The Wall Street Journal: Total/Sibneft

Edited by Hugo Dixon

April 27, 2004

Sibneft may still be trying to wriggle out of Yukos's clutches, but Total already seems to be beating its rivals in the race to clinch a 25% stake in the Russian oil company. The French oil company has won the Kremlin's backing for a deal, according to Financial Times, sidelining the likes of ChevronTexaco, Exxon Mobil and Royal Dutch/Shell.

Unlike some of its rivals, Total isn't actually desperate to do a deal in Russia. It has better growth prospects than its rivals. Last year it increased oil output more than twice as fast as BP, and reckons output will grow 5% a year until 2007. Neither does Total have a problem replacing reserves, unlike Shell.

So why is Total doing it? One simple answer is because it can. One of its main rivals for the stake, Shell, is in total disarray. And while the U.S. majors are keen, chilly tensions between Washington and Kremlin over the war in Iraq clearly play in Total's favor. In other words, the timing is right. Total's entry into Russia would also make long-term sense. It may not need growth now, but chances are it will in the medium term, and Russia is one of the few places where oil majors can still buy growth.

The risk, of course, is overpaying. That risk has increased a notch on news that French pharmaceuticals companies Aventis and Sanofi have agreed to merge. Total owns just under 25% of Sanofi, worth about €9.5 billion at current prices. That could give it plenty of extra cash with which to buy the 25% stake in Sibneft. The Russian company is worth $3.9 billion (€3.3 billion) based on trading in its illiquid shares, which have had a steady run on bid talk. On that basis, Total would be paying around $8 per barrel for Sibneft's SEC crude-oil reserves, a hefty premium to the $4.20 that BP paid for its stake in another Russian company, TNK.

Still, Total is right to strike opportunistically if it can get a good price. Any deal will have to wait until Sibneft and Yukos unwind their merger, which is proving a lot messier than expected. But the fact that the Kremlin seems to be open to entry of another international oil major could just be the catalyst they need to get their act together.