Russia’s energy majors heading West

Over the past ten years, Russian oil companies have become dominant market leaders in the distribution of oil throughout Southeastern Europe. Russia continues to aggressively develop and control the flow of oil and natural gas in the region. This, observers say, was calculated for significant influence -- both commercial and political -- in the region.

When the Russian oil company Lukoil built its first petrol filling station in the Balkans -- a 1998 project in the Bulgarian capital of Sofia -- few analysts saw it as the beginning of a long-term strategy for energy dominance in Southeastern Europe.

The most recent evidence of Russian's plan occurred in March 2009 when Surgutneftegaz bought a 21% ownership stake in Hungary's central energetic company MOL, previously held by Austrian OMV.

Surgutneftegaz is one of Russia's least transparent oil companies, with alleged ownership ties to Russian Prime Minister Vladimir Putin. By buying into the Hungarian company, Surgutneftegaz automatically gained a stake in Croatia's INA, whose 47% share is owned by MOL.

To limit Surgutneftegaz's influence, the Hungarian company changed its shareholder voting rules. But there is no doubt that by entering into the ownership structure of MOL and INA, the Russians achieved entry into the Croatian and Hungarian market. This is not only a business triumph, but points to the geopolitical success of a ten-year Russian strategy.

Russian companies now operate in all of the energy markets of Southeastern Europe.

The dominant position in Bulgaria is held by Lukoil, which also has operations in Serbia, Bosnia and Herzegovina (BiH), Montenegro and Croatia. Russia's influence in Serbia was further strengthened last year when state-owned Gazprom took over Naftna Industries in Serbia. In BiH, Russia owns Naftna Industries in Republika Srpska (NIRS).

It is clear that none of this occurred by chance or without great forethought. Indeed, the long-term strategy was executed through the business and political sectors, with the business component unfolding over a decade.

During that time, some Russian companies made deals for short-term losses now seen as a bigger strategy for later success. The Russians expanded in the region by buying up existing firms and if that failed, set up and developed their own energy firms connected to existing ones.

The process was costly, but well co-ordinated. In the final tally, Russian companies will have achieved almost complete control of retail sales, refineries and oil and natural gas transportation systems in every Southeastern European country in the next few years.

One year after the privately run Lukoil -- owned in part by the US-based ConocoPhillips -- set up business in Bulgaria, it bought 58% of the Neftochim refinery for 74m euros. Lukoil is considered the most transparent of all Russian oil companies. The Bulgarian plant purchased in 1999 is located in the Black Sea city of Burgas.

Lukoil's Burgas refinery is the largest in the Balkans and has become a base for further Lukoil development throughout the region. Lukoil is also one of the biggest companies in Bulgaria, generating 9% of the Bulgarian GDP and paying one-fourth of all tax revenue in the country.

In late 2003, the company undertook its largest investment when it purchased a 79.5% of Serbian oil company Beopetrol for 117m euros. Beopetrol owned about 200 petrol filling stations, and held 20% of the retail market for oil derivatives in Serbia.

Most of the petrol filling stations were once owned by INA and were seized by Serbia when the Yugoslav war broke out. Beopetrol's service stations were outdated and burdened with a variety of property rights problems.

Lukoil spent over five years and 76m euros to turn the company around before it managed to turn a profit in Serbia. These problems in Serbia slowed the company's expansion plans and Lukoil's next acquisition didn't occur for another two years.

On August 17th 2005, based on a deal hammered out with the Macedonian government, a Lukoil subsidiary was set up in that country which now runs a dozen service stations. Many analysts were amazed at the time that a company as large as Lukoil would spend significant resources on a market as small and closed as Macedonia. But it is clear that the company felt it was important to secure a presence in every country in the region.

In 2006, Lukoil tried to do business in Slovenia by way of a strategic partnership with the Slovenian state-owned company Petrol. The deal was thwarted by Slovenian Prime Minister Janez Jansa, allegedly after receiving direct instructions from Brussels to do so. Nevertheless, Lukoil that same year continued to expand its business, and in October of 2006 a subsidiary company was set up in Montenegro.

Negotiations were launched that same year on the privatisation of NIRS with Russian investors. The company includes a crude oil refinery in Bosanski Brod, an oil refinery in Modrica and the Banja Luka-based Petrol distribution company.

The deal was wrapped up ten months later. And while RS Prime Minister Milorad Dodik said at the time that it was an excellent deal for his nation and the Russian partners would invest significant funds to develop refineries, a report by the local branch of NGO Transparency International said the entire transaction was marked by irregularities.