IHS World Markets Energy Perspective | |
Significance | Bashneft, controlled by Russian conglomerate Sistema, received the rights to develop the two oilfields in the Russian Arctic with an offer to pay 18.476 billion roubles (US$587.8 million), just slightly higher than the Natural Resources Ministry's starting point of 18.171 billion roubles for an auction that did not happen. |
Implications | The Trebs and Titov fields, in the Timan-Pechora region of northern Russia, hold combined estimated oil reserves of 137 million tonnes (1 billion barrels), the largest known oil deposit in Russia for which the government had not issued a licence. |
Outlook | The Russian government still must formally issue the licence to Bashneft, as the cancellation of the auction meant that the tender committee merely recommended that Bashneft be awarded the rights to the two fields, but the earlier exclusion of several potential additional bidders from the auction will merely add to Russia's sorry track record when it comes to fairness and transparency in issuing licence rights to oil and gas fields. |
An Auction That Was Not Meant to Be
In a decision that surprised no-one, a Rosnedra commission yesterday issued its recommendation to the Russian government to award the rights to the Anatoly Titov and Roman Trebs oilfields to Bashneft, a mid-size Russian oil firm. What briefly looked (back in August) to be shaping up as a highly contested auction for the rights to the two Arctic oilfields—the largest known oil deposits from the Soviet era that had not yet been licensed—turned out in the end to be a contest in name only, as all of the drama and anticipation was drained out of the auction more than two months ago, when four out of the six companies that had filed applications to participate in the auction were excluded on the basis of some dubious criteria to comply with the tender's requirements (see "Related Articles").
Rosnedra, the Russian subsoil use agency, did not disclose a reason for dismissing LUKoil, Gazprom Neft, TNK-BP, and Nord Imperial (a unit of India's Oil and Natural Gas Corp.) from the auction except to cite "procedural infringements" in the tender process by each of the companies. When several of the companies threatened to contest their exclusion, Russia's Natural Resources Ministry defended Rosnedra, with Minister Yuriy Trutnyev saying that there was "no precedent" for challenging Rosnedra's ruling. Trutnyev's comment suggested that the excluded companies had little chance of success in pressing their case in the notoriously sycophantic Russian court system, particularly with the government signalling its approval of Rosnedra's move.
When Surgutneftegaz, the lone remaining competition for Bashneft in the auction, opted to withdraw from the running for the two fields in late October, the path was clear for Bashneft, which is owned by Russian conglomerate Sistema, to win the licence rights for Trebs and Titov without even the need for an auction. Surgutneftegaz gave no reason for dropping out, generating further speculation as to whether the outcome of the auction had already been pre-determined and providing support to conspiracy theories suggesting that Surgutneftegaz had been a foil all along. Rather than cancel plans to issue the licences in an auction bereft of competition, however, yesterday Rosnedra opted to simply cancel the auction but still recommend that Bashneft be awarded the rights to the two prized oil deposits.
Outlook and Implications
Sistema, which has close ties to the Kremlin (Russia's presidential administration), has quickly transformed Bashneft into an up-and-coming player in the Russian oil industry since acquiring controlling stakes in a variety of oil assets in the Republic of Bashkortostan less than two years ago. Having received the Russian government's blessing to take over the Bashkir oil assets, Sistema has moved to consolidate these under Bashneft, restructuring the former oil producer into a vertically integrated oil firm that is poised for growth. Sistema's acquisition of a 49% stake in fellow mid-size Russian oil firm Russneft earlier this year has generated talk of a proposed merger of the two companies, although Sistema has denied any such plans.
Winning the rights to the Titov and Trebs oilfields—for which Bashneft offered to pay just 18.476 billion roubles (US$587.8 million), slightly above Rosnedra's starting price point of 18.171 billion roubles for the aborted auction—will provide the nascent oil major with a substantive upstream asset from which it can expand its total production. Already, Bashneft is increasing its output at a rapid pace following its takeover by Sistema, as the company produced 1.206 million tonnes (290,631 b/d on average) of oil in November, up 13.8% year-on-year. For the first 11 months of the year, Bashneft extracted 12.929 million tonnes of oil, already surpassing its 2009 total.
Why exactly the Russian government opted to reward Bashneft (rather than state-run Rosneft, for example) with the Trebs and Titov licences is unclear, particularly when the actual price paid for the licence rights is but a fraction of the US$2 billion that Russian media said that the government hoped to garner from the auction when it was announced in the middle of the year. The answer to this question seems depressingly familiar, however, as yesterday's non-auction is but the latest in a string of unfair, non-transparent decisions by the Russian government in issuing licence rights for oil and gas fields.
Rosneft, which initially gave hope to other bidders that the auction might actually be fair and open when the state-run giant opted not to file an application to bid, may yet land a role in the development of the two fields via a potential "partnership" with Bashneft that may or may not have been pre-arranged. Regardless of what the future holds for the development of the Trebs and Titov fields, the shenanigans surrounding the tender and canceled auction for the two Arctic oilfields will further cement Russia's reputation for unfair, non-transparent licensing practices.
Related Articles
- Russia: 29 October 2010: Surgutneftegaz Drops Out of Running for Trebs and Titov Oilfields, Leaving Only Bashneft
- Russia: 1 October 2010: Government on Defensive as More Russian Oil Companies Challenge Ruling on Trebs-Titov Auction
- Russia: 29 September 2010: LUKoil Will Contest Exclusion from Auction for Russia's Trebs and Titov Fields
- Russia: 28 September 2010: Only Two Companies Reportedly Survive Early Cut to Bid on Russia's Trebs and Titov Fields
- Russia: 24 September 2010: Jockeying for Position Intensifies in Run-Up to Auction for Russia's Titov and Trebs Fields
- Russia: 21 September 2010: Six Companies Apply to Bid for Rights to Russian Arctic Oilfields, But Not Rosneft
- Russia - India: 11 August 2010: India's ONGC Reportedly Seeks Joint Bid with Rosneft in Tender for Russian Arctic Oilfields
- Russia: 22 July 2010: Energy Ministry Reportedly Targets US$2 Bil. in Revenue from Planned Auction of Two Russian Oilfields
- Russia: 26 May 2010: Sistema Denies Speculation on Plans to Merge Russian Oil Firms Russneft and Bashneft
- Russia: 13 May 2010: Russia's Bashneft Acquires Stake in Sistema-Invest in Transformation to Vertically Integrated Oil Firm