New Russian Oil Vertical

Oil&Gas Materials 17 January 2008 13:01 (UTC +04:00)

Azerbaijan, Baku, 17 January / Trend / - Russian oil companies Alliance (Alliance Oil) and West Siberian Resources (WSR), which trades in Stockholm have announced their unification on 15 January, Russian news agency RIA Novosti reported.

The merger will create one more vertically-integrated oil company, with a capitalization of $2.5 billion, which will mine and process hydrocarbons and sell the output. The unification of all stages of the oil process promises the company a bright future.

WSR is an independent Russian oil company incorporated in Bermuda. WSR's exploration and production assets provide a combination of current oil production with significant low-risk development and exploration potential.

Alliance Oil is a leading independent Russian oil company refining crude oil and marketing refined products in the Russian Far East and neighboring export markets.

Under the terms of the deal, which is to be completed in March, Alliance Oil, currently controlled by the Bazhayevs, a Russian business family, will become a 100% subsidiary of WSR, while the current owners will hold a controlling stake (60%) in WSR following the issue of additional shares. WSR shareholders will own only a 40% stake in their company.

Experts say that this is a fair deal, because the current capitalization of WSR is about $1 billion, while Alliance Oil costs $1.5 billion.

After the merger, WSR will remain a public company with a listing on the Stockholm Stock Exchange. The company's top leaders will keep their posts, while representatives of Alliance Oil will hold only a third of the seats on the new board of WSR directors.

The two companies complement each other quite successfully. WSR operates in three of Russia's largest oil basins: West Siberia ( Tomsk), Timano-Pechora and Volga-Urals. It produced 1.5 million metric tons (11.02 million bbl) of crude last year and plans to increase production to 4 million tons (29.4 million bbl) by 2011. But it has only one processing facility, the Alexandrov Refinery in the Tomsk Region.

Alliance Oil has a large refinery in Khabarovsk (with a turnover 3.2 million tons of crude a year, to be increased to 4.5 million tons by 2011) and 260 filling stations in Russia's Far East. But it has only one oil-producing unit in the Republic of Tatarstan in the Volga region.

The unified company will bring together the partners' upstream (oil production) and downstream (refining and marketing) assets, producing a synergic effect. In other words, the merger will cut spending and strengthen the company's position in the market.

There are many examples of this effect in the global economy, but the result will be especially important in Russia, because the sky-high oil export duties are rapidly making domestic refining a more profitable business. Revenue will be especially high if oil is refined personally.

Russia's first vertically integrated oil companies were set up as a result of the privatization of state-owned companies, but now the process is following market rules, i.e., mergers and acquisitions.

A relevant example is the merger of Sibir Energy and the Moscow Oil and Gas Company (MOGC).

Last autumn Sibir Energy, a London listed oil company with production and reserves in the U.K. and Russia, merged with MOGC, which is now a 100% owned subsidiary of Sibir. The new Sibir is a fully integrated oil and gas company with rapidly growing production as well as significant refining, marketing and retail assets, including a controlling stake in both the 240,000 barrel per day Moscow Refinery and 139 gas stations in Moscow and the Moscow Region. The merger boosted its shares on stock exchanges by almost 30%.

We can expect the same effect from the merger of WSR and Alliance Oil. But the unified company will face a difficult problem. As of now, the Khabarovsk refinery is processing twice the amount of oil produced by WSR, which intends to increase production mainly in the Timano-Pechora oil and gas province in the north of European Russia, a long way from Khabarovsk in the Far East.

Therefore, the unified company may buy new assets in East Siberia, especially since the East Siberia-Pacific Ocean oil pipeline, which is to come on stream soon, may have an offshoot to the Khabarovsk refinery.