over decision-making and cash flows is not. The result would be an oil and gas concern unrivaled anywhere in the world.





Gary Peach is the editor of the weekly newsletter Capital Markets Russia.