OOC and MOL:Mutual Benefits
While the two firms appear to be geographically odd bedfellows, MOL’s refining, distribution and manufacturing strengths are expected to dovetail with OOC’s business ties in the Middle East and Central Asia, as well as its technical know-how

Oman Oil Corporation’s recent purchase of a sizeable stake in MOL, the Hungarian energy company, came as something of a surprise, but could work out to be good business for both parties. OOC’s move secures it an interest in a key player in the Central European downstream oil market that should help the Sultanate’s oil sector diversify its investments. This is particularly important for a country in which oil extraction is difficult and costly.

From MOL’s side, the deal has been widely publicised as a move to block hostile takeover bids by other firms. But the Hungarian company may also be looking to reap the benefits of taking part in some OOC projects, which the structure of the “sale” may well permit. The deal will see OOC take 8.8 million shares in MOL, or around 8 per cent, for approximately US$1.28 billion. This values each MOL share at US$145.43, 10 per cent more than their market value on March 7, the last day of trading before the sale was made public. According to reports, MOL will also receive minority shares in OOC assets in exchange for the stake.

Complementary strengths
While the two firms appear to be geographically odd bedfellows, MOL’s refining, distribution and manufacturing strengths are expected to dovetail with OOC’s business ties in the Middle East and Central Asia as well as its technical know-how.
From OOC’s point of view, an investment in MOL offers the advantage of getting a stake in a relatively large company (indeed, Hungary’s biggest), which operates in many of the fast-growing markets in Central and Eastern Europe (CEE). OOC will have a share of profits from MOL’s activities in the downstream sector and retailing, an area in which it is particularly strong. Perhaps, more importantly, by buying into a firm which operates large refineries, has significant petrochemical interests and operates a large number of petrol stations in CEE, OOC is diversifying its portfolio, both geographically and in terms of the parts of the oil extraction-to-sale chain it has interests in. OOC may also be looking to harness MOL’s refining capacities within the Sultanate itself.

This diversification is particularly important for Oman’s oil industry. Extraction costs in the Sultanate are high and currently proven reserves are low by regional standards. The high global price of oil is currently bringing in tidy profits, making even Oman’s extraction expenses appear paltry, but the margins may tighten considerably again in the medium to the long term. Therefore through this investment, OOC is fulfilling its aim of investing today’s healthy oil windfalls for an uncertain tomorrow. MOL’s presence in several parts of the oil chain in strong, stable markets makes it a good bet for OOC.

Furthermore, MOL’s expertise and large holdings in refining in Europe may well be of specific use to Oman. The Sultanate is making efforts to establish itself as a refining and re-export centre for the region, as well as building up its petrochemicals sector. Even if the oil is not sourced here, the thinking goes, Oman can refine it. Here, the location of its ports outside the vulnerable Straits of Hormuz gives it an advantage as an export centre.

In a sense, OOC is acting in a manner similar to the Gulf sovereign wealth funds (SWFs), which have recently been shelling out vast sums to purchase chunks of enterprises abroad, particularly in North American and European banks, who are paying a heavy price for their risky investments in the mortgage market. The SWFs aim to help diversify investments of the countries that they represent and to increase their clout in the sectors in which they invest, helping build security for a future in which oil is less profitable – or non-existent.

Strategic move
While SWFs such as the Abu Dhabi Investment Authority (ADIA) have swooped to support banks hard hit by the credit crunch, MOL was a particularly canny target for OOC, given its current feeling of vulnerability due to hostile bids from Austria’s OMV and potentially, Russia’s Gazprom, the state-owned energy giant.

The OOC deal has raised eyebrows in Europe, largely due to an ongoing tug-of-war between MOL and its largest single shareholder, OMV, which owns a 20.2 per cent stake in the Budapest-based company. OMV, in which the Austrian government and Abu Dhabi’s state-run International Petroleum Investment Company (IPIC) have stakes of 31.5 per cent and 17.6 per cent, respectively, has long been interested in acquiring a majority holding in MOL, specially because it operates in many of the same markets in CEE as it does. Last year, OMV had doubled its stake in its Hungarian rival and has been aggressively looking to take control of the company since then. On its part in a rearguard action, MOL has been buying back its own shares. The Hungarian government has also been supporting MOL’s moves, retaining a “golden share” and enacting a law preventing firms part-owned by foreign governments from taking over majority shares of “strategic assets”. It has, however, raised no objections to OOC’s purchase of a minority stake thus far. The Austrians, already frustrated by moves to “protect” MOL, are livid about the OOC deal, pointing out that it values the shares at considerably less than the $186.16 per share that they were offering, albeit conditionally.

The picture is further complicated by the actions of Gazprom, which is thought to be interested in acquiring both OMV and MOL, or seeing them merge in order to secure downstream and distribution facilities in the region. According to an October report in British magazine, The Spectator, “independent” investors, effectively working on behalf of Gazprom, have been buying up shares in MOL, some of which have subsequently been sold to OMV. It reported that Gazprom was seeking to benefit from a merger between the two Central European companies, as the new entity might be forced by anti-trust legislation to divest itself of lucrative and strategic downstream assets, which would then be easy for the Russian firm to snap up.

Therefore, the sale to OOC can be seen as part of a concerted effort by MOL to defend itself from OMV and Gazprom. As part of this, in December, the Hungarian firm had sold a 7 per cent stake to CEZ, the Czech energy firm. And, according to one analysis, if the OOC deal goes through, MOL and its “allies” will effectively control 44 per cent of the firm.

However, the agreement is more than merely a defensive manoeuvre for MOL. While the details of which assets are to be transferred to MOL have been kept under wraps, Zsolt Hernadi, MOL’s chairman and chief executive, was direct about the benefits from the deal for his firm. “The Oman deal will give us access to different markets,” he said. “This transaction is about creating new markets.”

High potential
MOL may also be eyeing Oman’s work in developing enhanced oil recovery (EOR) techniques, or “tertiary” methods of oil extraction, which are deployed when natural pressure and gas, and liquid pumping are not sufficient to remove crude. Petroleum Development Oman (PDO) has been a pioneer in developing such technologies, out of necessity; Oman’s remaining tapped oil reserves are hard to exploit, and contain heavier crude with a higher water mix than other reserves in the region, making extraction up to five or six times as expensive. However, as easily accessible reserves begin to thin out, other countries will increasingly have to start turning to EOR, potentially presenting opportunities for Oman and its partners to bring their technology in. While PDO is not a part of OOC, it is 60 per cent owned by the Sultanate’s government, and often works as a partner with the OOC. For example, in refinery projects in Oman. The deal thus could meaning potential openings for MOL in EOR activities.

Neither OOC or MOL are gigantic world players on the scale of Gazprom or Saudi Aramco; but their strengths may well dovetail usefully and help safeguard one another from their weaknesses (expensive production with a finite timeframe and takeover bids from rivals, respectively). While the MOL equity purchased by Oman is quite small, it can be an interesting and important step in the diversification of Oman’s oil sector – both within and outside the Sultanate’s borders.
 

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