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SUMMARY: Russia Pulling Out of Oil Companies

MOSCOW. Aug 4 (Interfax) - Less than a year has passed since the government made new privatization plans for the country's major oil assets and the strategy now proposes to add Transneft (RTS: TRNF) and Zarubezhneft to the list, and to sell off Rosneft (RTS: ROSN), which has been beefed up with the assets of Yukos, in its entirety. First Deputy Prime Minister Igor Shuvalov's proposal to President Dmitry Medvedev is revolutionary. Just a year ago the plans were still very bold, but much more modest. Now the government proposes to sell off Rosneft and Zarubezhneft by 2017 and only maintain a golden share in the oil majors. Russia could by 2017 have just one state oil company Gazprom Neft (RTS: SIBN), which is part of the gas monopoly Gazprom (RTS: GAZP). Former Yukos boss Mikhail Khodorkovsky, who is due for release in the fall of 2016, may see his former assets almost completely out of state hands. Foreign companies could obtain access to Russia's huge offshore hydrocarbon reserves.

Rosneft: re-privatization

Rosneft became the number one oil producer and refiner in Russia (112 million tonnes of crude in 2010 and 121 million tonne target for 2011) after buying Yukos assets. Rosneft then held an IPO in Russia and on the London Stock Exchange - it received around $10.6 billion for 15% of Rosneft shares. The price per share was $7.55. BP purchased 1.4% of the shares.

As of August 1, 2011, state-owned Rosneftegaz owned 75.2% of Rosneft, another 9.5% are treasury shares owned by Rosneft subsidiary RN-Razvitie (which bought 9.4% in Rosneft during sale of Yukos assets). The Rosneft free float is 15.3%, of which 11.8% are GDR.

A privatization program was announced in November 2010 proposing the sale of 25% minus one share of Rosneft by 2015. The government said it would sell 15% on the open market and 10% minus one share were to be used for share swaps.

"We reckon that after 2015 Russia's share of Rosneft can be reduced and we may relinquish control over this company," Shuvalov said at the time.

Russia agreed to transfer 9.5% of its shares to BP in exchange for 5% of the British oil company in mid-January 2011. That would have given BP 10.8% of Rosneft if the Russian shareholders of TNK-BP (RTS: TNBP) had not blocked the deal, which involved BP's inclusion in Rosneft Arctic projects.

Rosneft President Eduard Khudainatov said in April 2011 that management would tell the government not to privatize for three to five years. "It is better to sell in 3-4 years with double the capitalization than to sell now and receive less," he said.

However, a few months later at the St. Petersburg Economic Forum, President Dmitry Medvedev talked in favor of a more aggressive privatization policy.

Two weeks ago when Medvedev met the Rosneft chief he asked: "How ready is Rosneft for privatization today?" "Company management is making preparations in accordance with your instructions. I, as any manager that says they need more time will favor some further preparation, but we are ready to go," Khudainatov said.

"We will not sell anything just like that. But if we consider that now is the right time the decision will be made and we need to carry out the necessary work, but this task requires some preparation," the president said.

Rosneft is unlikely to be ready for large-scale privatization by 2012 - the company is expecting some offshore tax breaks from the government to make its projects more profitable and the company more expensive.

As unofficial reports that the government planned to sell off its entire stake in Rosneft appeared early this week (August 1), Rosneft shares on the MICEX jumped to 238 rubles from 233 rubles and then fell to 230.5 rubles per share on August 2-3. When trading closed Wednesday, Rosneft's capitalization was around $81 billion. In contrast, the world's largest oil company Exxon Mobil is valued at around $360 billion.

Monopoly for sale

Disagreement about Rosneft's privatization mostly concerned the size of the stake to be put up for sale and when the sale would take place, but for Transneft the ministries asked whether a sale was necessary. The Finance Ministry proposed in the summer of 2010 that a 27.1% stake in Transneft be sold, reducing the government share to a controlling stake. Transneft Chairman Nikolai Tokarev and Energy Ministry Sergei Shmatko were firmly against the proposal and in the fall Shmatko told the press the government would not discuss Transneft privatization for another five years.

The Energy Minister said the sale of only 3% of Transneft shares had been considered. "We reckon that this would have changed the approach of company management. The risks that would arise from the sale of the shares are unjustified," the minister said.

Tokarev said that if Transneft shares were sold, oil companies would start to lobby their interests in gaining access to pipelines.

The government owns 100% of voting shares in the company and 75% of issued shares. Private investors own the other 25%. It was reported earlier that Interros and structures controlled by Basic Element are the major holders of preferred shares.

Now the Finance Ministry's position has won over and the government proposes to reduce Russia's stake to 75% plus one share, beginning in 2012.


There has been almost no talk about Zarubezhneft privatization before. The privatization plan approved in the fall of 2010 did not mention the company, because, as Shuvalov said, Russia had to verify whether it was bound by any obligations to its foreign partners. Zarubezhneft's main partner is Vietnamese state company PetroVietnam.

Zarubezhneft Chairman Nikolai Brunich said last week that the company is planning an IPO after 2013 if the government's privatization plan does not change.

Soon Zarubezhneft, after merging with Arktikmorneftegazrazvedka, will obtain the right to work on Russian offshore operations, which foreign companies cannot access without establishing joint ventures with Russian companies. Only Rosneft and Gazprom currently have such rights.

Medvedev signed a decree at the end of April 2011 about the transfer of Arktikmorneftegazrazvedka shares to Zarubezhneft. 100% minus one share in the company will be paid into Zarubezhneft's charter capital as payment for an additional share issue.

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