Russian oil merger poses threat to BP and Shell

A powerful merger of Russian oil giants, announced yesterday, threatens to damage the competing ambitions of Shell and British Petroleum in the former Soviet Union. Terry Macalister reports.

The tie-up between Yukos Oil and Sibneft, blessed in a formal signing ceremony by Russian prime minister Viktor Chernomyrdin, provides them with a strong platform to launch a takeover bid for Rosneft, the last jewel in the Russian oil crown.

Both Shell and BP have declared their interest in Rosneft when it comes up for privatisation later this year. Yukos and Sibneft, which had previously said they would make a joint bid for Rosneft, are now seen as major contenders.

Shell, the world's largest private oil group, which announced in November a strategic alliance with Russian gas behemoth Gazprom, said its ambitions in the region remained undimmed.

But a spokesman accepted the going would get tougher. He said: "We will be making a bid for Rosneft when the bidding process starts. But with increased deregulation in Russia we must expect there to be more competition."

BP, which last year formed its own joint venture with Sidanko in Russia, also shrugged off the new threat. A spokesman said: "It makes no difference to us. We will still consider bidding for Rosneft but our ambitions in Russia were never dependent on Rosneft."

Nick Clayton, oil analyst with Kleinwort Benson, says: "By putting together a formal link, Yukos and Sibneft have definitely strengthened their hand in the forthcoming [privatisation] auction."

Other Russian experts said the appearance of the prime minister at the conclusion of the merger talks is significant. They point out that Mr Chernomyrdin, who consolidated his power in a cabinet reshuffle at the weekend, is in poll position for head of state should President Yeltsin's health finally fail.

With political considerations playing a large role in Russia's commercial life, the fate of Rosneft could be decided partly by Mr Chernomyrdin, who is close to Yuksi leaders.

The Yukos/Sibneft merger, a first among top Russian companies, creates the largest oil group in the world in terms of proven reserves and the third largest in terms of oil production.

But its financial position could be stronger and many analysts expect Yuksi, as the new venture will be called, to quickly find a new western partner. Talks have already taken place between Yukos and Amoco. Texaco and Elf Aquitaine have also been linked with the Russians.

The Russian oil markets have been alive with corporate manoeuvrings since the government decided last year to end the restrictions on foreign companies holding more than a 15 per cent stake in domestic groups.

The Yuksi merger could also open up opportunities for well- financed Western oil companies as it could spark more oil sector consolidation as smaller firms struggle to compete with the bigger ones to raise finance.

"There is a good argument for saying this could be the start of further consolidation," said Jim Henderson, oil analyst with Renaissance Capital investment bank in Moscow.