Rising Russian state oil giant casts huge regional shadow

By Nick Allen Jun 17, 2006, 3:59 GMT

Gubkinsky, northern Russia - With the looming emission of billions of shares in Russia's Rosneft state oil company, a new energy giant is emerging from the Siberian swamps to bolster the Kremlin.

Rosneft's fortunes should theoretically also dovetail with growing national clout in energy supply - a possible replay of the Gazprom story, where the stock market value of the state-controlled gas monopoly soared as exports to Europe swelled, making it a frontline player in Russian foreign policy.

Tellingly, Rosneft's initial public offering first planned for mid-July would have directly preceded the summit of leaders from the Group of Eight (G8) industrial nations scheduled for July 15 to 17 in St Petersburg.

President Vladimir Putin will likely use the summit to convey demands for greater concessions - such as direct access to customers in Europe - in return for guaranteed supplies of Russian oil and gas to the EU. He is also expected to stand up to calls to liberalize the Russian energy market.

Due to organizational hitches, however, the Rosneft listing may now be delayed for several weeks, industry sources said.

Nonetheless, Rosneft is growing 'faster than any other Russian company at the moment,' says Vice-President Peter O'Brien, an American IPO expert who was recently hired as the company moved to internationalize its face. With his help, the listing is expected to raise at least 8 billion US dollars.

The fly in the ointment is the way Rosneft managed to move from being merely the seventh-ranked Russian oil producer to the second largest in just two years. Today it is hard on the heels of private company Lukoil for the number one spot.

In Rosneft's northern Russian heartland, officials are loath to discuss the 2004 dismemberment of the Yukos oil company of jailed billionaire Mikhail Khodorkovsky and the acquisition by the state of its prize assets.

'It was an economic war, one side won, the other lost, that's all there is to it,' said an oil worker who did not wish to be named.

'Two years ago we were all talking about this, now it's just boring,' added another.

Rosneft's staff includes many specialists who worked for Khodorkovsky. The fallen oligarch is now serving an 8-year jail sentence in Siberia for tax fraud after a trial that many view as having been engineered by the Kremlin to crush an ambitious rival.

Some 70 per cent of Rosneft's output now comes from Yukos' former main subsidiary Yuganskneftegaz, which was sold off in December 2004 at compulsory auction for 9.3 billion dollars to cover back taxes.

Even Putin's chief economic adviser at the time, Andrei Illarionov, called the sale to the state through intermediaries the 'scam of the year'.

Unfazed, the enlarged state company is pressing on with plans to boost production of crude by one third to two million barrels a day by the end of the decade.

'We feel 100 million tonnes (a year) by 2010 is a realistic target,' said O'Brien. Production in 2005 was 70 million tonnes.

Rosneft's history presents investors with a dilemma: how wise is it to buy into a company close to authorities that so ruthlessly dismembered Yukos in a highly politicized case? Will this protect investments in future or render them more vulnerable to changes in the line-up and policies of the leadership?

For now though, the reappointment this month of the deputy head of Putin's administration, Igor Sechin, as chairman of the Rosneft board of directors is expected to bring marked benefits.

And reservations about the IPO will likely be eclipsed by the anticipated dividends. Petrodollars continue to swill around Russia as its oil fetches up to 70 dollars a barrel compared to the 27 dollars per barrel calculated into the state budget.

This oil and gas muscle became a major issue in international relations. US Vice President Dick Cheney recently accused Russia of using its energy wealth to intimidate other countries.

Ukraine, Moldova and Georgia had their gas cut off by their powerful neighbour last winter amid pricing disputes. And as hopes fade for a unification of Russia with Belarus, subsidized energy prices for Minsk are also expected to be hiked in 2007.

While there is much speculation about who will replace Putin when he is due to step down in 2008, the Kremlin boss staunchly defends the renationalizations in the oil and gas sector. These included the state's purchase of a controlling stake in Gazprom last year.

Nor should Europe expect a U-turn in policy that will clear the way for foreign companies to snap up large swathes of the industry, he indicated at a June meeting with foreign news agency heads.

'I would stress that these are our energy systems, Russian money paid for the transport facilities and the (oil and gas-holding) depths of the earth belong to the Russian people,' he said.

But despite growls by energy officials that Moscow is dissatisfied over supply terms to the West and that resources will gradually be turned east, Putin assures Russia will remain a reliable partner.

'For 40 years Russia has supplied energy resources to Europe,' he told Deutsche Presse-Agentur dpa. 'Not for one day, not for one hour was there a breakdown,' he added, noting that shortages experienced in many countries in January were caused by Ukrainian pilfering of gas exports to Europe rather than by Russia failing its customers.