Pipeline companies to merge

On May 15 the Kremlin announced that pipeline operator Transneft would merge with oil transit company Transnefteprodukt (TNP). O&G looks at the implications of the merger.

Transneft is already one of Russia’s most powerful companies. It owns more than 43,000 kilometres of pipeline, and carries 93 percent of Russian oil, supplying much of the exports of Russia’s most economic asset to Europe. And following the announcement that it will be merging with TNP it looks like it is set to become even more powerful.

TNP itself is a state-owned pipeline carrier that controls over 19,000 kilometres of pipeline in Kazakhstan, Ukraine and Belarus. The logic behind the merger is clear, to create a single network of oil pipelines. Indeed in its statement announcing the merger, part of the explanation the Kremlin gave was to “protect the economic interests of the Russian Federation”.

This has lead some observers to suggest that Moscow is looking to use the consolidation of the companies to exert more international pressure with regards the price paid to its neighbours to ship Russian oil to export markets in Europe. It has also been suggested that Moscow wants to strengthen its grip on the pipeline infrastructure in the face of private projects.

Whether this is true is unclear – after all the Kremlin already owned 100 percent of TNP and 75 percent of Transneft. Under the terms of the merger TNP will become a private company, and the capital in Transneft will be increased. The process will end with a share swap against the new Transneft shares. Ultimately, Transneft will control TNP, with the Kremlin retaining its 75 percent share, and more importantly complete control of voting rights, in Transneft. So in many ways nothing will have changed.

This is certainly the position of Simon Vainshtock, the President of Transneft, who spoke on the Vesti TV channel a day after the merger was announced. “What is the effect of merging of Transneft and Transnefteprodukt on sharing of dividends? I don’t really think something could change. We do treat our minorities very carefully and prudently. Following merging there will be no actions to make the situation worse.”

Vainshtock also dismissed the idea that the merger means the end of private pipelines in Russia, arguing that the merger will not contribute to any “cardinal” changes with regards private ownership of pipelines. “Presently we have private pipelines. These are pipelines in Sakhalin, LUKOIL’s in Komi, the Caspian Pipeline Consortium,” he said. “Therefore I really don’t see such changes could happen as a result of this.”

Efficient business

Away from these wider questions, the merger of these two companies does make sense from a purely business point of view. The two firms have essentially the same business, and the consolidation into one company should produce operational efficiencies, as well as allowing the expertise of the two companies to be shared.

When discussing the advantages of the merger, Vainshtok explained that it would allow the potential of Transneft to transfer to TNP. “It is not a secret,” he argued, “that technologically and potentially Transneft is stronger than Transnefteprodukt. And now our system decision will be applied to Transnefteprodukt as well.” This will naturally have a great influence on the whole industry.

It will also have an influence on the employees of TNP – it is thought that only 10 percent of TNP’s current management structure will retain their employment in the new structure.

With any merger though there is a risk that the operational efficiencies will be hard to find. Although a bigger company has more size and capital to exploit its opportunities, as the organization grows there is always more avenue for waste, complexity and faults. Vainshtok is aware of this risk, but is confident about the outlook.

“Undoubtedly, management will be more complicated,” he told Vesti. “Yet this is normally managed company.” He explained he thought it would be a democratically managed company, and that issues would be discussed in the right way, and once decisions are made they will be executed in a “workmanlike manner, in time and effectively.”

A new destiny for Russia

One thing is clear about the merger, it is part of Russia’s ongoing efforts to reduce the amount of raw crude oil it exports, and increase the amount of processed petroleum it sells to foreign markets. This strategy is aimed at allowing Russia to capture more of the value of its oil production by cutting out the foreign refiners who are currently processing much of its oil. It should also help reduce Russia’s economic dependence on exports of crude, helpfully diversifying risks to Russia’s economic outlook.

This is a goal that Vainshtok certainly thinks is important. When asked about his attitude to a reduction in exports of crude oil, he expressed his hope that this could be achieved. “Our opinion is that export of oil and raw materials is not continuing to be the destiny of Russia,” he said. “We managed to firmly stand on our feet so as to develop petro-chemistry and so to decrease export of raw materials and continue to be raw appendage for western oil refining and chemical brunches. We can do all by ourselves, we must do it.”