Emzar Jgerenaia TSU Professor
Georgia’s geopolitical advantage is melting – we are losing function at international market
At the end of nineties, despite Russia’s raging resistance, Baku-Tbilisi-Jeihan project has been accomplished. USA and West were ardent supporters of the project. This was followed by Istanbul summit and signed agreement with Russia, concerning disengagement of military forces in Georgia.
Foundation was made for Georgia’s statehood and our country gained function on international market. The state has been established. Since then, the oil prices started to increase, Putin’s Russia strengthened and grew rich – imperialistic dragon awoke and Russia started to show its real face. Naturally, war against Georgia and its independence and independent projects has been started. This became the main field of activity for Russia and Putin during the last eight years.
Georgia is participating in long list of pipeline projects, but none of them is accomplished due to Russia’s resistance. Russia was looking for a chance to bring troops in Georgia and it successfully took the opportunity of doing this in August. As a result, essential project for Georgia are blocked even more. Boasted Nabucco project hang itself. The news about the fact that Austrian company OMV sold shares of Hungarian MOL to Russian Surgutneftgas was like a bolt from the blue. Surgutneftgas became biggest stakeholder of holding (See scheme one). As a result, the control of strategic object was lost. Russian paid double price for the shares of Hungarian company. MOL is one of the founders of Nabucco project. If one takes into consideration, dependence of former or current Hungarian government on this energy company, one thing becomes obvious – this is significant lever in Russia hands for blocking Nabucco project. That is why, for Russia it was worth of paying colossal price for obtaining shares of MOL.
By the agreement signed on 26 June of 2006, Austrian OMV and Hungarian MOL, together with Turkey, Bulgaria and Hungary founded Nabucco project (See Sakartvelos Ekonomika 2008 No 11, page 12). Russia’s first attempt to block the project was pressure made on Kazakhstan and Turkmenistan. Afterwards, together with its old partner country Turkey, Russia tried to entice project participant countries – Hungary and Austria.
Surgutneftgas has become one of the major stakeholders of Hungarian holding. At the end of March, the company purchased 21.2% shares of MOL from Austrian company OMV for EURO 1.4 billion. Over several years, this was the first decision of Surgutneftgas to make independent investment that moved forward its capital to major oil processing industry of Eastern Europe. Until that the company was taking oil from pipeline Drujba and making investments in former soviet union countries (Ukraine, Belorussia) or in small oil processing factories (Serbia), either in the countries that were serving pipeline Drujba (Rumania, Bulgaria). As a rule, on the front of takeovers serious victories are achieved by means of huge efforts. This agreement was not an exception either. Surgutneftgas has paid almost double sum and get serious headache that is connected with the desire to control MOL. Surgutneftgas encountered serious confrontation from the company’s management and local government. We already noted that the treaty was accompanied by disinclination: there is an obstinate demand to make immediate amendments in regulations of holding that broadens rights of committee of directors, complicate process of their reelecting and endures owners of 2 percent of shares to establish own structure in fear of losing their voice. MOL’s managers expressed initiative to check legality of agreement made between Surgutneftgas and OMV. Russian ambassador was summoned with the request to acquaint future plans at Ministry of Foreign Affairs of Hungary, in Budapest. Oppositionist right wing conservative party Fidesz accused socialists in collaborationism and threatened that in case of their coming to the power they will stop this “economic invasion” immediately.
There are two important factors in MOL history: why Hungarians are against this merging and what dividends might Russia get from availability of this company’s assets.
Show us the registration
Basis of MOL’s business (Magyar Olaj – es Gazipari) is processing of oil products and trading that brings 80% of holding’s profit. One of major oil processing factories in Hungary, Slovakian company Slovneft, average-sized oil processing company in Italy, wide network of petrol stations are owned by the company. The company holds petrochemical assets also. MOL is making 2 million tones of oil beyond the borders of Hungary. The company owns 5 thousand km. length pipeline. 17.5 billion Cubic meters of gas are transported annually by the company. MOL’s overturn amounts $20.5 billion that opposes Surgutneftgas’s turnover ($23 billion) in 2007. After moving to market economy, Hungary just like other eastern European countries entrusted its economy to trans-national companies or western major players. However, this did not spread on oil assets, but they were privatized. Therefore, MOL’s management, which is in tight connection with Hungarian political circles, was striving for such structure that would allow maintaining control over the company in the future. If one or another stakeholder was strengthening, company bought shares at the market and selling them to friendly investor. As a result, disloyal stakeholder was losing its positions. The aim was missed in case of Austrian OMV, which increased its share up to 20% and started negotiations about merging. Austrians were planning to merge factory owned in Shvekhat by OMV and Bratislava oil processing factory into one oil-processing complex. This would allow OMV to create biggest oil processing factory in Eastern Europe and become leading player in local market of oil products. Hungarian holding management had negative reaction toward this idea and tried not to let MOL and OMV to have control in their hands. MOL’s private stakeholders had limited rights (irrespective of shares’ portion they had only 10% of voices), but this limitation was not applying to the state. Stakeholders were left without voices, as they were required to present original documents proving the registration of the legal body they were representing. Besides this, in order to increase loyally disposed stakeholders, the company’s management sold shares of three companies of the holding without consent of director’s board at quite low prices in opinion of OMV. As OMV claims, in the peak of conflict MOL declared about involvement in Southern Stream project, which was competing with Nabucco project supported by OMV. Austrian holding did not manage to replace MOL’s management. Since Euro committee declared that merging of two oil and gas holdings would restrict competition and selling of assets was needed, OMV decided to buy back own shares. It started to search for potential buyer of its holding of shares.
The buyer appeared pretty soon. As we have noted, Surgutneftgas purchased 21% of shares for $14 billion. It agreed to pay double bounty for MOL shares in comparison with market value. If one calculates how much barrel oil processing powers we get the number that is fits to peak prices of oil, rather than current reality. Moreover, MOL’s financial indicators are worsening gradually and it would be hard to sell it profitably. Surgutneftgas refused to comment what were their aims when making such unprofitable deal. One might guess only. The first thing that might come to mind is that Surgutneftgas integrated in Eastern Europe’s oil processing. Strange that the company is not providing oil to MOL yet, (Rosneft and Lukoil are doing this). Moreover, it has no experience in asset integration or their purchasing business. Up to now, Surgutneftgas had no interest in oil processing industry. The idea that main aim of Surgutneftgas was not MOL’s oil processing business, but network of gas transportation that could be sold to Gasprom at a profitable price look quite rational. Some negotiations and some friendly relations were between MOL and Gasprom. However, if we take into consideration, maneuver policy characteristic to Hungarian party, full transition of Russian gas to Europe stands under question. If Gasprom manages to control MOL’s gas transportation network, it will end Nabucco project finally, together with Ukrainian gas transportation network modernization plan. Gasprom is the one who needs MOL’s gas transportation network most of all, but Lukoil’s assets would look nicer with MOL’s oil processing factories. As we already mentioned Lukoil is providing MOL with oil and owns petrol stations network in Hungary.
Anesthesia is needed
Before we discuss profitable selling of shares bought by Surgutneftgas, it should become share holding’s plenipotentiary owner and place its representatives in board of directors. Hungarian party is strongly resisting to this. Country’s government is supporting this resistance either. The experts reckon that just as Poland Hungary compensates its inferiority complex by means of national oil companies. Oil processing industry is considered not as economic, but as political and historical sympathy-antipathy matter. Therefore, Russia, which is main provider of oil to these countries is holding one fourth of oil processing factories. Shell of Russian companies is occupied by Hungarian MOL and Polish Orlen. Russian experts forecast that oil assets of Eastern Europe will appear in hands of Russia. They compare resistance of these countries to the reaction of stubborn child, whose favorite toy has been taken away. First Surgutneftgas will assure stakeholder free of MOL’s management influence, that their coming to the power will increase profitability. Afterwards they will prove this in practice. There are talks that it is a peace of cake to prove that MOL is ineffective national oil company. It is not accidental that other Eastern European countries declined similar oil business model. In terms of small market and without cheap raw materials this business becomes hearth of monopoly and corruption instead of national achievement.
Energy summits held in April, in Turkmenistan and Bulgaria were other attempts to find a way of transporting gas bypassing Russia. However, new rival appeared on 3 April, Turkmenistan, in parallel to Iran and Russia, presented new project of transporting gas to China and India. Project concerns gas main blowing on way to Russia, when Turkmenistan blamed Russia in blowing Gasprom pipeline. Russia showed Turkmenistan that how easily it could bankrupt the country if the last does not obey Russia. Turkmenistan said nothing about either Nabucco project or newly baked White Stream project. Nabucco is Russia’s traditional enemy. Azerbaijan swore allegiance to the Russia now. Aliev gave his consent to Medvedev about passing the gas through North Caucasus. Azerbaijan is already considered as a business partner. The same is with Turkey that claims to be business partner in the project instead of transit country.
Even the project initiators Austria and Hungary does not want to participate in it. It comes out that under Russia’s pressure project hang itself and only USA is trying to resurrect dead Nabucco like Lazarus. Anyway, energy summit in Bulgaria was another attempt of this. However, European countries are less obeying USA and thus Georgia gradually drifts apart of major oil and gas projects. One thing is obvious; we need to break the wall in neighboring and partnership policy.