Key findings

 

  • In cooperation with the government and other companies (e.g., OTP), in the past few weeks Mol management significantly reinforced its defences against Surgutneftegaz’ further encroachment, i.e., the threat of additional acquisitions has been averted for the short term.
  • The new government’s foreign policy focus has perceptibly shifted from Russia to the European Union. In respect to some issues this could escalate the conflict with Moscow at the diplomatic and economic level alike and, at the same time, it may prevent further Russian takeover bids at several junctions.
  • Domestic players have closed ranks in response to the threat. Compared to the Gyurcsány cabinet, Prime Minister Gordon Bajnai and Foreign Minister Péter Balázs have lined up behind the Hungarian company with more resolve, while Mol’s general meeting greatly increased the government’s say in strategic decisions. Moreover, the share swap between Mol and OTP is a good illustration of their efficient co-operation, already evident in connection to earlier foreign takeover attempts. The unprecedented co-operation of Hungarian stakeholders may effectively block similar ambitions by Surgut and other Russian corporations.
  • However, Mol continues to be a top priority for the Russian company for three reasons: (1) its leading role in the Nabucco project; (2) its refinery capacity; (3) its gas pipeline network and gas storage facilities.
  • Mol acquires its primary resources from Russia; in a worst-case-scenario, an escalation of the conflict may threaten the safety of the company’s source of supply.
  • At the same time, Hungarian resistance is somewhat undermined by the fact that a significant part of the Hungarian economic and political elite (especially within MSZP) has a vested interest in the success of Russia’s attempt to expand its influence.

 

Shift in foreign policy

 

Based on statements made in the past few weeks, the change in government represents a shift in foreign policy as well, and, thanks to mutual gestures of good will, an earlier cool relationship between the cabinet and Mol appears to be on the mend. This, in turn, increases the resolve of the Hungarian side.


  • Statements made so far by Bajnai-cabinet members and the person of the new foreign minister suggest that Hungary will follow a firm and more pro-active foreign policy and become more visible and effective. Thanks primarily to foreign minister Péter Balázs (former EU commissioner) the emphasis will be shifted to the European Union. This also means that Hungary’s allegedly pro-Russian policy will take a back seat. This is suggested by a number of interviews given by the foreign minister where he emphasised: in the past there were too many high-level talks between Hungarian and Russian officials, a clear indication that he would move the focus of his diplomatic efforts. Aside from that, the partly EU financed loan Hungary received late last year also serves as an incentive for closer co-operation with the European Union. Moreover, for the potential easement of loan terms Hungary will have to regain Brussels’ trust.
  • The new government also appears more willing than the previous administration to confront Russia. In contrast to the Gyurcsány cabinet’s cautious statement in connection to Surgutneftegas’ Mol share acquisition, Gordon Bajnai took a firmer stance. However, instead of treating the case as the Russian government’s attempt to gain influence, the new prime minister removed the issue from the political arena and criticised it as a takeover bid of a Hungarian strategic company by foreign business interests for unspecified purposes.
  • Right after Surgutneftegas’ share acquisition, at a meeting of the foreign affairs committee Fidesz committee president Zsolt Németh and Mol president/CEO Zsolt Hernádi sharply attacked the government claiming it should have known about the takeover attempt. However, since that time the conflict between the government and MOL appears to have eased and with its statements referred to above the new administration signalled its intension to stand behind Mol in its struggle, while by extending B-series rights at its general meeting the Hungarian conglomerate handed the government one of the most powerful defensive weapons.

 

 

Defensive moves

 

In many ways Mol is a strategically important energy-production company in the region. Among others, the Hungarian company has a majority stake in Slovak and Croatian oil companies. Moreover, its refineries are among the most advanced in Central Europe, it has huge gas storage facilities and its network of pipelines plays a key role in East-West energy transhipment.

 

Surgutneftegaz’ recent acquisition of 20 percent of Mol shares carries three potential advantages for the Russian company:

 

  1. The Russian company hoped to acquire Mol’s refinery and storage capacities, as well as its pipelines, to exercise even more direct control over the region’s energy supply.
  2. Mol is one of the key players in the Nabucco project; gaining a seat on the Board of Directors, Surgutneftegaz could have direct access to information on proposed pipelines (representing an alternative to the Southern Stream project, favoured by the Russians).
  3. In the medium term Surgutneftegaz plans to take over control of Mol, or at least have a say in decision-making, i.e., prevent the implementation of the Nabucco project. Russian officials made no secret of their intentions: if Surgut is unhappy with Mol’s plans for Nabucco, it is ready to campaign against those at the general meeting.

 

None of the three objectives finds favour with Mol management; it had to react with speed and noise as, in the event of a foreign takeover, the Croatian government has reserved the option of repurchasing INA, the recently sold national oil company, i.e., the deal concluded with great effort would go up in smoke.

 

A number of the components of the defensive strategy started after the acquisition of a 20 percent stake proved to be effective; management made several decisions making Surgutneftegaz’ creeping takeover attempt all but impossible:

 

  • In part with the help of the Hungarian Energy Authority, Mol prevented the Russian company from attending Mol’s April general meeting where in a unanimous vote shareholders managed to shore up their defensive lines.
  • Under terms of the general meeting’s decision, in the future only shareholders disclosing their ownership structure are given the right to vote. As we have already mentioned in our earlier analysis, Surgutneftegas is one of the least transparent of all Russian energy companies, the identity of its principal beneficiaries is unknown and the company is unlikely to comply with Mol’s request and reveal the names of its deliberately concealed owners.
  • Also, in a unanimous decision, Mol considerably restricted rights for B-series shares: in the future, decisions not supported by the Board may only be approved with the consent of the owner of these shares (currently, the Hungarian government).
  • Recently, Mol and OTP performed a share swap of great value, with the intent to change to proportional number of votes in the general meeting. (As a result, currently there are no treasury shares in the possession of Mol). OTP president/CEO, Sándor Csányi, is also the chairman of Mol Board of Directors, and the two companies had closely co-operated to fend off earlier foreign takeover attempts and are expected to come to each others rescue in all similar situations in the future.

 

The potential for a counter-attack

 

Based on the developments of the past few weeks it appears Mol managed to consolidate its defensive positions. However, the battle is far from over; Surgutneftegas has significantly more ammunition to reach its objectives than Austrian ÖMV ever had:

 

  • In some respect Mol is at the mercy of Russia, the supplier of primary resources for Mol. Surgutneftegas is clearly backed by top Russian officials: with the closing of the Friendship oil pipeline, Mol could acquire resources only at a considerable mark-up. It is a clear warning that after the Lithuanian government decided in 2006 to sell Mazeikiu Nafta refinery to Polish PKN Orlen (instead of one of the Russian bidders) the country no longer receives crude oil through the Friendship pipeline.
  • Based on data issued by the Russian company, it sits on huge liquid assets; as Mol cannot compete at that level, it continues to acquire shares paying prices well above the market average.

 

There are a number of signs indicating that Surgut considers Mol as a top prize, and energy companies tied to the Kremlin continue their expansion in the region:

 

  • Following the formation of the new government and Mol’s decision, editorials in Russian dailies (Kommersant2 and Vedomosti3) noted with concern that Gordon Bajnai has yet to take a public position as to which southern gas pipelines he would prefer. The media refer with resentment to the Hungarian side’s (the government and Mol) aloofness in respect to Surgut. Vedomosti interviewed the deputy chairman of the Duma, also president of the Russian Gas Industry Association (who earlier referred to Nabucco as a “stillborn child”) who said that Surgutneftegas acquired a stake in Mol as it suffers from a shortage of refining capacity and would like to develop a closer contact with end users.
  • In recent months the race has been resumed and intensified between the EU and Russia for eastern gas fields, representing a potential important source for the EU. After a gas dispute with Russia, Turkmenistan declared its interest in the success of the Nabucco gas pipeline and it signed and agreement with one of the members of the Nabucco-project, German RWE, to deliver gas to Europe by circumventing Russia. At the same time, Russia reached a long-term agreement (not final as yet) with Azerbaijan about gas deliveries, and it also works on consolidating its positions in Uzbekistan and Kazakhstan. Simultaneous to the unresolved battle for gas fields on the eastern front and in the Caspian Sea region, the struggle for transit countries has intensified, encouraging the Russian side to redouble its efforts in the East- and Central-European region.

 

Source: Bernard A. Gelb: Caspian oil and gas: Production and prospects