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Royal Dutch Shell Plc .com: Wall Street Journal: Russia

Investors Line Up
For an Oil Stake
July 8, 2006; Page A2

When President Bush meets with Vladimir Putin Friday, he will have a chance to express his concerns about the Russian leader’s policies.

The day before, investors will have a chance to do the same. On Thursday, the $10 billion initial public offering by the state oil company, OAO Rosneft, is scheduled to be priced.

So far, investors seem so eager for a piece of Russia’s oil riches that they are willing to overlook Mr. Putin’s curbs on democracy and heavy-handed economic policies. “Greed is taking precedence over fear,” says one person close to the deal.

The reason: Russia is one of the world’s largest producers of oil. Rosneft is the main beneficiary of the Kremlin’s dismantling of OAO Yukos, the closely held company that had sought to be Russia’s oil flagship until its chief executive and main shareholder was jailed in 2003.

Rosneft’s takeover of Yukos’s main asset — a giant Siberian oil-producing company — catapulted the state company into the top ranks of Russian oil producers, highlighting the Kremlin’s drive to bring the country’s energy riches under its tight control.

The IPO will be a test of whether foreign investors, who lost billions on Yukos when the government crushed the company with $30 billion in back-tax claims, are ready to put those losses behind them and bet on the Kremlin’s horse.

International energy companies already are lining up. The Kremlin has steadily squeezed their access to Russia’s rich oil and gas reserves, pushing for home-grown companies like Rosneft to get controlling stakes in any future large projects. Staying in the good graces of Rosneft and its Kremlin overseers is critical for any foreign company seeking to operate in Russia, say industry officials.

So isn’t surprising that when Rosneft offered oil companies across Europe and Asia the chance to participate in the IPO, there was plenty of interest. BP PLC and Royal Dutch Shell PLC, both with substantial Russian operations, are likely to participate, taking as much as $1 billion or more each, according to people close to the deal.

State-owned companies in Asia, eager to curry favor with Moscow in the hope of getting more fuel, also are likely to invest. India is examining a proposal to invest as much as $3 billion in Rosneft through state-run energy firm Oil & Natural Gas Corp., a senior Oil Ministry official said Friday.

Russian investors, both individuals who can sign up to buy shares at banks across the country and the super-rich, also are showing strong interest.

Among Western investors, the biggest concern is whether the market capitalization of $60 billion to $80 billion that Rosneft is targeting is too rich a price for a company with little track record among investors. Worries about potential litigation from Yukos or any lingering anger about losses don’t seem to be major concerns.

Says James Fenkner, a Moscow fund manager: “Betting against the Kremlin has been a very poor strategy over the last few years.”

Write to Gregory L. White at [email protected]


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