Investors Against Budget

Stephen A. Jouline

Oil and gas companies are considered by investors to be a milking cow of the Russian budget. As a result the sector’s capitalization drops down.

A sustained growth of oil prices brings to Russian oil and gas companies an increased tax burden. The fuel sector in Russia has turned practically indifferent to the world market favorable economic set-up.

80 dollar per barrel brings misfortune

Oil prices continue to break all historical records. In September the October contract at the New York NYMEX to supply WTI oil was offered for over 80 dollars per barrel. Still, such a favorable economic set-up was beneficial to anybody but the Russian oil and gas sector. The state budget surplus has reached unprecedented heights. Counteragents of Russian oilmen (pipe-builders, construction companies) and consumers, using up all the state oil dollars, have also been on the winning side. The same is true about foreign competitors of the Russian corporations, steadily increasing their capitalization — the cost of Exxon Mobil has already exceeded 500 bln dollars. But our domestic companies so far have been increasing their payments to the budget. For instance, LUKoil in 2006 paid about 14 bln dollars of excise and export dues. It is more than all other taxes, including profit tax, taken together. In 2006 LUKoil annual profit was estimated as 10.5, but presently P/E ratio has gone below 8. Actually, it would be wrong to say that export dues are the only state instrument in regulating the heat and power complex. The state controlled companies may expect certain favors. The state has made a lot of good things to Gazprom and Rosneft.

In the name of the state

Gazprom continues to receive all-round support from the government in increasing prices for near-abroad consumers; the state has helped Gazprom in EU monopsony issues (most revenues from selling gas come from EU). But the company's main achievement was the Sakhalin problem resolution. In April 2007 Gazprom bought 50% plus one share of Sakhalin Energy. Sakhalin-2, operating one of the largest oil and gas projects in Russia, was sold for 7.45 bln dollars. British-Dutch Royal Dutch/Shell and Japanese Mitsui and Mitsubishi turned to be the vendors. The gas giant unexpectedly paid with cash, not with shares. The RF President Vladimir Putin supported the deal in public. The size of Sakhalin Energy had to secure the company the place in Expert-400 long ago, but it did not reveal its assets due to closure of shareholders — production sharing agreement gave them such a right. But Audit Chamber and Rosprirodnadzor returned the project to the domain of the Russian economy (Oleg Mitvol, deputy chairman of Rosprirodnadzor, estimated the damage from the activity of Sakhalin Energy as 30 bln dollars and promised to raise an issue of revoking the operator's license). The current year results of Sakhalin-2 will already be reflected in Gazprom reporting. Gazprom net profit exceeded 20 bln dollars.

Rosneft at last managed to collect YUKOS’ splinters and was a success, too. True, our oil leader had to pay very big money at the auctions. Handing oil and gas industry over to the state required significant financial interventions. By the end of 2006 debts of Rosneft amounted to 25 bln dollars against 15 bln of LUKoil. But the market responded to the new acquisitions: Rosneft capitalization went up by 20 bln dollars almost within a year.

The Russian cross: oil rises in price, shares cheapen

As to private oil and gas companies, their achievements were far from successful. LUKoil and Surgutneftegaz, taken together, lost 17 bln dollars. Analysts no longer believe a Russian analogue of a private Exxon Mobil is possible. Russneft demonstrated speedy development and hit the top thirty of Expert-400 list, but Мikhail Gutseriev sold the company and left the country, saying that the investment climate in Russia is not favorable. Other owners of private oil and gas companies did not jump to such conclusions, but all their "creatures" lost their ground in Capitalization-200 list, which might mean that private investors turned to be more cautious about oil and gas industry.

More money is required

apitalization growth in the sector has decelerated to make the situation look pretty gloomy. The companies pursue different policies (ТНК-ВР — big dividends and big loans against pretty moderate investments, Surgutneftegaz — big dividends, no loans and solid investments), but results in bln dollars are similarly deplorable. The authorities may reconcile themselves to the fact that initially companies satisfy they needs in dividends (like ТНК-ВР) and acquisitions (like Rosneft and Gazprom), and only later, feeling well off, they make investments into technological development. A valid way to stimulate growth of capitalization among oil and gas big shots is to let them have (apologies to budget structures) even more money. The state has long been dealing with the problem of extra money — it may easily cancel taxes introduced in time of hardships; by the way, cancellation of the sales tax made Russian retail a fast-moving locomotive in Expert-400 for all years that followed.

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