Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

State May Take Control Over Norsi

Norsi, the largest oil refinery in European Russia, may be transferred to presidential administration management an official at the Enegy Ministry has said.

If this happens, LUKoil's plans to purchase the factory at a low price will be dashed and activities at the refinery will be kept highly confidential.

According to Igor Gitlin, head of the state property department at the Energy Ministry, the ministry intends to establish a federal property complex at the Nizhny Novgorod refinery, which would be temporarily managed by the presidential administration.

Such complexes enjoy significant benefits including tax exemptions, which would also be applied to Norsi, an official said.

Norsi is part of the Norsi Oil Co., which is 85 percent state-owned.

Unlike most of the nation's other refineries, Norsi is not part of an oil holding. While it can refine 18.5 million tons of oil a year, Norsi Oil has no reserves of its own and has to pay other companies a premium for its supplies. As a result, Norsi has been on the brink of bankruptcy since 1996. The Energy Ministry put its debts at $70 million of which about 900 million rubles ($33 million) are owed to the federal budget.

The Federal Bankruptcy Service resolved May 12 to file for bankruptcy against Norsi, but has not yet done so. It was proposed the factory be sold by auction to a buyer that could supply not less than 6 million tons of oil per year. Norsi management hoped the buyer would be LUKoil.

LUKoil supplied the plant with 72 percent of its crude oil in 1999.

The Energy Ministry's Gitlin said the idea of creating a property complex at Norsi had come about as an alternative to bankruptcy.

"We believe it is wrong to sell a factory for kopeks, which has assets worth hundreds of millions of dollars. The management and the presidential administration fully support our stance," he said.

Ultimately, Norsi shareholders will decide. However, the state holds 75 percent of the votes in Norsi through Norsi Oil Co. and the State Property Fund.

Gitlin said a decision to convene an extraordinary shareholders meeting could be taken next week after a routine meeting at which the management and the presidential administration would be present.

LUKoil officials are not particularly worried about the news from Norsi.

"If the state wants to plant their flag in Norsi, then fair enough. We're not jealous. We weren't really prepared to pay big money in any case. There are plenty of other refineries in Russia and they are all reasonably cheap," said LUKoil vice president Leonid Fedun.

LUKoil may purchase one of the Bashkortostan refineries, which are newer and more efficient than Norsi, he said.

Not all of the officials are aware of the government's plans, said Igor Kachukov, head of management with the Financial Improvement Service.

"But if two such structures order it then the rest will toe the line," said a highly placed official at the Property Ministry.

Those who plan to transfer the factory to the presidential administration are sure that this will save it.

Tax write-offs will provide the refinery with funds to purchase oil at market prices and if the refinery gets 6 million to 6.5 million tons of oil per year its profitability will increase to 17 percent, Gitlin said.

Norsi would be able to survive the transitional stages on credits, with Central Bank subsidiary Eurobank prepared to extend a $100 million credit line to the planned property complex, he said.

Despite the positive financial claims, virtually all transparency at Norsi would go were it transferred.

The activities at state property complexes are kept confidential, though a certain amount of information can be gleaned from the Moscow Registration Chamber data base.

Gitlin, however, is certain that this will not lead to abuse by state officials. The estimate of Norsi's costs will be approved jointly by the presidential administration, the Energy Ministry and the refinery's management, while its annual report will be made available to a number of controlling bodies including the Audit Chamber, tax bodies and private shareholders, Gitlin said.

"Our planned compensation levels will give the management no cause to steal," he added.