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. Last Updated: 07/27/2016

Gazprom to Bid for Yuganskneftegaz

Gazprom will bid for Yuganskneftegaz as the Kremlin forges a massive state-controlled oil and gas major to include Yukos' main production unit.

The gas giant's new oil unit, Gazpromneft, will bid for Yuganskneftegaz, building up oil production to compete with major world energy companies such as ExxonMobil, BP and Royal Dutch/Shell Group, Gazpromneft general director Sergei Bogdanchikov said Tuesday.

"Gazpromneft will take part in the auction for Yugansk," a visibly nervous Bogdanchikov told a hushed conference at Gazprom's headquarters in southwestern Moscow.

"We will continue to work on acquiring assets because Gazprom must have two components of equal strength [in oil and gas] so that Russia has at least one really world-class company."

The announcement confirmed fevered speculation that Gazprom would take part in the auction for 76.79 percent of Yugansk. The Federal Property Fund said last month that the unit would be sold at auction on Dec. 19 with a starting price of 246.75 billion rubles ($8.65 billion).

Having Gazprom buy Yugansk allows the Kremlin to build up the gas giant's oil production as it crafts a state-controlled energy colossus capable of competing on world markets while destroying Yukos, whose controlling shareholders have been in conflict with the Kremlin for a year and a half.

Gazprom's purchase of Yugansk would give the Kremlin control over nearly 20 percent of oil output, as the state moves to strengthen its influence over strategic industries and unruly oligarchs. President Vladimir Putin indicated Tuesday that he would continue to fight the influence of oligarchs.

The planned sale of Yugansk -- one of the biggest asset transfers in Russian history -- is also a sign that the battle between Putin and Yukos founder Mikhail Khodorkovsky has reached its final stages with Gazprom as favorite and Yukos on the brink of bankruptcy.

Getting Yugansk, which produces 1 million barrels of oil per day, would boost Gazpromneft's oil production, helping to raise output to 88 million to 90 million tons next year, Bogdanchikov said. That is as much as LUKoil plans to pump next year. LUKoil is the country's second-biggest oil producer in output so far this year, trailing Yukos.

Bogdanchikov said production would total 125 million tons of oil per year in 2010 to balance Gazprom's massive natural gas output, the biggest in the world. Deutsche Bank has advised Gazprom to buy Yugansk, Surgutneftegaz and Sibneft, he said. "If you look at ExxonMobil, Shell, BP and others, you see they have different proportions, but close to 50 percent gas and 50 percent oil, so the second component of Gazprom must be as adequate as the first," he said.

Gazprom is very unlikely to have made the decision to bid for Yugansk without the Kremlin's blessing. Putin's chief of staff, Dmitry Medvedev, is chairman of Gazprom's board, which still has to approve the plans to bid. The board met Tuesday, but Gazprom said the bid was not included on the agenda.

The state is merging Rosneft and possibly other assets into Gazprom to boost its stake in Gazprom to 50 percent plus one share. Rosneft and other oil assets will be controlled by Gazpromneft. Bogdanchikov is also Rosneft president.

Senior oil executives said they hoped competition would be preserved in the oil and gas industry, which is increasingly dominated by the rapidly expanding Gazprom.

"Was it a surprise?" John Barry, Shell's president for Russia, said after the announcement. He declined to comment on whether Shell would bid.

"I can see the logic behind creating an integrated player, looking for certain synergies and economies of scale, and I look forward to competing with them," he said. "I would like to see it done in such a way that competition survives."

Bogdanchikov said Gazprom would tap international financial markets to fund the Yugansk bid, but gave no details. Gazprom said in a statement that it would borrow money to finance the purchase and then lend it to Gazpromneft.

"Finding the money should not be a problem. Gazprom is a first-rate borrower. And at the end of the day nobody is going to look too closely at the fact that the deal is questionable," said Valery Nesterov, an oil and gas analyst at Troika Dialog. "The issue right now is whether Gazprom would be able to raise the funds in time for the auction."

Gazprom's aggressive expansion plans have been opposed by some ministers, including Economic Development and Trade Minister German Gref. Gref refused to discuss Bogdanchikov's announcement, saying he did not have enough information, Interfax reported.

But Interfax quoted a source within Gref's ministry as saying Gazpromneft's bid for Yugansk would contradict the government's long-term strategy. The source said the government still wants to break up Gazprom to create a competitive market.

A number of international energy companies have been tipped as possible bidders for Yugansk, possibly with Gazprom or oil companies such as Surgutneftegaz.

"I think some would be tempted to bid -- business is business. But I don't know of any who are getting ready to bid," Andrew Somers, president of the American Chamber of Commerce in Russia, said when asked whether major Western energy companies could bid.

The daily Berliner Zeitung reported Tuesday that German Chancellor Gerhard Schr?der is trying to help set up a finance consortium that would buy stakes in oil and gas projects in Russia.

The paper, which cited people familiar with the situation, said Allianz, Siemens and leading energy utilities were among the companies contacted about getting involved, with Deutsche Bank as a coordinator of the project. The German Embassy in Moscow declined to comment on the report.

But foreign bidders may be scared off by the threat of legal action from Group Menatep, which controls Yukos, industry insiders said. "We continue to consider this an illegal process in breach of Russian law," Group Menatep director Tim Osborne said. "Any buyer will have to run the risk of future litigation. If they buy Yugansk, they will buy it with all its liabilities and will be forced to face up to these obligations."

Yugansk is the guarantor of more than $1 billion in loans from Menatep.

"We have to assess whether it is within our rights to demand immediate payment," Osborne said.

Staff Writer Catherine Belton contributed to this report.