The Russian oil refining industry is facing a clear challenge - the need to match with modern technology and upgrade ancient Russian equipment. There are two major trends that are clearly visible: Internal investment in upgrading/ building Russian refineries and/or External investment in the already efficient and advanced refineries.
Even though the Russian government is favoring local investments and has raised the export duties of crude oil, in order to encourage the refining industry in the Russian Federation, it has created Lukoil. LUKOIL was created as a publicly-owned, joint-stock company by a decree of the Russian Government.
There seems to be a desperate need of capital in the Russian state that is pushing very aggressive “fund raising” actions, by suing oil companies for “exorbitantly high gasoline prices” and raising the export duties of crude oil.
The major exponents are the first two biggest oil producers of Russia - Rosneft, state owned, and Lukoil, publicly-owned company. Regardless of the political affirmations, the Websites of these companies are proof enough of the different approach - the state is investing inside Russia and the publicly-owned company is investing mostly outside of Russia.
The external investments of publicly-owned Russian companies:
1. LUKOIL signed an agreement in June 2008 with the Italian company ERG S.p.A. to create a joint venture to operate the ISAB refining complex, located on the island of Sicily in Italy. The final value of the deal is 1.45 billion Euros.
2. OAO LUKOIL completed today the purchase of a 45 percent share in Holland-based Total Raffinaderij Nederland (TRN) from Total. The value of the stake (excluding crude oil and products inventory) was $600 million, in line with an agreement between LUKOIL and Total, last June.
3. Surgutnefegaz, the transparency-challenged publicly-owned oil company named by Igor Sechin as “Russia’s best publicly-owned oil company,” would seem the most likely acquirer of European assets. The company is believed to be sitting on a cash pile and potential war chest of $20 billion, and in April this year bought 21 percent of Hungary’s energy company MOL for $1.4 billion from Austria’s OMV, causing outrage in Hungary.”
The situation is clear and the outcome predictable: the state-owned companies are investing mainly in local assets, while the publicly-owned companies are investing in external assets. What message is this sending to the world? The political and legislative atmosphere of Russia is not yet stable enough to attract major local investors, let alone external investors.
The transportation of crude and refined products, which is one of the most important segments of oil refining, is still at state monopoly, and companies are dependent on the state for the taxes/ prices. This is clearly not an attractive perspective for outside investors.
However, regardless of the unstable Russian “business climate” there are still unquestionable values in investing in Russian oil companies. Ultimately, oil is and will still be used for the next 10 to 20 years and ground oil prices are still the catch of the eye. Also, most of the companies in Russia are vertically integrated, from finding the oil in the ground to extracting it and selling the refined product to the consumer, and this adds value to them, from a strategic point of view.
The ultimate question is to invest within the contry or outside. The answer lies in your perspective. The investments are needed since the refining industry in Russia is screaming for improvement. From a country point if view, the logical investment should be in its own assets and in the effort of developing the local economy and infrastructure. A more developed economy and infrastructure will clearly provide more growth to the oil refining and marketing sector. From an investment risk point of view, a more stable environment is more attractive to the public sector. From a balanced risk point of view, trying to find the middle path between profit, stability and business sustainability, a split in both these directions would be the most advisable one.
Certainly, the player who is playing the balancing game is Lukoil, which is investing both in the development of the local Russian assets and also in the Western acquisitions. This is providing diversity and it strengthens the position of the Russian publicly owned companies world wide.
In the end, whatever the direction of investment may be, the outcome is the same: the more oil that is produced in Russia, the more the will be refined by the Russian state-owned companies, be it inside Russia or outside of it. Russia wins anyway.
Alin Rosu is a Sustainability Analyst with Solaron Sustainability Services. He is based in Russia and covers the same market for Solaron. Solaron (www.solaron.in) is a niche Sustainability / ESG research firm with a global team of 60+ Analysts present across several Emerging markets like India, Brazil, China, UAE, Mexico, Russia, Eastern Europe and Africa.
