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. Last Updated: 07/27/2016

Khristenko Hints at Oil Champion

MTKhristenko, left, attending the MAKS air show last year with Defense Minister Sergei Ivanov and President Putin.
State-owned Rosneft could eventually merge with Surgutneftegaz to help create a Russian champion able to compete with the biggest global energy giants, Industry and Energy Minister Viktor Khristenko said in an interview published in Vedomosti on Monday.

"Rosneft really can start producing 100 million tons per year by 2010 under its current configuration. This is a serious enough amount to make the subject of merging it with Surgutneftegaz realistic," Khristenko told the paper.

Even though Khristenko also said he saw no need to conduct a merger immediately, his comments came as the first real sign that the government is considering merging the two companies, a deal long speculated over.

Surgut, which is considered close to the Kremlin, and Rosneft both have licenses to develop vast fields in eastern Siberia.

Khristenko told Vedomosti that merging Rosneft with Surgut could make them more competitive.

"The consolidation of assets ... is not a matter of fashion. This is a response to the risks and challenges posed by the global market," he said. "In the end, only a powerful company can become transnational.

"But despite all the pluses of consolidating these assets, I don't see any real need currently for joining Rosneft and Surgutneftegaz," he said.

Khristenko's remarks show the government has not yet given up on the idea of creating a state-controlled global energy giant along the lines of Saudi Arabia's Aramco, said Chris Weafer, chief strategist at Alfa Bank.

Last year, there was speculation that a planned merger between Rosneft and state-controlled Gazprom could later expand to involve Surgut too.

But when the tie-up between Gazprom and Rosneft fell through amid infighting, the strategy for the creation of a state-controlled Russian supergiant seemed to fall off the radar screen.

Now, with Surgut sitting on more than $10 billion in cash, the Kremlin could ask the company to use its funds to link up with Rosneft, Weafer said.

"I can't imagine they are looking at a full-on merger yet, but in the meantime there could be investments in crossover holdings to cement [the two companies'] business relationship," he said.

Rosneft is 100 percent state-owned, while more than 50 percent of Surgut is controlled by the company's management through a complicated structure of treasury shares.

While Surgut's market capitalization currently stands at $38 billion, Rosneft has been estimated to be worth more than $40 billion. For the state to retain control of a merged entity, other state assets such as Gazprom would also have to be folded in, Weafer said.

In the short term, Surgut could use some of its cash for a strategic holding in Rosneft, Weafer said. The government is planning to sell off part of Rosneft in an initial public offering or by private sale to a strategic investor in order to pay off a $7.5 billion loan due this year. The government, which is considering both options, has said it plans to raise up to $17 billion through the deal.

Khristenko told Vedomosti that the government still had not decided how it would handle the sale. "In my view, 2006 will be decisive in determining the strategy," he said. Conducting an IPO could help attract more interest from strategic investors, but nothing can be decided until an evaluation of Rosneft's value has been completed, he said.

A strategic investor has not yet been chosen, he said.

"At the moment there are too many 'ifs' to try to pick the specific investor right now. Although I think it's already clear which countries these investors could come from," he said.

"China and India are running quite aggressive policies when it comes to oil and gas acquisitions. At the same time the list of big players on the global energy market is very short -- around 10 companies."

Khristenko also conceded that no decision had been made yet on whether to consolidate Yuganskneftegaz into Rosneft ahead of the IPO. Rosneft acquired Yugansk, Yukos' main production unit, following a controversial auction in December 2004. Consolidating it into Rosneft could open the company to lawsuits from Yukos shareholders who claim the state expropriated Yugansk. But without Yugansk, Rosneft's production base drops sharply.

"It's clear that an IPO without consolidating Yuganskneftegaz would be a totally different story and would present different opportunities for Rosneft. The assets of Yuganskneftegaz would raise the capitalization," he said. "Before, I talked about separating Yuganskneftegaz from Rosneft, but one should not be dogmatic about this. The work of legal and financial consultants is coming to a close, and on this basis a final position will be reached."