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. Last Updated: 07/27/2016

City of Moscow Strengthens Oil Holdings

The City of Moscow is joining forces with several oil majors to expand its oil holdings, a move analysts said was designed to provide Mayor Yury Luzhkov with greater control over the city's oil supply as well as giving him access to new cash flows necessary to fuel his presidential campaign.

Luzhkov signed a decree last Friday merging the city-owned Central Fuel Co., or CFC, into the recently created Moscow Oil Co., or MOC. CFC runs dozens of gas stations around Moscow and owns a controlling stake in the Moscow Oil Refinery, which supplies the region with petroleum products.

In a swap for the 100 percent control of CFC, the city will receive at least a blocking 25 percent stake in MOC, said its president, Ernest Bakirov, in a telephone interview Wednesday.

Stakes are being contributed to the company by oil producers Evikhon, Yugraneft and Sibir Energy and Oka-Oil, which owns storage tanks in the Moscow region and is planning to build a refinery. In addition, Sibir Energy is handing over a 26 percent stake in Yugraneft and a 20 percent stake in Evikhon, the Nefte Compass oil newsletter reported.

"[Shareholders of] Evikhon, Yugraneft, Sibir Energy and Oka-Oil will bring in more then 50 percent of their shares, so the controlling stakes in these firms will go to the Moscow Oil Co.," Bakirov said.

Evikhon, Yugraneft and Sibir Energy are expected to provide MOC with reserves of more than 500 million metric tons of oil, according to Bakirov. As part of its contribution to the new company, the city of Moscow will put up 200 plots of land for new gas stations along with infrastructure and transportation, Bakirov said. CFC already operates 96 filling stations mostly in Moscow region via its 51 percent stake in retail firm Mosnefteprodukt.

Construction company ST Group, which has close ties with the city government, is also taking part in MOC, but its role is unclear.

As the result of the deal, the assets of the company will go up to $1 billion by the end of next year, Bakirov said.

When MOC was created in February, the city of Moscow contributed 20,000 rubles to its charter capital. Currently, its charter capital is worth 83,000 rubles ($3,400) f the legal minimum needed to register a corporation. Luzhkov is the chairman of the Moscow Oil Co.'s supervising board, which is part of the board of directors.

The formation of MOC will allow Luzhkov to fulfill his dream of securing crude oil deliveries for the Moscow Oil Refinery independent from commercial traders f a goal he has pursued since CFC was created in 1997.

CFC owns a 51 percent stake in the refinery, which is capable of producing 12.2 million tons annually.

Currently, the Moscow Oil Refinery produces roughly 60 to 70 percent of the gas used in Moscow, but the lion's share of this is produced from crude oil supplied by LUKoil, Tatneft and other oil traders.

Last year, the refinery experienced a 9.5 percent drop in production, when oil companies hiked crude exports at the expense of supplies to domestic consumers.

The exact share of MOC that the city will control is to be determined after an independent appraisal, Bakirov said. Currently, the company is running a tender for an appraisal company, with its results to be announced in about two weeks.

"We need to objectively know the share price for MOC," Bakirov said.

For Luzhkov's new partners, the deal will give them stakes in Moscow's only oil refinery and a guaranteed share of the city's lucrative market, providing them with a hedging opportunities in case of new oil export restrictions. The government slapped tariffs on oil exports earlier this year in a bid to raise budget revenues.

Betting on Luzhkov's political future could also be risk-free for the companies: Even if he doesn't win the presidency, Luzhkov won't lose control over Moscow.

The entire Moscow oil market is estimated to be worth $3 billion to $5 billion a year.

Analysts said the new company was a bid by Luzhkov to create another cash cow for his presidential campaign.

"This is not just an attempt to replenish campaign coffers, but a way to build stronger links with regional governors through economic ties," said Andrei Ryabov, a political analyst with the Moscow Carnegie Center.

But Bakirov said the city didn't have such motivations.

"We would love to do that, but we won't have the time," he said, laughing. "The only people who currently make any money in the company is the Moscow Oil Refinery."

MOC does not expect to make any profits for three to four years. The main reason to create Moscow Oil Co. was to give the city of Moscow a lever to control oil supply and prices in the city and to "alleviate social pressures," he said.