Derek Brower in London -

Surgutneftegas is to buy a stake in Hungarian oil and gas company Mol, in a move which is raising alarm bells about Russia's ambitions to expand into the downstream of Europe's energy sector and the fate of the EU's cherished Nabucco gas pipeline.

The deal, which sees Austria's OMV sell its 21.2% holding in Mol to Kremlin-friendly Surgutneftegas, surprised the sector - not least because of the price, which at twice the market value suggests a political element, reckon analysts. The €1.4bn transaction is the first major foreign acquisition of Russia's fourth-largest oil producer, which accumulated around $20bn in cash during the recent oil-price bonanza. Surgutneftegas is run by Vladimir Bogdanov, who is thought to enjoy a good relationship with Russia's prime minister, Vladimir Putin, but its ownership structure is opaque, with shareholders thought to include senior Russian officials.

The deal will delight OMV, allowing the Austrian firm roughly to recoup the cost of its aborted attempt to buy Mol outright. The European Commission finally blocked the move in the summer of last year on competition grounds. OMV would not respond to requests for an interview.

Surgutneftegas said the stake was a "serious basis for the start of long-term, mutually beneficial co-operation between our companies and will serve to strengthen European energy security."

But the move has annoyed Mol and the government, which had colluded to defeat OMV's hostile takeover attempt. In a statement, the company said it had, "always favoured partners providing stable, mutually advantageous cooperation. There have not been, nor are there, any strategic or operational relationships between Surgutneftegas and Mol. Therefore, the intentions of Surgutneftegas, formulated in its statement, are not clear." The company added that it only learned of the deal through press reports.

The official reaction from Brussels to the Surgutneftegas deal was muted. A spokesman for Energy Commissioner Andris Piebalgs told bne that the commission would not get involved. "They aren't buying control of Mol," said spokesman Ferran Tarradellas, indicating that there would be no competition worries from the deal. And he downplayed worries of growing Russian influence in the EU. "You can buy Lukoil oil in Brussels. Aeroflot can buy Ryanair tomorrow. Our market is open to every company that wants to invest."

Gas pipelines

However, that reaction sidesteps the wider implications of the agreement, which could affect Europe's broader energy strategy, say analysts. Given Surgutneftegas' close ties to the Kremlin, the deal will prompt worries about Hungary's position on two rival proposed natural gas pipelines projects in the region. Mol is one of the partners in the Nabucco pipeline consortium to import Central Asian gas to Europe - a project the European Commission says is a "strategic necessity" as the continent seeks to weaken Russia's hold on its gas supplies. But Russia has also courted Budapest to endorse its South Stream project, which would export Russian gas to the region in competition with Nabucco.

Indeed, Surgutneftegas' willingness to pay twice the market value for the stake has raised 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." Weafer suggested the deal might be a "favour to OMV," with implications for the South Stream pipeline, which OMV has also endorsed despite heading the consortium to develop Nabucco. Although Surgutneftegas is unlikely to launch an aggressive campaign 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.

Igor Sechin, head of Russia's oil sector, denied that Moscow had acted in the deal on behalf of Surgutneftegas, which he described as Russia's "best private oil company." Yet any blow to the Nabucco plans could be collateral damage from Russia's broader campaign to consolidate the country's oil exports in the hands of its biggest producers - and preferred traders. That strategy, in place since the Kremlin dismantled the country's once-largest oil firm Yukos in 2004, has seen oil exporters close to the Kremlin, including Surgutneftegas and state-controlled Rosneft, concentrate the bulk of seaborne and overland sales in the hands of favoured trading companies, such as secretive Switzerland-based Gunvor.

Lukoil has also sought to gain control over crude sales into Germany through the 1.3m barrels-a-day Druzhba pipeline to Central Europe. And in recent weeks, changes made by the Russian energy ministry to the flows along the pipeline have favoured Russia's largest oil exporters, including Surgutneftegas and Lukoil, to the detriment of smaller companies, say observers. The arrival in Hungary of Surgutneftegas may now influence Mol's crude-oil purchasing policy from the pipeline, too.

It will also help meet Russia's ambition to broaden its portfolio of downstream assets in Europe's downstream. The Kremlin was disappointed not to win control of a refinery in Lithuania that once belonged to Yukos, and Lukoil was recently considering a bid for Spanish energy firm Repsol. Last year, it also added a joint venture with Italian refiner ERG to other European assets.

Yet any worries in the EU about the latest transaction - and what it signals about Russia's goals - will reveal, again, the inherent inconsistencies in the bloc's energy strategy. Brussels blocked OMV's bid for Mol, despite implicitly allowing the creation of other large corporate tie-ups in the bloc's utilities sector. Moreover, OMV warned last year that Brussels' move would force the company to sell its stake in Mol to another firm, possibly an expansion-minded Russian one. The EU can't claim that it wasn't warned.

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