Something Very Unusual Just Happened In Russian Oil & Gas

Refineries might seem pillars of stability in very volatile oil markets - trading companies unbacked by downstream assets are frailer than the others as they cannot stand on both feet, vulnerable to market shocks and recessions. Because refineries are long-term projects feeding the needs of regions and nations, rarely does one hear about refineries being held captive to protracted ownership disputes or being suffocated by governments. Yet Russia has been witnessing a peculiar case of bankruptcy entailing the Antipinsky refinery, one of the most recent additions to the nation's downstream segment. Truth be said it is not often that one perceives a hitherto independent oil refinery being taken over by a state bank.

But let's take it one step at a time. The Antipinsky refinery was commissioned in 2006, and for quite a long time it seemed like the quintessence of the capitalist Russian dream, an initiative carried out by an enterprising young university graduate who managed to put some well-connected officials around the project. Transneft, the Russian pipeline transportation monopoly has toyed with the idea of building a refinery along its major trunk pipeline from Western Siberia to Europe in the mid-1990s - it has already chosen the spot, a tiny village (Antipino) a couple hundred meters from the trunk pipeline, as would-be location. Transneft has also bought the basic ready-to-install refinery equipment from US firm Petrofac, for a nominal throughput capacity of 0.5 million tons per year.

Yet then came a new Transneft CEO and the project was quickly mothballed. The refinery equipment blocks were seized by the Russian customs who had no idea what to do with it, eventually tendering all of it out in 2004. Dmitry Mazurov who was in his mid-20s at that point has gathered the support of then-Governor of the Tyumen Region (now mayor of Moscow and one of the most influential people in the country) Sergey Sobyanin as well as prominent bankers and lawyers, only to win the tender (in fact being its only bidder) and kick-start a meteoric career. In 2014, Mazurov extended his portfolio by adding several upstream projects in the Orenburg region which were effectively granted by the government to his budding New Stream holding.

The Antipinsky Refinery was the first purely private refinery to be put onstream from scratch in the history of post-Communist Russia - even though there are more recent additions such as the TANEKO refinery in Tatarstan that was launched five years later, due to the state playing a significant role in them Antipinsky stood out as the one successful example of a private enterprise managing to function properly in a system that massively prioritizes state-owned business interests. Over the years the refinery has undergone a series of upgrades, resulting in it reaching an impressive level of refining depth (97.4 percent) which is by an order of magnitude higher than the Russian average (the leading Russian oil company Rosneft wields a mere 75 percent refining depth).

Just as everything seemed to fall into place, there comes the inevitable nosedive à la russe. The first canary in the coal mine - a management reshuffle as per the wishes of Sberbank, Russia's main (state-owned) bank and concurrently the main lender of New Stream. Second, just as the Antipinsky refinery completed its latest refurbishment, rumors started circulating that the company is struggling with crude supply disruptions. And then an all-out war broke out between the initial owners with Mr. Mazurov as their main representative, claiming that Sberbank is effectively extorting New Stream's downstream assets under false pretenses. Sberbank retorted that Mr. Mazurov's management style (i.e. marketing oil products via a Swiss-registered trading firm with his sister at its helm) has left the company cash-strapped, with millions of rubles embezzled and crucial documentation missing.

As the conflict rose in intensity, a series of odd revelations started to come to light. For instance, recent Russian media inputs have suggested that currently the total debt owed by the Antipinsky refinery to international trading houses stands at 13 billion rubles (200 million), not 5 billion (75 million) as previously reported. Russian news reports claimed it was TOTSA, BB Energy, Socar Trading and a bunch of bog-standard little trading companies that suffered losses from Antipinsky's incapacity to fulfill its contractual obligations. Yet in another twist of events, it turned out most of the supply contracts were already signed after Sberbank took over control over the refinery (took place November 13, 2018), whilst in Mr. Mazurov's era there were only two valid term contracts, one with Socar Trading and the other with another unknown, Transchemie.

Let's just brief up the things that we know for sure. We can be outright certain that the Antipinsky refinery's former owner, Mr. Mazurov is being held at a pre-trial detention facility until September 13. We can also confidently point out that Sberbank seized the refinery less than two months after it had finished its latest round of equipment upgrades and maintenance following which its aggregate output capacity rose from 7.5 to 9mtpa. We can also assuredly claim that SOCAR Energoresurs is now marketing crude products refined at the Antipinsky refinery - it has been spotted selling LSGO and gasoline in the Baltic ports of Ust-Luga and Primorsk, inevitably raising the question whether this should be the new setup.

The appearance of the Azerbaijani state oil company SOCAR as the new owner/operator of the Antipinsky Refinery is certainly a highly notable fact. Just a month after the refinery has filed for bankruptcy in May 2019 it had a new owner, the above mentioned SOCAR Energoresurs, co-owned by Sberbank and SOCAR. When the Azerbaijani firm entered the refinery's shareholding structure, one could straightforwardly see the direct link that could be traced back to the maternal company, SOCAR. Yet that is no longer the case as SOCAR Energoresurs has reshuffled its ownership in July, seemingly making a Cypriot lawyer the main beneficiary of the company, insinuating that all this is happening with the Kremlin's backing.

The takeover also raises a plethora of questions that are really difficult to answer even for seasoned Russia watchers. The ownership structure of New Stream included partners of Sergey Sobyanin, mayor of Moscow and one of leading political figures in Russia, a former classmate of President Putin and several others, yet all of them have been silent throughout the seizure of the refinery. Moreover, Russia's main bank Sberbank was up to now rather uncomfortable with delving deeper into Russia's highly politicized oil sector - with its hands forced or not, now it is asking the government for state support measures vis-à-vis the Finance Ministry's so-called tax maneuver (abolishing of the export duty with increasing mineral extraction tax) and may seek government help in amending Antipinsky's upstream licenses.

Now where does this leave Russia's downstream? First and foremost, this leaves the future of independent refiners (those few remaining) in the air. In the past years and months, there have been rumors that companies like Russneft might see increased pressure from the part of Rosneft and others. If the seemingly well-connected New Stream could capitulate this easy, the others would go down even easier - if need be, of course. Second, this only confirms the overall trend of the state taking an ever-larger share in companies. In both the upstream and downstream segments, it is either state-owned companies (Rosneft, Gazprom Neft) or firms implicitly supervised by the state (Surgutneftegaz, LUKOIL) that can wield positive results. To put in Thucydides' terms, the others suffer what they must.