Eric Forss, Alliance Oil Company
Release Date: 2010-05-18
What was the rationale behind the merger between West Siberian Resources and Alliance Oil, and which assets and experience within the Russian oil and gas sector brought the two companies together?The merger was a very good fit and the two companies complemented each other very well. West Siberian had been a purely upstream company, growing quite rapidly, building a base of upstream assets in Tomsk, Timan Pechora, and Samara. At the time, the company was looking to get into the downstream business for two reasons: to balance and add more stability to our operation, and to recover some of the taxes the company pays in the upstream segment. Export duties are high in upstream, and a lot of the profitability in Russia is in the downstream segment. Obviously, we were and have been in a growth pattern, so we were looking to continue to grow the company.
Alliance, at the time, had most of its assets in the downstream sector. They had been planning their own IPO (looking to list in London) seeking to access the western capital markets, and that way create options for the financing of refinery modernisation. As part of that process, they were also looking to increase and balance their business, and looking for upstream assets to do this. When these two companies were combined, it produced a fully integrated company with a good balance, with upstream and downstream assets.
West Siberian was already listed in Stockholm. The company went public in 2000, named Vostok Oil at that time. The company changed its name to West Siberian Resources in 2004 in connection with the reorganisation. The current management came in 2008 after the merger. In the merger, the Bazhaev family became the major shareholder and the company adopted the name Alliance Oil Company in 2009. The current CEO is Arsen Idrisov. Rather than list in London, Alliance Oil took a Stockholm listing instead. At the time, London was a very exciting place to be for Russian oil and gas companies, and there were fantastic stories about Imperial, Urals and Sibir Energy. However, some of those stories are not as fantastic today. At the time, those were our peers. We had a lot of investors talk to us about being listed in Stockholm over London. It’s interesting when you look at it today: most of those companies are gone or in a completely different shape than they were back then. In the last year, there has been a tremendous increase in investor interest in Alliance Oil, despite being in Stockholm. We are being compared to Lukoil and Rosneft. There is a big difference in size, but we are the leading energy company by market cap listed in Stockholm.
What do you think you brought to the company when you arrived? Why were you the right match for both Alliance Oil and West Siberian?
I have been working in public oil and gas companies for almost my entire career, working with corporate governance issues, financing and public markets, investor relations, relations with authorities and strategy. One of the things that appealed to Alliance and to the Bazhaev family was that West Siberian had a track record of being public, transparent, working with corporate governance codes, all those issues, and in those discussions we very quickly developed an understanding of how the companies should be set up, and what the philosophy should be in order to access western capital markets.
When the Russians knocked on your door, what was your first impression?
I always liked challenges, and to be in the oil and gas business you have to have that mindset. I always liked international business because of the different dynamics of each country. Every place is different: different cultures, and different ways of doing things. It is a matter of understanding, and figuring out how you are ready to deal with the different scenarios that might affect what you do. I’m not saying it’s easy all the time though!
On May 27th Alliance Oil will have its annual meeting. What will be the hot issues on the table, and important decisions to be made?
This year it is very much a standard procedure. We’re not bringing any major proposals, so this is really a matter of proving the annual accounts. The nomination committee proposed that everyone be re-elected.
Production in Q1 in 2010 was less than in Q4 2009. Was this expected?
We are very much in line with our plans. You may have noticed that we haven’t changed our guidance for the year. The first quarter is always challenging because of the weather, and a lot of preparations for the year. If you look at the past year quarter by quarter, you see that production did decline a little during the crisis. We cut our capex for 2009 quite dramatically, so in the past year the company has not been drilling a huge amount, or adding any new wells. In Q4 2009 we started doing this again, and for this year, the company has an aggressive capex programme. What you are seeing now is the turning point of production.
Alliance Oil has a $316 million USD upstream capex programme for 2010. Is this not too aggressive?
It is aggressive. If you break that number down, two-thirds of that money goes to Timan Pechora, and a very large portion of this money goes to one field, the Kolvinskoye field, which is completely new development; Alliance Oil currently has no production and is building infrastructure there, and it’s a field that qualifies for tax exemptions. We’re accelerating the investment there to take advantage of the situation, and bring a lot of oil out of the field in the coming years. It should be in production by 2011, and expect to ramp up production quickly to 20-25000 barrels, and then to higher levels beyond that.
Today, about half of the company’s production comes from the Volga-Urals, but there is only one third of our reserves in that region. Conversely, in Timan Pechora, the company has almost 60% of reserves, but only about a third of its production. This will be shifting: we are spending most of our capex in the coming years in Timan Pechora. That’s where we have the most opportunities. However, Alliance is drilling a lot of wells in the Volga-Urals as well. It’s more accessible, its cheaper, and we don’t need to build infrastructure.
In Timan Pechora many of Russia’s major players operate. Mid-size companies see this as either an advantage or a disadvantage. How does Alliance Oil view the situation?
To some extent we are working together and cooperating when it makes sense. From that perspective it’s beneficial that the major players are present in the region, and a company our size is not in a position to compete for the big licenses there. There is a good balance: the company is working with some of the big players, and the independents, and it works out quite well.
Is it time to divest from Kazakhstan? Your operations there are quite small in comparison to the scope of Alliance Oil.
Kazakhstan today is a non-strategic asset. We have to consider whether to expand or to divest. Those are the two long-term options – the situation will not remain the same. Alliance Oil is always looking to develop its business and grow it. We want to have the opportunities soon to do that. If we cannot do that in one certain area, we have plenty of other opportunities in other areas.
Alliance Oil just raised $360 million USD in Eurobonds. The company has a good credit rating, B+ from S&P. Was it easy to raise the money? Is it all to be allocated purely to exploration?
It’s never easy to raise money. With Alliance’s bond offering, you might have seen that we withdrew it from the market, and ten days later, the window opened again. When we did pull the bond, we had good investor interest, the book was oversubscribed, but we didn’t like the price. However, ten days later, the situation was better.
Alliance Oil is very well positioned generally: the balance sheet is in good order, the company has good liquidity, and access to various sources of financing, both debt and equity. I don’t see the company going to equity markets for a long time, unless there is a major acquisition. In terms of debt, we are working with our debt portfolio at all times. Our focus has been and remains to extend maturities, to bring down costs, and we have been able to do this quite successfully. Eurobonds helped the company restructure its debt and increase flexibility. It’s always hard to earmark money, but in order to finance our investments, we have the cash flow, we have the cash on hand, and we have the debt sources.
The company plans to upgrade the Khabarovsk refinery, in order to be the best quality refinery in Russia. How does the increase in refinery capacity and quality fit into the overall strategy of Alliance?
Alliance Oil is modernizing its refinery and adding additional facilities, increasing the complexity of what the company can offer. Today almost 40% of the refinery’s produce is heavy oil. That percentage will be a lot lower in the future. Alliance will be able to bring out a lot more gasoline and diesel, meeting Euro-4 and Euro-5 standards. This means that the company can continue to cater to domestic markets. The company is the market leader in the Far East, with some 250 gas stations.
Most of Alliance Oil’s exports today are comprised of mazut exported to China. With the upgrade of the products, the company gains a lot more export flexibility, as it will have better, more high-value products, and as with crude, the company will have a lot of alternative marketing options. What we generally see is that margins will be a lot better after modernization. We’re looking at almost doubling this margin, ceteris paribus.
Do you see this refinery as something that makes Alliance Oil unique? To find a refinery in Russia that is not taken by one of the major companies is a rarity.
We do have a unique company. Alliance Oil has a unique setup in the Far East with the refinery, the gas station network and the logistics the company has there. With the ESPO pipeline coming through the region, right next to the refinery, over time Alliance will be able to bring down its transportation costs and improve supply logistics.
The Alliance Group (partly shareholders of AOC) has made a very smart move in the Ukraine, by re-branding their Alliance petrol station through a partnership with Shell, and the benefits jumped because of the brand recognition. How is the branding of Alliance Oil in the Russian Far East? And is this something that is being envisaged?
Alliance Oil as a high market share and is market leader in the Far East, where the brand is extremely well-known. This places Alliance ahead of Rosneft, which is the second participant in the market there. Rosneft has its refinery in the north in Komsomolsk, which is the only other major refinery in the Far East. From this perspective, we have a very good position to further promote our brand in the Far East..
Alliance Oil’s production will be 90,000 barrels by 2012, plus 90,000 barrel refining capacity. Once these two match together, what will be the next step?
The company is now discussing strategies beyond 2012. There are many opportunities in the Russian market, including several acquisition opportunities. Alliance will continue to grow its business, and continue to see how we can expand the downstream business further. Generally speaking, our key priorities are to grow in the areas where we are, where we can realise the synergies and continue to build on the basis that we have.
From an investor’s point of view, how have the shares been doing in Stockholm?
Over the past year, the stock price has moved. In the middle of the crisis Alliance’s shares were trading at 40 Swedish krona per share, and now the company trading at 110 krona. Last summer, the company made a combined equity and commercial offering. The price on the equity offering was 95 Swedish Krona, today we are trading at 110. Most of the large Swedish investors hold our shares, but the big increase has come from London- and US-based funds. Today, we have around 15 investment banks doing research on us: Morgan Stanley, Merrill Lynch, and Goldman Sachs. Our retail shareholder base has grown from 4.000 to more than 40.000 in recent years.
Mr. Forss, what is your final message to Oil and Gas Financial Journal’s readers about Alliance Oil Company?
In a few words, I believe that we are a truly unique company in the sense that we are an independent integrated company in Russia, with a good track record, good performance, and future plans that are very growth orientated. We can offer growth at a level that very few Russian oil companies can match.
| Company: | Alliance Oil Company |
| Position: | Chairman |
| Country: | 俄罗斯 |