RussNeft Building up its Vertical.

From what RBC-Daily has come to know, Oil Company RussNeft under control of Mikhail Gutseriev intends to acquire its own oil refinery before the end of the year. As a result the company will complete its vertical integration. It is not yet clear though whether RussNeft will venture to build a refinery from nothing or try to buy an existing enterprise. Experts assume that it will be more reasonable for the company to do the latter naming possible options of the purchase. According to the experts it may be either one of Yukos’ refineries in the Volga region or a refinery in Bashkiria. However a source familiar with the present state of affairs at RussNeft says that they do not consider the option of buying from out-of-favor Yukos. The experts are of the opinion that the price of the deal will be close to $ 1 billion.
RussNeft was established in September of 2002. The company controls more than 10 oil producers whose recoverable reserves exceed 300 million tons. The peak of its activities fell on the last year when the company completed its deal on acquiring oil producers Beliye Nochi, found in Khanty-Mansiysk Autonomous Okrug (KhMAO), Aki-Otyr and Uralskaya Neft in the Republic of Udmurtia. In the second half of 2004 Russneft also bought 6 small oilfields in the Tomsk region. In March of this year the company headed by Mikhail Gutseriev decided to diversify its activity having bought Moscow’s biggest independent retail network of petrol stations called Grand. Less than one month ago a subsidiary of RussNeft also won by auction a subsoil license covering another area in KhMAO.
Now in order to complete its vertical integration RussNeft needs only have its own oil refining capacities. “It is not that the company cannot do without a refinery. However, to be a full-value vertically integrated oil company it must have its own refinery,” – says a market participant familiar with the state of affairs at the company. The talks about RussNeft finalizing the matter of having its own refinery were held as far back as last year. However, as RBC Daily has come to know, it looks as if this matter could be resolved in the nearest future. As one of the market participants close to the company has told the newspaper, RussNeft intends to arrange for refining oil using its own capacities before the end of the year. “Mr. Gutseriev has set the task to finalize the matter of oil refining before the end of the year. It is implied that either an existing refinery will be bought or a new one built. The time of decision-making will depend on availability of “quick and easy” money needed for the purchase,” says he.
The experts questioned by RBC Daily agree that the company needs a refinery. “It is a topical matter for the company taking into account that until recently it has collected many assets in the upstream,” - ratiocinates Zenith Bank analyst Eugene Suvorov. “Apart from small-scale Slavneftekhim found in Byelorussia, which is in fact a petrochemical but not oil refining entity, the company has no more property in oil refining”.
However experts have no common opinion as to whether it is more promising that an own refinery be built or an already existing one bought. According to one expert, the company is likely to choose the Ulyanovsk region for the construction of its own refinery basing on its favorable location in the central part of Russia, good relationship of the company with the local authorities and its closeness to the oil producers of RussNeft. Brokercreditservice (an investment company) analytical office manager Maxim Shein assumes that this plan must be accessed warily. “Building one’s own refinery in Russia is a rather expensive experience. Moreover it is important to choose the correct location,” - he said to RBC daily. “In case the site is in the wrong place the company will run the risk of having to buy fuel for its petrol stations elsewhere instead of selling its own products. Lukoil has partly found itself in a similar situation, according to the accounts of the company. But for Lukoil such problem is insignificant; as for RussNeft it will mean the end of its hopes for becoming vertically integrated. Therefore it is more likely that the company will buy a refinery”.
Analysts point out several potential objects for the purchase. “Out of thinkable options one can pick out assets of Yukos and capacities of Bashkiria refineries. At least RussNeft’s affiliate Beliye Nochi already delivers its processing feed to Uralneftekhim,” – says Maxim Shein. According to Eugene Suvorov, the company may become interested in Syzran Refinery or Novokuibyshevsk Refinery (both possessed by Yukos), in case they are offered for sale.
The interlocutor of RBC Daily having communicated RussNeft’s intention to come into possession of a refinery confirms that the company is well under way using the capacities at Syzran though it won’t admit its interest in buying the refinery in case it is set out. “Presently the company delivers its crude to Syzran Refinery found in the Volga region and possessed by Yukos. The feed processed at the refinery covers in full the requirements of the company in fuel delivered to its recently acquired petrol stations Grand. Some of the products are exported. The refinery’s maximum capacity is about 5 million tons per year, however, taking into account the condition of the equipment that needs upgrading, not more than 4.1 million tons of crude can be refined. RussNeft delivers approximately 3 million tons to the refinery, of which 2 millions are brought from 6 nearby operations and another million from Udmurtia. In this respect the refinery is well located from the point of view of the company. However there is no talking about purchasing it,” he says.
Whatever option is chosen by the company, specialists point out that to implement any will require huge amount of money. The design project of a new refinery may cost from $900 million to $ 1 billion. Nevertheless they consider such investments well-taken.
“To obtain a synergetic effect though the company will have to bring its producing assets into a single structure,” – RBC daily was told by Dmitry Manguilev, an analyst of investment company Prospect. “But if we are talking about establishing a vertically integrated company, even more so after the recent acquisition of the retail network, construction or purchase of a refinery could be a reasonable move”.

Companies Department
Dmitry Koptyubenko