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. Last Updated: 07/27/2016

Oil Tender Pricing Formula Proposed

Russia's Fuel and Energy Ministry has proposed a formula to set starting prices in oil company tenders at above-market prices, a method that could be used in a series of oil tenders this fall.


The ministry is proposing setting minimum prices in oil investment tenders at 1 1/2 times the market price of the stake, First Deputy Fuel and Energy Minister Sergei Kiriyenko was quoted by Interfax as saying Tuesday.


Kiriyenko discussed the proposal this week with executives from Slavneft, Norsi Oil, the Siberian-Urals Oil, Gas and Chemical Co., or Sibur, and the Eastern Oil Co., all of which are slated to be sold in investment tenders this fall.


The minimum price would cover the sale price and the value of investments in the company that are required in most tenders. For companies that aren't actively traded, the government would hold a cash auction for a small portion of the stake before the tender to determine market value.


"In this way, market forces rather than bureaucrats will dictate the conditions of the subsequent contest," Kiriyenko said.


The format could be used to set a starting price for the long-awaited Slavneft tender, which could be held by year-end for up to 34 percent of the company. A preliminary cash auction for 2.2 percent of Slavneft, Russia's eighth largest oil company by production, is expected to be announced next week, said Stephen O'Sullivan, an oil analyst with MC Securities, London.


Oil analysts said Friday that Kiriyenko's plan is a positive step toward profitable privatization of valuable government assets, but they wondered whether investors will be willing to pay premium prices for the second-tier oil companies to be sold this year.


"This is the first time market price has been mentioned in setting sales prices," said Alexei Kokin of Renaissance Capital. "But I don't think they will be able to stick to the 1.5 multiple."


Kokin used as an example the planned sale of a 34 percent stake in Eastern Oil Co. Eastern Oil's market capitalization is roughly $3 billion, making a 34 percent stake worth about $1 billion. Under the new plan, the share packet would cost $1.5 billion, a price Kokin said is "enormous and not realistic."


By contrast, the government has stated it hopes to raise $1 billion from the sale of more than 90 percent of Rosneft, a company whose worth exceeds that of Eastern Oil, according to one Moscow analyst.


Russia's State Property Fund and State Property Committee have traditionally set auction starting prices using measures that are viewed to be largely arbitrary, while powerful Russian banks have used their ties to the government to secure large stakes in Russian companies for prices far below market value.


A property fund official said Friday that dates previously set for cash auctions of Sibur, Norsi Oil and Eastern Oil could be changed.


"Those were approximate dates; no final dates have been set, nor have starting prices," said Vladimir Yefemchik, editor of a bulletin that details upcoming privatization sales. All three auctions were to be preceded by investment tenders that could be run according to Kiriyenko's proposed format, although Yefemchik would not comment on the plan.