● Russian Oil Production Up but Resource Nationalism Continues
By Sven Ridley-Wordich
17 Aug 2007 at 01:23 PM
resourceinvestor.com
AMSTERDAM (ResourceInvestor.com) -- Although Russian news agencies reported that oil production, which includes gas condensates, has increased by 2.8% to reach a level of 285 million tonnes in January through July 2007, the hidden crackdown by Moscow on the private oil sector continues. The Russian Ministry of Oil has reported that during the first seven months of 2007, overall primary oil refining increased by 5.2% to reach a level of 132 million tonnes, while gasoline output increased by 5.8% to 20.4 million tonnes. At the same time, total refinery production of the country has been around 35.7 million tonnes of fuel oil and 1.5 million tonnes of lubricants, respectively an increase of 5.7% and a decrease of 12.7%.
The latter picture shows a slightly positive situation, supporting claims made by Moscow that its oil sector is booming. However, international agencies continue to warn that Russia, based on its current investment portfolio, will not be able to supply contracted export volumes around 2012, confronting Europe with a very negative situation. How much the Russian figures can be trusted is still a question, as no outside independent financial analysis is available. Under Russian law, most companies, especially state-owned, are not obliged to give a full update on production, sales and revenues. It seems that Russia is following the same line as most OPEC oil and gas companies, leaving most of the analysis open for speculation.
At the same time, Russian president Vladimir Putin’s crackdown on privately owned oil and gas companies in Russia has made a new victim. The already very disputable Russian legislature has again forced a Russian player out of the game, when a Russian court reported that it had ruled the Russian state should be handed full control over $7-billion worth of oil assets previously owned by private companies based in the Volga region of Bashkortostan. This new move is one in a long line of enforced Russian state control over its formerly booming private sector.
It needs to be admitted that most Russian oil and gas companies - and their owners - have made a fortune based on illegal or disputable tactics, but the open attack on the private sector is worrying most Western analysts. Not only Russian companies have been feeling the pressure from the Kremlin, as Shell [NYSE:RDS-B], BP [NSYE:BP], Total [NYSE:TOT] and others have learned the hard way. Russia’s former leading oil and gas company Yukos, led by currently imprisoned CEO Mikhail Khodorkovsky, was the main victim of Putin’s quest to regain full control of one of the country’s most vital economic sectors.
The new court decision is being seen as just one step further towards full control, which is expected to be put in the hands of the state-owned giant Gazprom. In addition to the latter, another Russian state-led oil company Rosneft is also in the game, as some assets are being put in the portfolio of this company at the same time. As has been the case with Yukos, the new court decision was based on tax claims made by the government. The former companies’ lawyers have still stated they will appeal against the court decision, but analysts don’t expect any other results.
Two major players, Bashkir and Bashneft, have been the main victims the last days. Russian sources indicated that the Bashkir assets include mid-sized oil producer Bashneft, refineries Novoil, Ufimsky, Ufaorgsintez and Ufaneftekhim. Bashneft, which is largely a refiner with a capacity of 400,000 barrels per day (bpd), holds crude oil production of 240,000 bpd. It seems that the Russian government now has stepped up its efforts, as it has slightly shifted its attention from oil producing companies to downstream operators. The latter have become main targets as Russia’s two main companies, Gazprom and Rosneft, are still battling with a lack of overall refining capacity.
The past days, another saga has also continued. Yukos’ last assets have been sold off by the government via another so-called “open auction,” which has been proven before to be a major farce, totally orchestrated by the Kremlin. Yukos’ last assets, largely based abroad, have been bought according to official reports by an unnamed source. The latter issue could have major repercussions, as Rosneft first has stated that one of its units was the winner. Several hours later, this claim was retracted without any reason given. Analysts expect that the Kremlin has put a stop on information, probably afraid to show its face.
The international Yukos assets have been of interest to several players, but no success was even possible. The auction has sold assets held by Dutch unit Yukos Finance UK BV, which included a 49% equity stake in Slovak pipeline operator Transpetrol and some $1.5 billion in cash. It is rumoured that Rosneft or Gazprom are still holding these assets, as they are a possible strategic part in both companies’ strategy - under instigation of the Kremlin - of owning downstream assets abroad to secure its own outlets to the West. The Slovak pipeline is a main connection point to Austrian or German markets. Financial analysts have been questioning the total auction procedure, as the Russian state has started the sale of the Yukos assets at a totally ridiculous price of $300 million. The sale is now being challenged in the Dutch courts. Former Yukos shareholders are continuing their fight in court.
At the same time, the Slovak government also has put some questions on the whole deal as Transpetrol, which is a 51% state-owned entity of the Slovak government, sees the ownership as a national strategic issue. It has been trying to buy the Yukos equity part, but no reaction in this case was received from the Kremlin.
In addition to the current resource nationalistic strategies employed by the government, new surprises are already in the making. Russian government officials have indicated that they are preparing new, much stricter rules on the use of Russian mineral resources by foreign companies. In a remark to the press, Russia’s Mineral Resources Minister Yury Trutnev stated that there will be new proposals entailing that foreign companies be prohibited from acquiring a controlling stake in the development of all offshore deposits and any onshore deposit containing more than 70 million tonnes of oil, 50 billion cubic meters of gas, 50 tonnes of vein gold or 500,000 tonnes of copper.
This new law could have severe consequences for international operators in the country, analysts expect. The main driver behind the latter, as indicated by the government, is the fact that Russia wants to increase its overall tax regime, based on the situation that 56% of direct tax receipts for the budget of the Russian Federation depend on mineral resources. Remarkably, the latter proposals come just after Russia stepped up its offshore search for mineral resources, as was presented by its disputed claim on the continental shelf on the Arctic.
The coming months, it seems that companies will not only receive postcards “with love from Russia.” The love coming from the Kremlin is only the love for its own bank accounts. International players need to reassess their investment strategies further; until now it seems that Russian gold is still blinding realistic assessments. Not all gold is what it seems!
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