Bashneft sale, a bellwether for Russian oil strategy: Fuel for Thought

When Vladimir Putin greenlighted the sale of Russia’s 50% stake in Bashneft in May, it became a test case for how the government may reshape Russia’s oil industry—would it opt for a more consolidated or diversified and competitive Russian oil market?

Analysts are also taking notes on how the government handles Bashneft’s privatization to see if it offers clues as to how it may deal with Russia’s largest oil company, Rosneft, which is also on the docket for privatization.

Bashneft, Russia’s sixth largest producer, has been one of the sector’s success stories at a time when ongoing low oil prices and Western sanctions have posed serious threats to producers’ investment programs and output plans.

Bashneft’s output grew by over 10% in 2015, and the growth rate in the first half of this year was only slightly less. The company achieved this despite being renationalized in late 2014 after its majority-owner Sistema and boss Vladimir Yevtushenkov, were accused of money laundering during the purchase of Bashneft shares.

The 75% transferred from Sistema at the time is now split, with 50% plus one share owned by the federal government, and a further 25% owned by the regional government of the Republic of Bashkortostan. So far, only the central government has said it intends to sell its stake.

If the government opts for consolidation, Rosneft may get the nod as the buyer. But several officials have been outspoken recently about Rosneft not taking part, seeing little logic of a privatization where one state-owned company buys another.

And a sale to the state-owned giant would raise questions of monopolization and weaken the image of Russia as a competitive market, some experts say.

Rosneft has already submitted its bid for the asset, according to reports by local media, but it is unclear whether Rosneft can win the Kremlin’s support to go ahead with the plan.

No doubt, Bashneft’s dynamic crude production growth would be a bonus to Rosneft. With an eye to its eventual privatization, the addition of Bashneft’s growing assets would increase Rosneft’s value at a time when Rosneft is struggling to maintain output levels as new projects fail to compensate for declining production at brownfields.

In terms of Rosneft’s own priorities, the asset acquisition strategy that saw it take control of TNK-BP and Itera in 2013 seems to have slowed.

If diversification is the way forward, several individuals and smaller companies have emerged with interest in the company.

Eduard Khudainatov, a former Rosneft CEO, is considered a strong candidate, who may move to acquire a stake in Bashneft via his Independent Petroleum Company.

There are doubts over how independent Khudainatov’s company is, however, with domestic tax investigators looking at links between Khudainatov and Rosneft, to see if the companies are actually close enough to be called affiliates.

Officials also said little-known Tatneftegaz, as well as businessmen Alexei and Yuri Khotin, may be interested in acquiring a stake in Bashneft.

Analysts have questioned whether these smaller players would be able to secure the necessary funding to buy a large stake in Bashneft. If they are, that would lead to greater diversification of the Russian oil market, signaling a change in the state’s approach to recent consolidation of the sector.

Lukoil may be asking for too much

The buyer which analysts said represents the most logical choice for Bashneft is Russia’s second largest producer, Lukoil. The two companies already work together on the major Trebs and Titov field, and Lukoil is a key crude supplier to Bashneft’s refineries.

But there are key issues to be resolved, namely over price and control. Lukoil CEO Vagit Alekperov said that in order to properly govern and optimize spending on such an asset a 100% stake is necessary. He is unlikely to get this, but purchasing the federal government’s full stake would at least give him control of the company.

As for a price, Alekperov’s number was nearly half of Bashneft CEO Alexander Korsik’s valuation of the company. Korsik estimated Bashneft’s worth at $7.5 billion in June, and Alekperov indicated in mid-June that a fair price for a 100% stake would be around $4 billion.

Some officials, market experts, and Bashneft’s CEO Alexander Korsik have said selling the company to a pool of investors would be the best option for both the government and the company.

Source: http://blogs.platts.com/

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