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. Last Updated: 07/27/2016

Putin Signs Pipeline Firms Merger

Itar-TassVainshtok, left, looking on as Putin indicates a change in the course of a proposed Far East oil pipeline last April.
President Vladimir Putin has signed a decree to merge oil product pipeline monopoly Transnefteprodukt with crude oil pipeline monopoly Transneft, the Kremlin said Monday.

The statement said Russia would keep at least 75 percent in the merged firm, which would be created within the next five months. Transneft would issue new ordinary shares to take over Transnefteprodukt, the statement added.

The government is building up state-controlled oil and gas companies, called "national champions," as Putin seeks to use the country's energy wealth to bolster its political status.

Transneft is planning new, multibillion-dollar export routes to Europe, avoiding transit countries and bottlenecks such as the Bosporus strait, and across Siberia to tap Asian markets.

"There's no obvious economic benefit to combining the pipeline operators although it satisfies the Kremlin's feeling that bigger is better,'' said Roland Nash, chief strategist at Renaissance Capital.

"Transnefteprodukt is a valuable asset, but the benefit is political. Transneft preferred shareholders are still unlikely to get a big dividend.''

Russian media have reported that Transneft might need to issue new preferred shares, but the statement made no mention of it. The statement also did not say whether Transneft's current head Semyon Vainshtok would lead the combined company.

"Transnefteprodukt is a very profitable business and, considering the advantageous economics of oil refining in Russia, demand for inexpensive pipeline transportation of refined products is likely to increase going forward," Aton brokerage said in a recent research note.

Analysts at Alfa Bank have said merging the pipeline infrastructure would bring little in the way of synergies, while a combination of the companies' seaport terminals could be positive.

Transneft is already the world's largest oil pipeline system and supplies much of Europe with crude.

Transnefteprodukt runs 19,000 kilometers of oil product pipelines with total annual transportation capacity of 30 million tons of light products, one-third of all Russian light product shipments.

The remaining two-thirds of Russia's light products and almost all its fuel oil are delivered by rail.

Transneft wants to build an $11 billion, 600,000 barrel-per-day pipeline to China by the end of this decade, while TNP's key project is a $1 billion gas and oil pipeline to the Baltic port of Primorsk, where Transneft already has a big terminal.

Industry experts have valued TNP at around $1.5 billion. The state fully controls Transnefteprodukt.

The state also controls Transneft's entire ordinary stock, which represents 75 percent of the firm's charter capital, while private investors control all of the firm's preferred stock, which represents 25 percent of the charter capital.

Transneft would need to issue new preferred shares as well as ordinary stock if it wishes to keep the 75-25 proportion.

Last April, Putin unexpectedly decided to shift the course of the proposed Far East oil pipeline away from Lake Baikal, surprising Vainshtok, who had made the case for the safety of the planned route, which was to come within 800 meters of the lake.

In May, a Moscow court banned all operations and trading in preferred shares of Transneft as part of an investigation. Trading in the stock was resumed in August.

Reuters, Bloomberg, MT