Russia's Energy Titans Prepare for Acquisitions

MOSCOW Oct 2, 2006 (Dow Jones Newswires from the Wall Street Journal)

Russia's state-controlled energy giants are gearing up for a new round of acquisitions that could give the Kremlin ownership of nearly half the country's oil production, the highest level since privatization of the Soviet industry began more than a decade ago.

Industry executives and others close to the situation say state oil company OAO Rosneft is seeking at least several billion dollars of financing to buy many of the remaining assets of OAO Yukos at state-mandated bankruptcy auctions in coming months. OAO Gazprom, the majority state-owned natural-gas giant, this week said it would be interested in buying out the Russian partners who now hold half of TNK-BP Ltd., a joint venture with BP PLC that is the third-largest oil producer in Russia.

TNK-BP's main Russian shareholders -- tycoons Mikhail Fridman, Viktor Vekselberg and Len Blavatnik -- haven't expressed a public desire to sell and company officials insist they continue to behave as committed long-term investors. But several people familiar with their thinking say that if the Kremlin were to indicate a desire for them to sell, they would likely agree as long as the price were reasonably fair.

Since it crushed Yukos with back-tax claims starting in 2003, the Kremlin has steadily reasserted control over the energy sector. While the growing state ownership is popular in Russia, pro-market government officials and analysts warn that it is likely to reduce efficiency and raise doubts about the outlook for production growth in the world's No. 2 oil-exporting country behind Saudi Arabia.

The current terms of the agreement between TNK-BP's Russian shareholders and BP requires the consent of both sides for any sale before the end of next year. But given the importance of maintaining good relations with the government here, BP would likely agree to a Kremlin-supported deal, according to people close to the company.

There are no discussions on a deal with Gazprom under way at the moment, however, and no deal is likely before next year, according to people close to the companies. But Alexander Ryazanov, the chief executive officer of Gazprom's oil unit, on Thursday said his company would be interested in buying the TNK-BP stake were it to come up for sale. He said it would be "no problem" for Gazprom to raise the money needed, which could be as much as $25 billion.

People close to the companies said his comments are partly an attempt to warn off potential rival bidders, especially Rosneft. In July, BP spent $1 billion to buy shares in Rosneft's initial public offering, helping the Kremlin meet its price target for the politically important issue.

People close to BP said the company might prefer working with Rosneft, which is much less bureaucratic and more business-oriented than Gazprom. But having ties with both state companies could also be an asset.

A deal with Gazprom, for example, might help unlock TNK-BP's massive Kovykta gas project in Eastern Siberia. That development has largely been blocked by Gazprom to date, and regulators are threatening to revoke the license to the project.

But one person close to Rosneft said that company isn't interested in TNK-BP's portfolio of largely older assets. A few newer TNK-BP projects in East Siberia might be of interest were they up for sale, this person said.

Rosneft's current focus, according to people close to the company, is the remaining assets of Yukos due to be auctioned in the next few months. Rosneft already bought Yukos's biggest unit after a controversial government auction in December 2004. Next to come on the block are two big oil-production units, as well as several refineries and regional marketing networks. Rosneft is said to be particularly interested in the profitable refining and marketing assets. Yukos's bankruptcy administrator will select a company in mid-October to value the assets before sale.

But Rosneft could face competition in the auctions from Gazprom, as well as Russia's big remaining private oil companies, OAO Lukoil and OAO Surgutneftegaz. Foreign companies aren't expected to participate. Rosneft has something of an advantage in the process, because it has about $5 billion of claims against Yukos already included in the bankruptcy proceedings and several billion more awaiting confirmation by a court.

Copyright (c) 2006 Dow Jones & Company, Inc.


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