Kremlin increasing dominance over oil

LONDON: The Kremlin’s oil arm Rosneft is poised to raise its share of the industry above 50 percent, Russia’s top private producer said while warning that excessive state control is already hampering development of new resources.
“It looks like there will be a super champion that controls more than 50 percent of oil production in the Russian Federation,” said Leonid Fedun, vice-president and the second largest shareholder in Russia’s No.2 producer Lukoil.
State-controlled Rosneft, Russia’s biggest oil producer, is seeking to buy BP out of its TNK-BP joint venture with a group of Soviet-born tycoons in a deal worth more than $ 20 billion.
Rosneft is then expected to follow up with a similar-sized transaction, buying the rest of TNK-BP from billionaires Mikhail Fridman, German Khan, Viktor Vekselberg and Len Blavatnik.
Fedun said he believed both deals will go through. If they do, the Kremlin’s share of the world’s largest oil industry will rise above 50 percent from the current 40 percent.
“I don’t know what the shareholders’ arrangements are but, by law, you have to make a mandatory offer if you buy more than 30 percent in a company,” said Fedun, whose personal worth is put by Forbes magazine at $ 6.5 billion.
Russia privatized its oil industry, the world’s largest, under President Boris Yeltsin in the 1990s but regained 40 percent in the last decade under the presidency of Vladimir Putin. The biggest private company, YUKOS, was nationalized and its politically active chief Mikhail Khodorkovsky jailed for tax evasion.
The Kremlin limited access by privately-owned companies to big Arctic fields and passed investment legislation subjecting large transactions to state approval.
“The situation is back like it was 1993, when there were only (private) Lukoil and Surgut and (state-owned) Rosneft. What does this mean? It means that, as always, the stronger will finish off the weaker,” Fedun said.
Rosneft’s expansion is led by its chief executive Igor Sechin, formerly a top government energy official and a close ally of President Vladimir Putin.
Fedun said the Kremlin’s rising role was still tolerable and would not fully destroy competition.
“Fifty percent is not that dangerous,” he said but warned that Russia was already losing competitiveness in some areas.
“Of course, when you have a lot of players, you get efficiency. Just look at how Norway is developing its offshore and how we are developing our northern seas. In Norway, they have practically all their offshore zone developed,” he said.
“We, by contrast, have created a club for two companies. Maybe this is good for the companies but not necessarily good for Russia,” he said referring to Russia’s decision to allow only Rosneft and state-controlled gas company Gazprom to lead development of Arctic resources.
“I have no doubts the government will sooner or later open up the doors. If you open up to small companies, venture capital the situation with the Arctic would be clearer. This is how West Africa and Brazil were developed,” he added.
Lukoil is set to benefit in coming years from new tax breaks on development of heavy oil that the government has introduced.
It also halted a decline in output in West Siberia and plans a steeply increase in dividends to catch up with Western peers.
The firm’s free cash flows would soar to over $ 20 billion a year from 2021 from an average of $7 billion in 2010-2021. Of that sum, 40 percent would go to dividends and share buy-backs by 2021, up from 23 percent in 2007-2011.
The dividend decision was indirectly encouraged by the Kremlin after Sechin moved from the government to Rosneft, where he turned into an advocate of dividend payments.
Lukoil’s chief executive Vagit Alekperov said dividends will rise because the company was no longer feeling “negative pressure” to artificially cap them.
“Before we were told that by paying high dividends, we were effectively encouraging capital outflows from the country. Now this is no longer the case,’ said Fedun.