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Russian Companies Buy Facilities in former Soviet Bloc

Russian oil companies, overflowing with cash and crude, have begun snapping up assets such as pipelines and refineries in former Soviet-bloc countries in a bid to secure market outlets and customers as Russia becomes an oil powerhouse.

Russian oil companies, overflowing with cash and crude, have begun snapping up assets such as pipelines and refineries in former Soviet-bloc countries in a bid to secure market outlets and customers as Russia becomes an oil powerhouse.
Russia overtook Saudi Arabia in February as the largest oil producer, and its steadily rising output far exceeds domestic demand.
Eastern Europe has been an early choice as Russia looks to purchase "downstream assets." Countries in that region are close and familiar and already are large consumers of Russian energy. They are also the places that Russian oil and oil shipped through Russia from Central Asia must traverse to reach the West. The top two Russian producers, Yukos Oil Co. and Lukoil Holding OAO, have been the most active buyers. Yukos bought a part interest in a pipeline in Slovakia in January and has expressed interest in refineries in Slovakia and Poland. Lukoil owns oil refineries in Bulgaria and Romania and is expanding its marketing in the region. "Russian oil companies are putting down roots," said Marina Dracheva, bureau chief in Moscow for the Energy Intelligence Group, a trade publisher based in London and New York. "This country is choking on the crude it produces. This is a safe and easy way to market their crude." Besides ensuring themselves of stable markets for exports, the companies see downstream assets as a hedge against political and economic risk in Russia. The investments have paid fairly low returns so far, but the income has been steadier than in Russia, where for years the government intervened heavily in the industry and many domestic customers were paralyzed by insolvency.
"The strategy is to become involved in the downstream in Europe because they are our customers," said Ray Leonard, Yukos vice president for exploration and new ventures. "Getting a market is a big focus."
But with memories of Soviet domination still fresh, Russian companies are treading softly. For example, Yukos recently reached an agreement to pump oil at one of its Siberian fields in partnership with the Hungarian oil company Mol Rt. The project will help Yukos expand sales in Central Europe and, perhaps just as important, is likely to improve the Russian company's image in a country that remembers Soviet tanks crushing a pro-democracy uprising in 1956. Three pipeline projects will give Russian companies more sway over oil and gas flows in the region. Yukos's purchase of 49 percent of Transpetrol AS, Slovakia's monopoly pipeline operator, gave it control over a transit route to Europe.
Russian companies are also working with a Croatian oil pipeline that once carried oil from Adriatic ports to points east to reverse its flow and carry Russian oil to the Mediterranean. And in March, Gazprom OAO, the Russian natural gas monopoly, joined several European companies to buy a 49 percent stake in Slovakia's gas pipeline.
"Russian oil companies want to control the market," said Emmanuel Bergasse, administrator for Central and Eastern Europe at the International Energy Agency, which is based in Paris. "By controlling the market, they mean control over the pipelines." The Russians have not met a warm welcome everywhere. The Polish government has balked at selling its large oil refinery at Gdansk on the Baltic Sea to Russian bidders. When the Polish authorities discovered two years ago that Gazprom was quietly laying a fiber optic cable across Poland along with a gas pipeline it was installing, they felt that they had been duped and have since redoubled their suspicions about big Russian companies and their intentions. Similar suspicions are sometimes heard in other countries.
"Politically, Russian investors are not really welcome now," said Tamas Pletser, an analyst at Erste Bank in Hungary. "This may change, but we need a few years for that."
The pragmatic politics of President Vladimir Putin of Russia are helping to reduce obstacles abroad. Since Putin took office in 2000, Russian foreign policy has emphasized economic ties, not political muscle. On a recent visit to Vietnam, for example, Putin announced that Russia would abandon a naval base there and help build Vietnam's first oil refinery. Gazprom won rights to explore for gas off Vietnamese shores.
While Yukos and Lukoil have mainly been buyers of assets, Tyumen Oil OAO, the No. 4 Russian producer, said it had been pursuing partnerships and joint ventures in Europe instead, an approach it says is cheaper and more efficient.
"Our cost of capital is two or three points higher than for a Western company," Simon Kukes, the president of Tyumen, said in questioning his rivals' strategy.
"Why would you do this? To market your product? But do you really know how to market in Central Europe? All we have to offer is our crude, and crude is a commodity." Kukes said TNK would rather leave marketing to local partners, while trying to absorb Russian small companies through bancrupcy