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State to relinquish hold on Slavneft

A 74.95% FEDERAL stake in Slavneft is likely to be auctioned in December. The last big domestic oil privatisation will be open to both domestic and foreign bidders. The sale will deliver Slavneft into the private sector, apart from an 11% stake held by Belarus.

The government's decision to sell off its entire holding in Slavneft took investors by surprise. Until October, plans were to divest just 19.68% of the company this year and then another, smaller chunk in 2003.

No official starting price for the sale was announced when the prime minister, Mikhail Kasyanov, instructed the Federal Property Fund to conduct the open auction in December. All proceeds are to be transferred to the state by 15 February. However, it is claimed the Slavneft sale could reap at least $1.3bn for the budget, helping compensate for the last-minute cancellation in August of the privatisation of 5.9% of Lukoil on the London stock exchange. That sale was expected to earn at least $0.6bn.

Markets have not rallied since then. But competition for Slavneft is expected to be fierce, especially now that a controlling stake in the company is on offer. With 13m tonnes a year (t/y) of oil production, Slavneft is a minnow among Russian oil firms. Most of its oil comes from the Megion region, in western Siberia, where fields are depleted. But Slavneft has busily picked up new western Siberian acreage in recent years and also holds prospective licence areas in the Krasnoyarsk region of eastern Siberia—one of the country's most exciting new oil frontiers.

Downstream, Slavneft owns the Yaroslavl refinery, in northwest European Russia, where products markets are booming. The plant is at a major oil pipeline nexus and is also well placed to handle production from the prospective Timan Pechora Basin, which runs north to the shore of the Barents Sea. In Belarus, Slavneft owns the Mozyr refinery, situated at the gateway to Europe's crude and products markets.

Several Russian oil majors say they will consider bidding at the auction. And even more may be interested. Two years of high prices have allowed oil producers to build large cash mountains and most companies are seeking to expand.

Although Russian business life is full of surprises, most analysts claim Sibneft will win the Slavneft stake. Sibneft has the lowest-cost production of any Russian producer and runs a tight operation financially. The company has been borrowing heavily this year to finance expansion plans.

In May, Slavneft's shareholders appointed a former Sibneft vice-president, Yuri Sukhanov, as head of the company. Sukhanov's appointment "gave Sibneft an advantage in understanding how the company works, what the true costs are and where hidden value can be extracted to justify a particular purchase price", says United Financial Group.

Sukhanov found that Slavneft worked badly. The company was inefficient and should be privatised as soon as possible, he told reporters in July.

The sale will end almost a decade of, often turbulent, oil industry privatisation and leave Rosneft as the only domestic oil company under state control. Analysts predict that the Slavneft sale may also tidy up the results of the 2000 privatisation of Onaco, won by Tyumen Oil (TNK) for the princely sum of $1.08bn. Upon taking over Onaco, TNK found that Sibneft held a 35% stake in the firm's only production enterprise, 8m t/y Orenburgneft.

TNK has built up sizeable minority holdings in both Slavneft and that company's main producer, Megionneftegaz. If Sibneft wins Slavneft it will want to acquire those interests itself. One option might be to pay for a graceful TNK exit with the Orenburgneft shares. Such speculation strengthens the widely held belief that Russian privatisations are typically settled in behind-the-scenes deals rather than on the transparently competitive auction floor.

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