RusEnergy

January 16, 2008 - The Moscow Times by Anatoly Medetsky - Oil producer West Siberian Resources on Tuesday agreed to merge with Russian refiner Alliance Oil to create a $2.5 billion company where the majority interest will belong to Alliance's Kremlin-friendly owners. The deal continues a trend for oil producers -- be it smaller companies like WSR, controlled by a Russian businessman and traded on the Stockholm Stock Exchange, or industry champions like Rosneft -- to seek higher margins in refining. Bermuda-registered West Siberian Resources hopes that the partnership with the three government-friendly Bazhayev brothers, who own Alliance and will take 60 percent in the new company, will insulate it from political risks on the market, which is closely watched by the Kremlin, WSR managing director Maxim Barsky said in a conference call to investors. West Siberian Resources has been snapping up production units since 2004, expanding the company like Mikhail Gutseriyev did with his Russneft before it fell foul of the Kremlin last year. Prime Minister Viktor Zubkov inspected Alliance's prime asset, the Khabarovsk refinery in the Far East, last month and blessed its ongoing $800 million upgrade, Barsky said. The Bazhayevs, who come from Chechnya, also donated $50 million to the government for the rebuilding of the republic, Barsky said. "We have a very good political position," he said. In a sign of unclouded relations, the Kremlin named one of the brothers, Mavlit, to sit on the Public Chamber, a body that was designed to exercise public oversight of officials. The Kremlin, however, did not reappoint him in a recent member rotation. A spokeswoman for the company declined immediate comment and did not respond to e-mailed questions Tuesday. The merger will create a modest company that will, by reserves, trail two other foreign oil companies working in Russia independently, Imperial Energy and Sibir Energy, said Anton Konchin, an analyst at UniCredit Aton brokerage. West Siberian Resources, which will give its name to the merged company, has reserves of 307 million barrels, while Alliance has 123 million barrels in its fields in Tatarstan and Kazakhstan. The new company will have a market worth of $2.5 billion, produce 51,000 barrels per day and will expand to 90,000 by 2011, Barsky said. WSR current shareholders will have 40 percent of the new company, the company said in a statement. Alliance's refinery was the last available privately owned refinery with large capacity in Russia, Barsky said. It is able to refine 70,000 barrels per day and will produce better quality fuel starting in 2011 when the upgrade ends, he said. Among the reasons for the deal, Barsky named the heavy Russian taxes on oil production and export that encourage refining; growth of local fuel consumption; and higher fuel prices in the Far East due to the long distance from the country's main oil production and refining facilities. West Siberian intends to reduce the cost of transporting the crude to Khabarovsk by swapping its oil for the oil that is produced closer to its refinery by companies such as Surgutneftegaz, Barsky said. The new company will also operate 255 gas stations and 24 oil products terminals in the Far East, Barsky said. After the merger -- which needs to be approved by the companies' boards, WSR shareholders and Russian regulators -- the company's depositary receipts will continue to be traded in Stockholm and it will inherit senior managers from the current WSR, Barsky said. The companies intend to complete the merger in the first quarter of this year, he said. WSR's major shareholder is Alltech Investments, controlled by Dmitry Bosov. WSR did not disclose the size of Alltech's stake Tuesday. Another large owner is Spanish oil and gas company Repsol YPF, which owns 9.2 percent. WSR had a net profit of $30.2 million in 2006, while Alliance Oil had net profit of $101.63 million that year. Synergy created by the merger could push the combined profit up by 10 percent to 20 percent, said Timur Khairullin, an oil analyst at investment company Antanta Capital. The deal continues a trend toward consolidation on the market, he said. "There are increasingly fewer players, but they get larger," he said.