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Surgutneftegaz marches into Hungary

A deal for a stake in Hungary's Mol shifts momentum in eastern Europe's energy sector back towards the Kremlin, writes Derek Brower

ONE OF Russia's most opaque and politically connected energy firms has bought a stake in Mol, the Hungarian oil and gas company. The deal deflates recent EU attempts to make progress with its gas-supply diversification strategy and signals the Kremlin's renewed intent to push Russian firms further into the region's downstream.

Surgutneftegaz, Russia's fourth-largest oil company, said last month that it would buy OMV's 21.2% stake in Mol for €1.4bn ($1.8bn). OMV said the selling price was €63.10 a share, almost twice as much as Mol's final stock price of €32.70 just before the deal was announced.

The transaction is good news for OMV. Having failed last year in its hostile bid to buy Mol outright (PE 1/08 p29), following objections from EU competition authorities, the Austrian company is passing on the stake for a hefty 16% mark up on the price it paid in 2007. Indeed, the price of the transaction – twice the market value for the stake – surprised many analysts, raising suspicions that politics is involved.

Surgutneftegaz's boss, Vladimir Bogdanov, is understood to enjoy a close relationship with Russia's prime minister, Vladimir Putin. But the company's ownership structure is opaque; many sources say senior Russian officials are among its shareholders. Igor Sechin, head of Russia's oil sector, last month denied that the Russian government had acted in the deal on behalf of Surgutneftegaz, which he described as Russia's "best private[-sector] oil company".

The European Commission offered little commentary on the deal. "They aren't buying control of Mol," said Ferran Tarradellas, a spokesman for the energy commissioner. He rejected claims that the Commission's energy strategy had allowed Surgutneftegaz to expand into the EU. "You can buy Lukoil oil in Brussels," he said. "Aeroflot can buy Ryanair tomorrow. Our market is open to every company that wants to invest."

Mutually beneficial co-operation

Surgutneftegaz says the stake is a "serious basis for the start of long-term, mutually beneficial co-operation between our companies and will serve to strengthen European energy security". OMV did not respond to requests for an interview.

The reaction in Hungary, where the government and Mol had worked in tandem to defeat OMV's hostile bid last year, was less detached. In a statement, Mol said it had "always favoured partners providing stable, mutually advantageous co-operation. There have not been, nor are there, any strategic or operational relationships between Surgutneftegaz and Mol. Therefore, the intentions of Surgutneftegaz are not clear." The company added that it learned of the deal through press reports.

Zsolt Hernadi, Mol's chairman and chief executive, said the deal "cannot be friendly, because any friendly move would be based on communication between the companies and there was none". Mol says Surgutneftegaz will secure a seat on the board only if directors recommend such a move to shareholders. This is unlikely as long as Mol views the Russian firm as a potential predator. Mol now also wants to introduce a new regulation to force shareholders to declare the actual benefactors of their shares.

Hungary's President Laszlo Solyom said he had "expressed his concern over the ... possible effects of the acquisition". A statement said he "would ask the government to continue to take into consideration the safety of energy supply and the potential effects of the transaction". Hungary's financial regulator, PSZAF, says it will investigate the sale.

The muted reaction from the Commission will perplex some observers, given the broader strategic implications of the deal. Surgutneftegaz's close ties to the Kremlin means its acquisition will prompt worries about Hungary's position on two proposed, rival gas-pipeline projects in the region. Mol is a partner in the Nabucco consortium to import Central Asian gas to Europe – a project the Commission says is a "strategic necessity" to weaken Russia's hold on EU gas supplies. But Russia has also encouraged Hungary to endorse its South Stream project, which would deliver Russian gas to central Europe, in competition with Nabucco. In January, the Nabucco countries staged a heads-of-government summit designed to speed the pipeline's progress.

In addition, Surgutneftegaz's willingness to pay twice the market value for the stake raises the spectre of the Kremlin's involvement in the deal. "It looks like there is something else involved," says Chris Weafer, an analyst at Uralsib, an investment bank based in Moscow. "In isolation, it does not make commercial sense." Although Surgutneftegaz is unlikely to try to secure control of Mol, it will probably seek a blocking minority stake of 25% plus one share, Weafer says. That could affect the company's participation in Nabucco or its attitude to South Stream.

Vladimir Socor, an analyst at Washington's Jamestown Foundation, says Surgutneftegaz "may be acting as a half-way house for larger, but cash-strapped Russian companies, which may repurchase this Mol stake at a later stage". He also claims Surgutneftegaz is likely to increase its stake, but, unlike Weafer, says this would probably be a prelude to a full-blown take-over attempt. With a cash pile of more than $20bn, he adds, Surgutneftegaz can "easily overpay to acquire additional Mol shares, just as it paid double the market value for the stake it just bought. It can also tempt some in Hungary with promises to help recapitalise the energy sector during the financial crisis."

But the strategic play for gas pipelines might be a sideshow to the Kremlin's other energy ambition – Russian expansion into Europe's downstream oil sector and the consolidation of the country's oil exports in the hands of its biggest producers and preferred traders.

If it comes to a take-over battle, Mol will have to consider its own dependence on Russian crude supplies through the 1.3m barrels a day Druzhba pipeline into central Europe, says Socor. Russia has repeatedly interrupted supplies through the line. Some analysts claim interruptions have been politically motivated and could be used again if Surgutneftegaz starts a take-over battle from within Mol.

Lukoil has also waged a battle for control over the sale of its oil to Germany through Druzhba. In recent weeks, changes made by the Russian energy ministry to the flows along the line have favoured Russia's largest exporters, including Surgutneftegaz and Lukoil, to the detriment of smaller firms, say observers. Surgutneftegaz's arrival in Hungary may also influence Mol's crude-purchasing policy from the pipeline.

In Russia, the deal, along with a host of other recent similar-sized ones, triggered some optimism that the financial crisis might be easing. Yet the political rhetoric opposing Surgutneftegaz's move in Hungary might yet deter other Russian investors. Last month, Lukoil's vice-president, Leonid Fedun, said "some countries in eastern Europe have an extreme level of political antagonism towards Russia, so speaking of investments in Poland and Lithuania is ridiculous at this point." Lukoil has been interested in acquiring refineries in the Czech Republic and Poland, and was recently considered a suitor for Spain's Repsol.

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