SHELL OFFERS A BOUNTY IN GERMANY TO ROSNEFT

According to Russian and German media reports, Royal Dutch Shell offers its stake in Germany’s largest oil-industry complex, MIRO, to Russia’s Rosneft, in return for Shell “access” to a field development project in western Siberia. If consummated, the proposed deal would mark the Russian state’s first acquisition in the heart of Western Europe’s privately owned oil industry.

MIRO is a crown jewel of Germany’s oil sector. Based in Karlsruhe on the Rhine, the complex includes Germany’s largest refinery, largest tank farm, a dedicated oil harbor (its navigable channel recently enlarged), and pipeline connections to the seaports of Marseilles and Trieste for crude oil imports. MIRO’s state-of-the-art refinery processes some 15.5 million tons of crude oil annually into a full range of products, including gasoline (at 5.2 million tons in 2006), middle distillates (diesel fuel and light heating oil, at 6.7 million tons in 2006) and other products. MIRO produces a full 20% of all gasoline used annually in Germany. The tank farm has a storage capacity of 4.6 million tons of refined products and crude oil.

Shell, with 32.25%, is the single largest shareholder in MIRO. That stake was recently valued at $2.5-3 billion. The other shareholders are Esso Deutschland with 25%, BP-Ruhr Oel with 24% (half of it held by the Petroleos de Venezuela state company), and ConocoPhillips with 18.75%. Shell and BP have something in common: They are being arm-twisted by Rosneft and Gazprom, respectively, into handing over Western assets in return for “access” to Russian oil and gas fields. Thus, MIRO’s shareholder structure is vulnerable to Rosneft takeover beyond Shell’s stake, if that stake is allowed to be surrendered.

For its part, Rosneft offers a stake to Shell in the Severo-Komsomolsk onshore oil field and two small offshore fields nearby, in the Yamal-Nenets district. With proven reserves of 70 million tons of oil, those fields are beyond Rosneft’s ability to develop. Shell would provide its advanced technology for what is likely to be a minority stake.

The proposed swap would be the first move to implement the Rosneft-Shell memorandum on strategic cooperation. Signed in July of this year, the memorandum envisages an alliance of the two companies for oil exploration, extraction, processing, and product marketing. The logic is partly based on swapping upstream assets in Siberia for downstream assets in Western Europe.

Prior to entering into this alliance, the two companies’ sole joint project has been Rosneft-Shell Caspian Ventures, holder of a 7.5% stake in the Caspian Pipeline Consortium’s (CPC) pipeline that runs from Kazakhstan to Russia’s Black Sea port of Novorossiysk. The consortium has for years experienced extortion by Transneft and other Russian authorities regarding the terms of access to the pipeline and the port. In December 2006, the Russian government forced Shell to surrender part of its majority stake in the Sakhalin-2 oil and gas project to Gazprom, at a deeply discounted price ($7.5 billion, instead of the generally estimated value of $12 billion), being reduced to a minority shareholder, in line with the Russian government’s recently enforced policy toward Western investors in energy projects.

Shell president Jeroen van der Veer publicly praised Russian President Vladimir Putin and his energy policies in the wake of those events. Van der Veer subscribes to the notion, fast gaining ground among Western oil majors, that they need to “hold hands” with Russian state-controlled companies in order to operate in Russia’s arbitrary legal and political circumstances. But Shell has become the first to offer a bonanza in the West in order to be allowed entry into a Russian project.

Rosneft has coveted refineries in the West for some time. But the company has had only modest experience with refining and is deeply tainted as a business entity. It grew from mid-size to giant size almost overnight through the state’s confiscation of Yukos. It operates under direct Kremlin supervision through the company’s board chairman Igor Sechin, a “former” KGB officer who is also deputy chief of President Putin’s administration.

Any takeover of MIRO equity by Rosneft (from Shell or the other MIRO shareholders) would signify a de-privatization and etatization of assets by the Russian state in Germany. It would deepen Germany’s already worrisome dependence on Russian energy. It would set a dangerous precedent in Europe, potentially compromising any serious attempts to develop a common European policy.

The German government and European Union authorities would be well justified to defend both the market economy and energy security by blocking the proposed Shell-Rosneft swap. In this regard, Hungary is setting an example with its draft law that would block takeovers of privately owned energy companies — such as MOL in this case — by foreign state-controlled entities.

(Vedomosti, September 13-14; Dow Jones, BMI Industry Insights-Oil and Gas Emerging Europe, September 13; www.miro-ka.de, accessed on September 17; see EDM, January 2)