Bashneft among Russia's highest oil producers despite troubled history
One year after being re-nationalised, Russian oil producer Bashneft is out to prove that state controlled companies aren’t always doomed to be uncompetitive
Apart from tighter security checks on foreign visitors entering its Moscow headquarters, little has changed at Bashneft since the Kremlin wrested a controlling stake in the oil company from Sistema, the Russian investment group.
With output of crude and condensates rising by more than 12% to reach 14.67 million tonnes in the first three quarters of this year, Bashneft ranks among Russia’s fastest growing oil producers. The company ranks sixth in Russian oil producers, behind Rosneft, Lukoil, GazpromNeft, Surgutneftegaz and Tatneft.
Most of the company’s top executives kept their jobs after the state takeover and have indicated a commitment to delivering the winning combination of growth and dividends that made the company the darling of investors when Sistema was at the helm.
“The company is working in the same way as before,” said Alexander Korsik, Bashneft president. “The management and corporate culture have not changed.”
Most of Bashneft’s 2.1 billion tonnes of proven oil reserves and all three of its refineries are situated in Bashkortostan, a republic in the heart of the Volga-Urals region that, until oil began flowing from vast discoveries in western Siberia in the 1970s, was the backbone of the Soviet Union’s energy industry.
After the Soviet Union collapsed, the Kremlin granted broad powers to the leaders of Russian regions. Murtaza Rakhimov, a former refinery director who became governor of Bashkortostan in 1993, assumed control of the region’s oil industry and eventually began privatising.
Many of the oil assets later consolidated in Bashneft were acquired by entities linked to his son, Ural Rakhimov.
A mid-sized oil producer burdened with mature reserves, inefficient refineries and an ownership structure that was murky even by Russian standards, Bashneft became known as the lame duck among its peers.
The Kremlin made no objections at the time of Bashneft’s initial privatisation and also appeared to approve when Sistema, an investment group led by Russian billionaire Vladimir Yevtushenkov, bought out Rakhimov junior in 2009 and the oil company changed hands again.
Almost five years went by before Russian prosecutors found fault with both deals and Bashneft, after a controversial legal battle, was drawn back into the state’s orbit.
In the meantime, Sistema had pushed through sweeping reforms transforming Bashneft from Russia’s oil industry laggard to the country’s fastest growing oil producer.
Under new management, Bashneft’s brown fields were given a new lease of life as modern enhanced oil recovery (EOR) technology was introduced.
To ensure future growth, the company diversified beyond its stronghold in Bashkortostan, acquiring the huge Trebs and Titov oil fields in the Nenets region of northwest Russia as well as a foothold in western Siberia.
The company also upgraded its huge refining hub at Ufa, the capital of Bashkortostan, that traditionally handles both locally produced crude and supplies from other oil regions. Yields at the three Novoil, UNPZ and Ufaneftekhim plants climbed above 60%, well above the average for the Russian oil industry.
Bashneft’s time under Sistema’s control was not without problems. An attempt to draw India’s ONGC in as a partner at Trebs and Titov failed and other Russian majors, including state-owned Rosneft, were constantly complaining that their upstart rival had won development rights at the fields through unfair means.
But overall, Bashneft kept investors happy, boosting oil production by 31% between 2009 and 2013 and paying out more than $5bn worth of dividends.
In the years since Vladimir Putin first became Russian president in 2000, the Kremlin has moved steadily to reverse earlier oil privatisations and assert state control over the industry.
Sistema’s problems began when Russian prosecutors announced that Bashkortostan’s privatisation of Bashneft in 2005 had been illegal and charged Ural Rakhimov with embezzlement. Rakhimov fled Russia.
Prosecutors then turned their fire on Yevtushenkov, accusing the Russian oligarch of engaging in a money laundering scheme at Bashneft.
For a time, it looked as if Sistema’s top management might share the fate of Mikhail Khodorkovsky, the founder of Yukos, who was jailed for alleged fraud and tax evasion in 2004 as Russian bailiffs began dismantling his oil company – most of which was sold off at bankruptcy auctions to state-owned Rosneft.
Yevtushenkov denied wrongdoing, but, after being placed under house arrest at his luxury mansion outside Moscow in September 2014, decided to accept defeat quietly.
The case came to an end last December when a court in Moscow ordered the transfer of Sistema’s stake in Bashneft to the Russian government.
Alexander Korsik, a seasoned oil man who was serving as a top manager at Sibneft when Gazprom bought Russian oligarch Roman Abramovich’s controlling stake in the company in 2005, is no stranger to state takeovers.
When prosecutors first charged Yevtushenkov, he reacted calmly, reassuring anxious staff that Bashneft would continue working as normal.
Indeed, more than a year after the takeover, Bashneft is still pursuing the course set in the Sistema era with remarkably little state interference.
Unveiling Bashneft’s strategy for 2016-2020 in October, Korsik outlined plans to continue investing in EOR projects in Bashkortostan aimed at maintaining regional production at a level of about 15m t/y until the end of the decade.
New greenfield developments, including Trebs and Titov where production is expected to reach a peak of 4.8m t/y in 2019, and Burneftegaz in western Siberia, are already onstream and will provide all of the company’s incremental output in the coming five years.
Looking further ahead, Korsik was confident that new discoveries in Nenets region – where Bashneft is exploring in a joint venture with Lukoil – and round Burneftegaz in western Siberia would be large enough to offset an eventual decline at the company’s mature fields. Bashkortostan also had exploration upside, he said.
Downstream, Bashneft is pressing ahead with refinery modernisation launched while Sistema was in control. Two or three aged primary distillation plants will be demolished in the coming five years and replaced with a single, up-to-date unit. A new coking plant will also be installed as well as facilities to improve processing of Bashkortostan’s predominantly sulphurous crude.
When the Kremlin began planning the takeover of Bashneft world oil prices were still over $100 a barrel and western economic sanctions imposed on Russia over Ukraine had not yet come into play.
Russian producers are less exposed than many of their international counterparts to volatility in world markets as the country’s main oil taxes are indexed to prevailing world oil prices.
Ruble weakness is also bringing some benefits for Russian oil exporters that, while earning revenues in US dollars, do most of their spending in the national currency. Take Bashneft’s oil lifting costs for instance. At $4.9/b in the first half of 2015, the costs hardly changed year on year, but were down by more than one-third in depreciated rubles.
Fortunately, Bashneft’s debt is mainly denominated in rubles so currency depreciation has had little significant impact on the company’s leverage.
A broader concern for investors is that under state ownership, Bashneft will abandon the tight financial discipline instilled during the Sistema era and is likely to become significantly less commercially focused.
Russian state companies have a reputation for inefficient investment and, with Bashneft raising its capital expenditure guidance to Rbs 461bn ($6.92bn) for the coming five years – 70% higher than the level previously forecasted – industry analysts sounded the alarm. Higher capex would not necessarily translate into better returns, warned Renaissance Capital, as Bashneft’s oil production outlook remained largely unchanged.
However, Korsik justified the capex hike saying that without increased upstream spending in Bashkortostan, production at Bashneft’s brown fields would immediately plunge. He said capex at the Trebs and Titov development will peak in 2016-2017, bringing a 100,000 b/d increase in production at the fields.
With low oil prices and Western sanctions weighing on the economy, the Russian government issued a directive in November, requiring state owned companies to pay higher dividends.
But Bashneft, which paid out $5bn to shareholders in 2009-2013, doesn’t need to be told to share profits. According to its new strategy, the company will hand out at least Rbs 20bn annually in dividends to shareholders, or 25% of net income as calculated in its international accounts. “It’s bad policy to withhold dividends,” said Korsik.
Waiting for an answer
Perhaps the biggest question hanging over Bashneft is the future ownership of Sistema’s former shares that were parked with the Russian State Property Committee after the completion of the state takeover.
Many industry observers suspect that Rosneft, the beneficiary of so many of Russia’s oil industry takeovers, has designs on Bashneft.
However, weighed down by debt following the $55bn acquisition of TNK-BP in 2013, and now prevented by Western sanctions from borrowing on global capital markets, Rosneft is unlikely to be in a position to buy more assets for at least the next couple of years.
“Nevertheless, Bashneft’s growing oil output and cash flow must be a temptation,” says James Henderson, a senior research fellow at the Oxford Institute for Energy Studies.
Another possibility is that the Russian government will decide to reprivatise Bashneft and revive Sistema’s earlier plan to list the company internationally.
“We don’t know what will happen to the share structure, but we believe the company should be privatised sooner or later,” said Korsik. “We think the government would be happy to get additional money into its coffers.”