Category Archives: Russneft

FAS mum on Deripaska’s bid for Russneft as the oil firm prepares for leadership shakeups

Still no word on the sale of Russneft to Deripaska - From Russia’s Federal Anti-Monopoly Service (FAS) was expected to rule on Oleg Deripaska’s bid to buy the oil company Russneft by the end of November, but there is yet to be a word on their decision. The FAS had previously taken a one-week extension, allegedly due to changes in case examination procedure, but that deadline has also passed. They are now choosing to remain mum.

Rulings on two tax evasion suits filed against the oil company by Russia’s tax service, following the predominant trend, were also delayed.

Meanwhile, snap elections have been called for the boards of directors of five main Russneft subsidiaries. They are scheduled for late January through early February at the Varyerganneft, Saratovneftegaz, Orsknefteorrgsintez, Neftermaslozavod and Orenburgnefteprodukt subsidiaries. None of the five are those cited last month as having breached the terms of their resource licenses; investigations into those violations are currently underway.

A source within the company told Kommersant that two vice-presidents had also been recently replaced with Oleg Schegolev and Igor Marchenko, both former members of management at the natural gas firm Itera. Rumored to have been axed are Dimitry Romanov (vice president for corporate relations) and Olga Prozorovskaya (senior vice president for finances), both of whom shared seats on a majority of subsidiaries’ boards with embattled former Russneft head Mikhail Gutseriev. Another vice president, Sergei Bakhir, left for vacation and has not returned, theoretically opening his position for a management shift. He is facing a criminal charge along with Gutseriev, who is currently on the run from Russian authorities.

These leadership changes are seen as the first steps in preparing the company for inclusion under Oleg Deripaska’s holding company, Basic Element. The expectation seems to be that the FAS will have ruled before the scheduled votes for the boards of director, allowing Deripaska to insert his own management team into the boards’ makeup once his firm takes control.

Gutseriev's whereabouts are still a mystery - From russneft.ruSpeaking of Gutseriev, according to the British ambassador to Russia, he has not applied to England for asylum, nor are his whereabouts known by Interpol. He apparently used his connections in Belarus — stemming from a $90 million investment in the RussNeft-Bryansk oil firm there, 25% of which he then gifted to Lukashenko’s government — to escape from Russia. His final destination has been suggested as Switzerland (cited because of his close ties to Glencore, though I would imagine he would have had more dealings with the commodity trader’s London offices) or somewhere in the Middle East (referring to his Muslim faith and connections to the oil sphere). For now, though, it remains a mystery.


Russneft FAS ruling delayed a week, while decision by tax courts will come in “early 2008″

Still awaiting the fate of Russian oil company Russneft -- From russneft.ruDespite the expectation that by November 30th, Russia’s Federal Anti-monopoly Service (FAS) would rule on the applications of Oleg Deripaska’s Basic Element and Swiss-based trading firm Glencore to buy the assets of Russneft, the agency decided to postpone the decision until the next week. Citing a change in methodology which adjusted the time-frame alloted for such applications, this delay also gave the FAS a chance to observe the results of this weekend’s parliamentary election in Russia before making a ruling.

It also would have given the FAS a chance to see how a Moscow arbitration court ruled claims from the Federal Tax Service (FNS) on the seizure of Russneft stock due to tax arrears, but the court also decided to delay a decision. One case is postponed to February 6th with another pushed back to January 23rd. The muddled affair involves numerous defendants associated with various Russneft subsidiaries.

The State Property Management Agency is also involved in order to ensure that the agency will be properly represented in the resolution. However, the property agency’s representative failed to show up for a meeting on December 2nd, leading to the court’s decision to postpone a ruling. Instead, the court is pushing the parties involved to come to a peaceful settlement in these interim two months, though this was presumably already tried in early stages of the case.

The court may be hoping that the FAS’ decision on the sale of the shares along with the country’s “new” political situation following the elections will facilitate a settlement. Typically, the absence of a 3rd party representative has not been enough of a reason for such a delay, suggesting that this is the desire of influential forces.

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

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.

Russneft ruling coming soon; frustrated Deripaska: “big company, big problems”

In a recent interview, Deripaska classified the situation he’s facing in securing the rights to go ahead and take control of Russneft — Mikhail Gutseriev’s former oil company — as “big company, big problems.” The Federal Anti-Monopoly Service, in a case muddled by tax problems and inter-governmental clashes, is expected to rule on his application to purchase most of Russneft’s assets by November 30th. As was reported earlier, Basic Element is joined by Swiss commodities trader Glencore in seeking Russneft’s assets. It now appears that the two firms are seeking to split the oil company 75%-25% respectively.

Deripaska also laid out his plans for Russneft, specifically how he hopes to concentrate on “the development of oil refining and petrochemical plants,” since the current oil situation in Russia is much more suited to profits from sales of refined products, rather than from crude (as explained by a recent Wall St. Journal article). This environment, combined with the fact that many of Russneft’s oil fields are apparently in decline, makes investing in refining capabilities the logical choice. Estimates for the cost of upgrading Russneft’s refineries stand at around $1 billion, however.

Oleg Deripaska’s attempt to buy Russneft is just one example of how the Russian billionaire is spreading his interests. His airplane unit is linked with Bombardier over a potential deal; his previous expansion into Canada’s auto-parts maker Magna has led to (denied) rumors that he’s interested in Land Rover, Jaguar, or other American auto players; he recently bought a quarter stake in the Austrian construction firm Strabag, with plans to cooperate on Russian infrastructure projects; and he is looking to partner with a Canadian mining company to enter into the gold industry, echoing the planned diversification outside of the aluminum industry for his mining behemoth RusAl. Despite these moves, Deripaska still pledges to stay focused on Russia.

Russneft Update — Glencore joins Deripaska in the fray

After it was leaked earlier this week that a mysterious second bidder had submitted paperwork to acquire parts of Mikhail Gutseriev’s beleaguered Russneft, speculation on the challenge to Oleg Deripaska’s earlier bid centered on Roman Abramovich and Lakshimi Mittal, or state firms like Rosneft and Gazprom. It turns out that the papers were instead filed by Glencore, the Swiss commodities trader that originally cooperated with Gutseriev in the founding of Russneft (and had since continued the relationship). From MSNBC (via FT):

Alexander Temerko, the former Yukos vice-president and a business associate of Mr Gutseriyev, said Glencore’s filing, first made in September, was an attempt by the trader to protect its interests in the company after the bid by Mr Deripaska failed…Glencore helped Mr Gutseriyev found the company in 2000, lending more than $3bn and taking shares and oil as collateral. Mr Temerko said Glencore already held a considerable stake in RussNeft itself, while a banker familiar with the situation said Glencore owns stakes in Russneft’s production units.

The bid Glencore submitted to Russia’s Federal Anti-Monopoly Service was for three of those production units, and appears to be an attempt to keep itself involved in the successful oil venture.

Glencore had previously cooperated with Deripaska in the creation of the world’s largest aluminum firm in 2006, made from a combination of the Deripaska’s Rusal, the Russian company Sual, and Glencore’s aluminum assets. This history together was seen as a potential plus in the efforts of Deripaska to take over the reigns from Gutseriev, after the former chief stepped down under pressure. However, with Deripaska’s bid sidelined by apparently competing factions within the Russian government, Glencore stepped in (supported by its weight in the mining and metals industries) to attempt to regain control of the production units.

However, Glencore is not trying to take over the entire company — these 3 production units only account for about 15% of Russneft’s entire output. Instead, the bid for the firms, which are valued at around $800 million, could be a deal for Glencore to ensure it will recoup some of its outstanding loans. Glencore already controls significant stakes in three other production units stemming from a 2003 deal with Russneft. The Swiss firm also has an exclusive 10 year exporting contract (beginning Jan 1, 2004) for those three subsidiaries.

Deripaska’s bid for the company had stalled, allegedly over incomplete paperwork. Apparently, the additional documents arrived “a few days ago” and are in the process of being investigated. The overall fate of Russneft — including the three units pursued by Glencore — may still be a ways in coming, however.

Warrant out for absent Gutseriev

Gutseriev, by ITAR-TASS, on Gazeta.ruRussian prosecutors have now issued a warrant for embattled ex-head of Russneft, Mikhail Gutseriev, after he has apparently fled the country following the funeral of his 21-year-old son last week. He was confined to house arrest since soon after stepping down as head of the oil company citing undue state pressure (a charge he later recanted). Gutseriev faces up to six years in prison for tax evasion charges.

Prosecutors are now undertaking an international search for Gutseriev, and speculation has emerged over where he might turn up. London, the traditional Russian businessman hotspot, may have become too ladened from continued fallout over the Litvinenko poisoning and soured British-Russian relations. Some have cited Gutseriev’s ties to the Swiss commodities firm Glencore, suggesting he may end up in Switzerland. Others have brought up his Muslim background, saying he could be welcomed in a Middle Eastern country, perhaps where he could put his oil savvy to use.

The warrant adds a further obstacle to the completion of a deal turning the company over to Oleg Deripaska’s “Basic Element” (Bazel). Presumably, Gutseriev’s presence would be needed to finalize the transfer of Russneft shares. Bazel’s application to the Federal Anti-Monoply Service has already run into problems, and was apparently improperly submitted. This has fueled speculation that the deal is being sidelined by Kremlin forces who wish to have Russneft acquired by someone else, namely the government-controlled Rosneft. However, it was already assumed that Deripaska could very well act as a simple stop-over in the fate of Russneft, until the state oil major was able to gather the necessary funds to buy it from him, given his status as a relatively Kremlin-friendly oligarch. Denying Deripaska Russneft would suggest something else in the works.

A further — tragic — wrinkle in the story is the death of Gutseriev’s young son, apparently as a result of a car crash., however, reports that GIBDD (Russia’s State Inspectorate for Traffic Safety) has no record of the accident that killed him. If this was some sort of organized attack on Gutseriev’s family — and this is pure speculation, in the absence of access to any investigations or detailed circumstances — it suggests the involvement of a particularly nasty organized crime or terrorist element, as opposed to simple badgering through state resources and agencies by the Kremlin.

Boris Nemtsov, a member of the liberal Union of Right Forces party, suggests that the situation should not be seen as a parallel of the Yukos affair, but rather a result of tumultuous personal relationships, particularly stemming from Gutseriev’s involvement in the Caucasus region:

Это не новый ЮКОС, это государственный рэкет. Меня удивило, что он отдал бизнес. Должны были отстать от него, по идее, но, видимо, тут уже вмешиваются какие-то личные мотивы. Если они против кого-нибудь ополчатся, то мало не покажется. То, что это достаточно далеко от правосудия, у меня сомнений нет.

[This isn’t a new Yukos, this is a state racket. I am surprised that he gave up his business. They should have left him behind, was the idea, but apparently here already some sort of personal motives are interfering. If they are against someone being up in arms, then little is being shown. That this is far from justice, I have no doubt.]

In other words, something else is going on, besides the usual government methods of involvement.

Perhaps this ties in to some of the recent upswing in conflict from Chechnya and its neighbors, particularly Gutseriev’s native Ingushetia…

Deripaska expands his energy interests

Putin and Deripaska in 2006 - From Despite running into obstacles in his attempt to acquire Mikhail Gutseriev’s Russneft, Oleg Deripaska is continuing to pursue strategic energy assets. Vedomosti is reporting that Deripaska’s Basic Element is planning on bidding for a stake this fall in the electricity holding TGK-1. Gazprom, Viktor Vekselberg, and the Finnish company Fortum had all previously reported interest in the electricity firm, which powers St. Petersburg and was formed in 2005 from the assets of Lenenergo, Kolenergo, an Karelengro.

TGK-1 is currently controlled by Anatoly Chubais’ UES (of which Deripaska owns about 2%), but the electricity giant has been selling off some of its assets in order to raise money to modernize its aging infrastructure. Earlier this year, Fortum was blocked from gaining control of TGK-1 due to the firm’s strategic role of providing power to St. Petersburg. The Finnish company would likely seek to import some Russian power into Finland, since Finnish electricity rates are higher than Russia’s subsidized prices (and Russian energy sources — natural gas, specifically — are much cheaper than what is available in Finland). It seems Russia may allow Fortum to take part in the upcoming auction, so long as a balancing force could be found.

Gazprom already invested heavily into Mosenergo, the electricity firm that powers Moscow, and has about a 10% stake in UES. The electricity firm relies on natural gas (i.e. Gazprom) for about 70% of its power generation needs, and Gazprom views its investment in UES as a way to coordinate with its largest domestic customer on sales, modernization, and diversification. (Converting power plants to coal frees up more gas for the lucrative export market, for example.)

According to the Vedomosti article, Deripaska has been pursuing power generating assets in areas surrounding his aluminum plants, suggesting he is seeking control over a further extension of his industrial base. Pursuing TGK-1, however, has more strategic–and visceral–reach, due to its importance to St. Petersburg, which is Putin’s city. Some of his top aids in the energy sector were involved in Lenenergo early on, and it is doubtful he’d agree to have the firm passed into unqualified hands.

It will be interesting to see how Deripaska’s attempt to acquire TGK-1 will play out, especially concerning “competition” from Gazprom and Vekselburg (not to mention the foreign Fortum). Deripaska is already seemingly running into problems with Rosneft over the fate of Russneft — it would likely be tough for him to butt heads with Gazprom at the same time. One thing to look out for is whether Deripaska would be willing to cede control over Russneft in order to secure access to TGK-1.