Kremlin fuels surge in Russian oil deals

Financial News

Jason Corcoran in Moscow

01 June 2009

The state is thought to be using the crisis to tighten its grip on the country’s energy industry

The recent spurt in acquisition activity in Russia’s oil and gas sector underlines the power state-controlled entities enjoy in dealmaking.

Industry analysts claim the Kremlin is using the economic crisis to exert greater control over oil and gas assets, sometimes at the expense of foreign-owned and independent energy companies.

Thomas Beck, director of corporate finance at KPMG in Russia, said that recent deals had largely been driven by the Government and realism on pricing by both sellers and buyers.

He said: “There has certainly been an uptick in M&A activity during the second quarter so far. A lot of this is in the very early stages and, where we have seen deals, most of them have been Government-driven. This modest recovery should continue at the same pace until the end of the year when we should see some improvement in the real economy.”

Last week, mid-sized oil company Sibir Energy agreed to a takeover offer from Gazprom Neft in the state’s first big play for the assets of indebted tycoons. Gazprom Neft, the oil arm of state energy company Gazprom, had previously seen off a rival bid for an initial 16% stake in Sibir by Anglo-Russian joint venture TNK-BP. A source familiar with the situation said: “TNK-BP was either naive or called it badly. The Kremlin may have given the nod to Gazprom which is something TNK-BP would have struggled to get.”

Credit Suisse had started an accelerated bookbuild of Sibir’s shares, offering 430p a share on behalf of TNK-BP, but was trumped after Renaissance Capital intervened and offered investors 500p a share on behalf of Gazprom Neft.

Andrew Cornwaithe, co-head of investment banking at Renaissance, said: “Our structure to counter TNK-BP’s offer on a first-come first-served basis proved to be an attractive one for shareholders. In two and a half hours, we had achieved our client Gazprom Neft’s objective in acquiring a sizeable minority position in Sibir.”

Gazprom Neft has since amassed a 27.5% stake in Sibir, which stopped trading in February after it became known that Shalva Chigirinsky, one of the firm’s major private shareholders, owed the company $325m (€230m).

Gazprom is now expected to acquire an additional 23.3% stake which is owned by businessman Igor Kesayev and has been held as collateral by state lender Sberbank.

Gazprom Neft has shown an acquisitive streak in recent years, most recently by taking stakes in Russian oil producers Slavneft and Tomskneft. Its 50% stake in Tomskneft in December 2007, for example, accounted for 11% of its total oil production in 2008 and prevented a year-on-year decline in production.

Gazprom also gained control of Serbia’s national oil monopoly NIS in December last year, and has formed alliances with European energy firms to build two pipelines to pump Russian gas to northern and central Europe, bypassing Ukraine.

Analysts said the completion on May 22 of a $2.5bn deal by conglomerate Sistema to acquire six oil production, refining and marketing companies in the Bashkortostan region of Russia had all the hallmarks of a Government-sanctioned deal.

Pavel Sorokin, an oil analyst at UniCredit in Moscow, said: “If you look at Sistema’s loan conditions, they don’t have to pay interest to the state for two years. They are primarily involved in telecoms and I can see them selling the assets on to state-controlled Rosneft.”

Sorokin said independent oil and gas producers could compete better for assets in western Europe and in the neighbourhood of the Commonwealth of Independent States than at home. Novatek and Lukoil are looking to do deals domestically and overseas but even these come within the Government’s sphere of influence.

Independent oil company Lukoil recently considered a bid for Spanish energy firm Repsol and last year added a joint venture with Italian refiner ERG to other European assets. On a trip to Spain, Russian President Dmitry Medvedev criticised the reaction in Spain to a possible bid from Lukoil. He said claims that the proposal would endanger Spain’s security were based on “stereotypes” and contradicted “the idea of a united Europe”.

The board of gas producer Novatek last week approved the purchase of a 51% stake in the Yamal Liquefied Natural Gas (LNG) project in east Siberia for $650m.

Yamal was previously thought to belong entirely to Gazprombank, although Novatek said it had acquired the stakes from three companies related to Volga Resources, which is reportedly controlled by Gennady Timchenko, a prominent businessman with close links to Russian Prime Minister Vladimir Putin.

Oleg Maximov, a senior oil and gas analyst at private investment bank Troika Dialog, said: “Volga Resources is a circa 5% shareholder in Novatek. Whatever the case, such a large field could only have been transacted with Gazprom’s blessing.”

Timchenko, who also has a major stake in Gunvor, the largest trader of Russian crude oil and products, is thought to have a stake of about 5% in Novatek as he seeks to diversify his businesses. Russian daily newspaper Kommersant said the sale of Yamal would enable him to double his stake in Novatek to about 10%.

Investment banks are beginning to capitalise on the M&A activity. Deutsche Bank has recently hired William Donovan, former head of M&A for oil and gas at Goldman Sachs, while UBS has tapped Maxim Moshkov from US hedge fund giant Farallon Capital Management to run the bank’s oil and gas research team. Citigroup and Nomura are also understood to be adding to their energy research teams in Moscow.

The Kremlin is assembling a unit to advise on foreign mergers and acquisitions in the energy sector and this month hired Natasha Tsukanova, head of investment banking at JP Morgan in Russia.

The purchase of 21.2% of Hungarian oil and gas company MOL for $1.9bn in March by Surgutneftegas indicated Russia’s appetite for foreign downstream assets in the west. Surgut, which has close links to the Kremlin, has long been seen as the most conservative Russian energy company, quietly hoarding a cash pile of around $23bn.