Update on “sale” of Russneft as the firm faces the loss of licenses following violations

A smiling Mikhail Gutseriev - From ITAR-TASS via rbc.ruAs the end-of-the-month deadline approaches for Russia’s Federal Anti-Monopoly Service (FAS) to rule on the purchase of beleaguered oil firm Russneft by Oleg Deripaska’s Basic Element (Basel), two events have further convoluted the picture surrounding the transaction.

First, the general director of Basel stated last Monday that they were holding sale negotiations not with Russneft-founder Mikhail Gutseriev (or his proxy, since he is currently on the run avoiding an arrest warrant), but rather “with different people, the new owners of the company.” Apparently, Gutseriev had in fact managed to quietly sell his stake in the Russneft some time previously. According to Kommersant’s source, an entity “close to representatives of the state” purchased it for $3 billion. Undetered, Basel is continuing to pursue Russneft’s purchase, with negotiations likely placing the new price around $5-6 billion — netting the unknown intermediary billions of dollars.

Exactly when this previous transaction took place, and who was involved, remains unclear. Indeed, FAS application documents list two off-shore holding companies, not Gutseriev, as the Russneft owners. Apparently, an agreement between Deripaska and Gutseriev was settled in July, but following the receipt of $3 billion, Gutseriev fled the country leaving Deripaska to apply to the FAS for formal ownership rights. According to Kommersant, figures within Putin’s presidential administration (PA) raised issues about the sale to Deripaska, throwing a wrench into the whole scenario. Igor Sechin is the first name to pop into my head, given his status within the PA as well as his leadership position at Rosneft, one of the few firms within Russia likely able to muster the necessary cash for such a sale.

The fields and oil reserves (in millions of tons) Russneft may lose - From vedomosti.ru

Secondly, in an article that examines Russneft’s recently-released 3rd quarter report (.doc), Vedomosti notes gross violations by the firm’s subsidiaries that could result in the loss of development licenses for six fields. From Alexander Tutushkin’s article in Vedomosti (my translation):

Russneft’s report describes in detail the manner in which its subsidiaries fulfill the license agreements, and it recognizes numerous violations: failure to observe geological surveying work deadlines and a lag in oil production units as stipulated in the agreements.

Russneft hopes to fix these violations by the end of 2007, but given the severity of some of them, this will be very difficult for the firm to accomplish. For instance, Russneft subsidiary Benodet Investments was supposed to drill seven exploratory wells between 2004 and 2006 at the Yuzhno-Pudinskoe field, but by last month only one had been completed. The subsidiary Ulyanovskneft had yet to drill any of the four wells they were supposed to sink at the Pravdinskoe field, and subsequently produced only 3,800 tons of oil versus the prescribed 21,100 tons. Similarly, at the Raduzhoe field, none of the six wells stipulated in the license had been drilled, resulting in production of only 400 tons instead of 8,700.

The total A+B+C1 reserves of the fields in question are about 35 million tons, representing 5.5% of Russneft’s total, so their loss would not cripple the company. (I assume the figures quoted in the above graphic are not A+B+C1, and are instead a different classification, though no explanation is included in the article.) However, this represents another obstacle facing this embattled company, which had previously been enjoying relative steady and sustained growth.

Russneft’s vice president Edward Sarkisov stated that “the company does not have any serious licensing risks,” though some analysts quoted in the article disagree. If the violations are not addressed, Russia’s Sub-Soil Use Agency (Rosnedra) can reclaim the fields — though typically, firms are given time to self-correct the violations before these steps are taken. However, an examination into the violations has been launched by Rosnedra, to be headed by Oleg Mitvol of Sakhalin-II and Kovykta fame.

A source from Basel said that since the firm does not yet own the oil company, they have yet to investigate the licensing matters, “though we suspected that they existed.”

The combination of these two factors — having to pay around a 100% markup on the purchase, as well as the specter of further hounding from the state legal apparatus — is likely dampening Deripaska’s enthusiasm for the transaction. Nevertheless, it seems he remains set in his desire to break into Russia’s oil industry via Russneft. Hopefully his future there will not be as difficult as his entry into it.

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