Sechin looks set to break deal with Russian cabinet

By bne IntelliNews November 6, 2012

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On one hand, the deal that Rosneft CEO Igor Sechin appears to have cut with Prime Minister Dmitry Medvedev last month seems to be holding up, after Sechin said that he will not make any claims on the $4.8bn (RUB148.8bn) that British oil major BP is due to pay to state holding company Rosneftegaz in return for a 5.66% stake in Rosneft. On the other, the former energy Tsar looks set to again try to push into the utilities sector, a move that the liberal cabinet has been resisting fiercely.

The sale of the stake in Rosneft to BP was part of the complicated deal agreed last month that will see BP sell its 50% stake in the Anglo-Russian joint venture TNK-BP to Rosneft for cash and shares worth about $55bn. At the same time BP will hand back $4.8bn to buy an additional 5.66% in Rosneft, is held by Rosneftegaz, which is in turn chaired by Sechin. In a separate but related deal, Rosneft will buy out the other 50% in TNK-BP from Russian consortium AAR.

The issue of what happens to the $4.8bn from the sale of the 5.66% stake is important. Sechin had intimated before the BP deal was agreed that he would use the money accumulating in Rosneftegaz to take a foothold in Russian utilities. That would effectively create a new super-sized energy champion controlling big stakes in oil, gas, and power, and thus boost Sechin's personal power into the bargain. Aside from the state's 75.16% stake in Rosneft, Rosneftegaz also holds 10.74% in gas giant Gazprom. Dividends from both energy giants have been pumping into the holding for years.

Medvedev and his liberal team have objected strongly to Sechin's plan, and targeting the source of his potential power, called in September for 95% of the RUB134bn ($4.2bn) cash pile currently held by Rosneftegaz to be turned over to the government. Technically the cabinet is in charge of these assets and can simply order Sechin to hand the cash over. However, Sechin told journalists that he would only do so after consultations with President Vladimir Putin.

The government agreed to negotiate and clearly a deal was struck last month. Rosneftegaz has reportedly agreed to hand over RUB50.5bn (around 38% of the total), while the holding retains RUB82bn for "other purposes". Moreover, Sechin said he would drop his bid to buy a stake in hydropower giant RusHydro, the most attractive asset in the utilities sector.

Fast forward, and Sechin said in an interview with The Wall Street Journal published on November 1 that Rosneft has no plans to claim the coming cash from BP. "Part of these funds, as soon as they are received, will be transferred immediately to the budget in the form of taxes. I think that is about RUB20bn ($645m). The rest will remain in Rosneftegaz for other purposes," Sechin said, without going into detail. The portion of the cash held back will boost the holding's cash pile to just over RUB200bn.

Worrying sign

In a worrying sign, a small item run by Vedomosti on October 24 announced that the presidential energy commission has decided Rosneftegaz should buy a 40% stake in the highly attractive Irkutskenergo power company for RUB50bn from Inter RAO, which is then to be swapped for newly-issued RusHydro shares during the hydro giant's recently-announced SPO. Matvey Taits of UralSib writes in a note: "If the [Irkutskenergo] plan is realized, it will be Rosneftegaz's first step towards entering the utilities sector, with the company to receive 14% of RusHydro via the asset swap."

No prizes for guessing that Sechin heads that very same energy commission, which is formed under the presidential administration, and technically has no power to make hard and fast decisions about the oil and gas sector. Rather it is First Deputy Prime Minister Arkady Dvorkovich to which that right formally belongs, and he has been the leading opponent of the plan for Rosneftegaz to get into the power business. However, as Sechin is head of all the key pieces - Rosneft, Rosneftegaz, and the presidential energy commission - he is clearly in a strong position to push such deals through.

Medvedev is in a unpleasant position. If the Rushydro deal comes together then the presidential energy commission will have usurped the cabinet as the policymaker for the oil and gas sector policy. In addition, despite Medvedev's apparent victory in leveraging the dividends out of Rosneftegaz, he will be shown to be powerless in the bigger game of moving pieces around the board.

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