Tuesday, April 8, 2014

A Corporate Struggle for Russia's Largest Port

By Eugene Gerden

Novorossiysk Commercial Sea Port (NCSP), Russia's largest sea port and one of the largest in Europe may be in the center of a corporate fight between its major shareholders, which may negatively affect its activities and result in the decline of revenue.

So far, the port has been controlled equally by Transneft, a Russian state-controlled business responsible for the national oil pipelines and Summa Group, a diversified private holding, specializing in investment activities in port logistics, engineering, construction, telecommunications and the oil and gas sectors, however both companies have recently announced their plans to split up the business.

Nikolay Tokarev, President of Transneft, said yesterday that Transneft plans to become a sole owner of the port's oil terminals, while Summa Group will focus on the transshipment of dry cargo.

According to Tokarev, in addition to the split, the companies are discussing the division of the spheres of influence, where each company will nominate its deputy general director to oversee each of the directions.

The conflict between the owners of the port began earlier this year. In February Mr. Tokarev, in an interview with Russian business paper Kommersant, sharply criticized its partner for the ways of the port's management. After that, Transneft initiated a change of the port's CEO and its board.

The controlling stake in the port (50.1 percent) is currently owned by Novoport Holding Ltd, which is a joint venture of Transneft and Summa. At the same time Transneft itself holds another 10 percent stake in the port, while the remaining 20 percent is held by the Russian government via the Federal Property Agency.

In the meantime, there is a possibility that the current uncertainty in the port's management could play into the hands of Rosneft and ExxonMobil, as the partners have repeatedly expressed an interest in the acquisition of the state's 20-percent stake in the port and, if possible, to increase it in due course.

According to Igor Sechin, head of state-owned Rosneft, the Russian company and ExxonMobil are interested in the acquisition of the port, as the companies are looking for a base for the development of the Black sea shelf.

Several weeks ago Sechin sent an official letter to Russia's President Vladimir Putin, asking to approve the potential deal.

Formally, state-owned companies are barred from participating in the privatization of assets, but there is a mechanism to avoid such a restriction, in the case of a sale of such assets in favor of a particular investor without an auction. In the case of the Novorossiysk Port, which has a strategic status, the decision must be taken by presidential decree.

At the same time the current owners of the Novorossiysk Port have already opposed the possible arrival of the oil companies in the list of its major shareholders, believing that this may result in the revision of the strategy of development of the port until 2018, which was recently approved by its management. There is also a possibility that the current corporate conflict may also result in the revision of the strategy.

The strategy involves a significant expansion of the current capacities of the port, through the building of new terminals and the expansion of existing facilities.

At present the annual cargo turnover of the port is estimated at about 90 million tons, however there is a possibility that it can be increased up to 200 million tons by 2020, in the case of a successful implementation of the strategy.

Total volume of investments is estimated at RUB 30.9 billion (USD$1.1 billion), of which 4.8 billion rubles will be invested already in 2014. Particular attention will be paid to increasing the transshipment of high paying freight, taking into account that currently up to 60 percent of the port's space is occupied by cargo, which generates only 20 percent of EBITDA.

Meanwhile, in the Russian port industry overall, last year total volume of cargo transshipment increased by 3.9 percent, compared to 2012, and reached 589 million tons, according to the official data of the Russian Association of Sea Trade Ports.

The biggest growth was observed in the segment of coal, whose transshipment volume increased by 13.3 percent over 2012 and reached 101.1 million tons. The growth was also observed in the segment of fertilizers (up 24 percent to 12.9 million tons) and containerized cargo (up 4.1 percent to 44.4 million tons). The transshipment of crude oil increased by 4.6 percent to 207.5 million tons, while ore was down by 2.8 percent to 7.4 million tons.

In the case of geography, the biggest growth rates observed were at the seaports of the Arctic basin, where the transshipment increased by 20 percent. At the same time, according to analysts' predictions, the volume of transshipment through the Russian Arctic seaports will continue to grow, due to the planned construction of a new port at Sabetta and associated with the increase of cargo through the Northern Sea Route.

Eugene Gerden is a free-lance writer based in Moscow, Russia who has covered the European maritime industry for 10 years. He can be reached at gerden.eug@gmail.com.