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. Last Updated: 07/27/2016

Yeltsin Decree Risks Rosneft's Sale Price




The privatization of Russian state oil company Rosneft may not turn out to be the big money spinner the government had hoped after a decree Wednesday reduced its influence over future big oil and gas deals.


The decree, signed by President Boris Yeltsin, said Rosneft no longer had the right to sell government stakes in future hydrocarbon production sharing agreements.


It also removed Rosneft's right to manage state stakes in dozens of firms that are not in the Rosneft company structure.


Rosneft was created as an umbrella organization to handle the government's stake in several oil producing and refining companies that did not join the new vertically integrated oil groups that sprung up after the Soviet Union collapsed.


It is also an oil producer in its own right, pumping 13 million tons, or 260,000 barrels per day, in 1997.


Rosneft, now the last great oil property still in state hands, is due to go under the hammer later this month, and removing its rights to control government property makes commercial sense, oil analysts said.


They added that most bidders had expected the decree.


But the government's decision to take back control over the sale of its share in lucrative production-sharing deals was still seen by the company as a blow.


"As concerns the decree on production-sharing agreements, for some buyers this may affect the price of Rosneft," company spokesman Vladimir Vyunitsky said.


"From early next century, oil and gas will be produced from these agreements, and volumes will run to tens of millions of tons and billions of cubic meters of gas [a year]."


Production-sharing agreements are internationally recognized and allow firms to tap mineral deposits under favorable terms.


But getting the rights to develop major deposits under these terms is a difficult because the opposition-dominated lower house of parliament, the State Duma, has been slow to pass the appropriate legislation.


Rosneft already has a stake in the international Sakhalin I project to tap oil and gas off the shores of the Far Eastern island of Sakhalin. It also wants a stake in Sakhalin II.


Both are production sharing agreements, and are expected to be producing huge volumes of hydrocarbons into the next century.


Vyunitsky said Rosneft's share in existing production sharing agreements, including Sakhalin I, was not affected by the decree.


"The government is not demanding Rosneft's existing stakes be cancelled," he said. "This is a suggestion being put forward by other oil firms. The government has made no such statement."


Any cancellation of Rosneft's share in existing production-sharing agreements would severely dent its attractiveness in the eyes of bidders, who value it for those stakes.


"Bigger companies' interest in Rosneft would just wither," said one Western analyst.


The government hopes to raise $1.5 billion to $2 billion from the sale of Rosneft. The proceeds will be key to filling state coffers and making ends meet in 1998.


Some analysts played down the impact of Wednesday's decree on the company.


"The position [of Rosneft] in future production-sharing agreements depends on who the new master will be," said Ken Kasriel at Robert Fleming Securities in London.


"If it is Gazprom-Shell-LUKoil, then its influence could still be significant."


Russia's gas monopoly Gazprom linked up with Russian oil major LUKoil and Anglo-Dutch giant Royal Dutch/Shell to bid for Rosneft.


The other main pretenders are an alliance between British Petroleum and Sidanko of Russia, and Yukos, Russia's second largest oil producer.


Potential bidders have shied away from fully committing themselves to taking part in what promises to be the most fiercely fought of this year's big state sell-offs.


The government has yet to decide how Rosneft will be privatized. Prime Minister Viktor Chernomyrdin is expected to choose between offering 50 percent plus one share in a single block and 75 percent plus one share.