MOL Reiterates Opposition to Surgutneftegaz Acquisition

The ongoing strife between the Russian oil and gas company Surgutneftegaz, and Hungary’s integrated energy group MOL over Surgutneftegaz’ stealthy acquisition of a 21.2% stake in the Hungarian company was brought back to the forefront when the chairman of MOL, Zsolt Hernadi, vociferously reiterated MOL’s determination not to co-operate with Surgutneftegaz and to fend off any attempts by the Russian side to establish managerial control in an interview with the Hungarian business weekly Figyelo. Mr. Hernadi’s comments were provoked by the actions of Russia’s Federal Mineral Resources Agency (Rosnedra), which earlier this week gave the MOL-Russneft JV that operates the Zapadno-Malobalykskoye (ZMB) field in western Siberia a deadline of six months to eliminate violations discovered at the field or face having its licence revoked. The prospect of MOL being forced out of one of its most valued international upstream assets brought up concerns that this may be a co-ordinated attempt by the Russian authorities to pressure the Hungarian company into complying with Surgutneftegaz’ demands, but Mr. Hernadi expressed confidence that the problems at ZMB are just a coincidence, stressing nonetheless that even if this is indeed an attack against MOL, the company would rather sacrifice the ZMB than accept an infringement of its independence.

Deteriorating Relations

Mr. Hernandi’s comments add yet more fuel to the flow of acrimony that followed Surgutneftegaz’ surprise acquisition of the 21.2% stake in MOL from Austria’s OMV in March, when Surgutneftegaz paid double the market price, or a total of 1.4 billion euro (US$1.86 billion). This unexpected transaction triggered a hostile reaction among the Hungarian political leadership and MOL’s management alike, as its speed and secrecy raised concerns that it is an attempt to extend Russian control over Hungary’s energy independence. For its part, the Russian company continued to insist that its only goal is to take advantage of the synergies of its own upstream assets and MOL's downstream capabilities and that it is seeking a successful equal partnership with MOL. However, these claims did little to calm Hungarian paranoia and as a defensive measure Surgutneftegaz was prevented from attending MOL's annual general meeting (AGM) of shareholders on 23 April, at which a set of new resolutions designed to prevent a hostile takeover were accepted. In justification of this move, MOL claimed that Surgutneftegaz has not been registered as a shareholder because Hungary's Energy Office declined to register the Russian company’s acquisition due to the fact that it had failed to provide some legally required information about its ownership structure. This stance did not go down well with Surgutneftegaz and in June it filed a complaint with a Hungarian court to cancel the resolutions adopted at the AGM. Surgutneftegaz’s position was further backed by the Russian authorities, with a number of Russian officials, among them Russian Deputy Prime Minister Igor Sechin, expressing the government’s readiness to support the privately-owned Russian company in its attempt to enter the management bodies of MOL. The expression of open support for Surgutneftegaz’ position on behalf of the Russian government raised fears that Russia may use its economic clout to force a change in MOL’s position, and these fears were further reinforced when Rosnedra issued the ultimatum to MOL’s JV in Russia.

ZMB in the Spotlight

The formal motive for the probe, according to the Russian authorities, is that the level of associated gas utilisation is below the contract-stipulated 95%. The JV, which is operated on a parity basis between MOL and the Russian oil company Russneft, has said it could increase gas utilisation to 100% if it received permission from state-run Rosneft to send its associated gas via pipelines now controlled by Yuganskneftegaz to the main oil production unit of Rosneft. The whole nature of the investigation, where the Russian authorities threaten the operating licence of a foreign-based company because of non-compliance with the terms of its contract, is reminiscent of the way in which Shell and TNK-BP were forced to concede control, respectively, of the Sakhalin 2 and Kovykta projects, which fuelled concerns that Russia might now be turning against MOL.

But despite the growing pressure over the ZMB field, the MOL leadership remains optimistic, pointing out that the issue with the JV could be interpreted as an all-Russian affair. MOL established the JV together with Yukos in 2002, and Russneft acquired the Yukos stake in ZMB in 2005, although most other assets of the bankrupt oil company were acquired by the state-owned Rosneft. The two Russian companies have been involved in a legal battle over Russneft’s stake in the ZMB, as in April the Moscow arbitration court ruled in Rosneft's favour in a 5-billion rouble (US$158.4 million) lawsuit. Last month Russneft was given a surprising reprieve until a new court hearing takes place in December, and this indicates that Rosnedra’s actions might be nothing more than an attempt to pressure Russneft into resolving the ordeal over the Russian stake in the field.

Even though there is a significant chance that the ultimatum over ZMB is just a coincidence, as Mr. Hernadi hopes, the importance of the field for MOL’s business model still gives plenty of reasons for concern to the Hungarian company. With approximately 188 million barrels of recoverable reserves and current oil production of some 19,900 b/d (at 50% MOL share), ZMB is one of the company’s most valued assets as it corresponds to approximately 50% and 23% respectively of its total hydrocarbon reserves and current production. Consequently, it stands out as a nerve that Russia could squeeze. Nevertheless, it was made clear by Mr. Hernadi that the company values its independence much more than this asset. When it is factored in that MOL’s business focus lies mainly with its refining operations and that the acquisition of the Croatian oil and gas company INA will add some 382 mmboe to MOL’s reserves, it becomes clear that while the potential loss of ZMB would be painful, it is not something that MOL cannot handle.

Outlook and Implications

The indications so far are that Rosnedra’s ultimatum over the Zapadno-Malobalykskoye licence may be an all-Russian affair. Still, aside from an expression of determination to keep the current course, the statement of MOL’s chairman is also a message to the Russian side that a revocation of MOL’s licence would not facilitate reconciliation between Surgutneftegaz and MOL, although it seems that the Hungarian side does not appear amenable to any sort of compromise. The conditions it has set for the registration of Surgutneftegaz’ shares purchase—to reveal the shareholder structure of the company—are known to be unacceptable to Surgutneftegaz, especially in light of the rumour that some of Russia’s high-standing political leaders may be affiliated with the company. On the other side, it is not very likely that the Russian side will pull out of MOL: one, because the price it paid is too high, and it is doubtful that another investor will be willing to take such a high stake after both OMV and Surgutneftegaz were treated in a hostile manner and two, because the company’s reputation is at stake.

With the continued exchange of hostilities between the two sides, the escalation of the split to a governmental level appears to be a more plausible course of development. And while MOL and the Hungarian government may feel comfortable sacrificing the ZMB field, they are not in the position of strength to deal with an all-out Russian threat since Hungary imports around 80% of its oil and gas from Russia. To this end, an escalation of the conflict would not be beneficial to the Russian side either. The country already saw its reputation as an energy supplier shattered following Gazprom’s dispute with Ukraine’s Naftogaz, and the potential involvement in another energy dispute, this time with a European Union (EU) member state, will only be negative for Russia in the long run. A third option may be to ensure Surgutneftegaz’ exit from MOL by providing some sort of compensation via the transfer of control of some of MOL’s assets to Surgutneftegaz, but there has been no indication that such a move is on the table as MOL has refused to hold any talks with Surgutneftegaz. This leaves the question open as to how the situation will be resolved, but by all means, the likelihood of seeing this escalate to an intergovernmental level is very high.

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