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Rosneft grows as supermajor status beckons

Its growth plan is aggressive, can Russia's state oil firm step out of the shadows to become a truly global player?

To understand the problem facing Russian state oil and gas firm Rosneft in its quest to become the world's next supermajor, consider the following: in June 2012, the combined value of Rosneft and its takeover target TNK-BP was $108 billion; a year later, when its management unveiled a plan to pay TNK-BP minority shareholders less for their stock than the March takeover price, that had fallen to $77bn. 

With the $55bn acquisition of TNK-BP, a Russian joint venture between BP and a group of Russian oligarchs, Rosneft was catapulted into the world's largest listed oil company by output, with production of more than 4.5m barrels a day (b/d), which is about 40% of Russia's total.

Yet even as investors acknowledge the birth of a new supermajor with unparalleled exploration assets in the Arctic and strategic partnerships with a host of international majors, doubts linger about this state-backed project, even if its architect is the powerful Kremlin insider Igor Sechin.

"Not only did the market disregard the $12bn potential value of synergies, but it apparently saw the deal as value-destroying," says Ildar Davletshin, an analyst at investment bank Renaissance Capital, of the TNK-BP deal. "While there are many reasons to be cautious about Rosneft's ability to extract those synergies in the future, the biggest factor behind the negative returns is to do with corporate governance."

Rosneft is in many ways still a shadowy organisation - it is after all a product of the forced-bankruptcy of Russia's once largest private oil company Yukos. In the latest piece of negative news, on 3 June RIA Novosti revealed that the Ministry of the Interior had opened a criminal case into the suspected laundering of $890m involving clients of a bank 85% owned by Rosneft.

At the same time, though, there are signs Rosneft is adapting to its role as the spearhead of Russian oil exploration, which inevitably requires a greater transparency to appease its growing base of foreign shareholders, such as BP with 19.75%. 

"Soon, 50% [of Rosneft] will be in the hands of private investors," says Konstantin Simonov, head of Russia's National Energy Security Fund, referring to prime minister Dmitry Medvedev's plan to continue selling down the state's stake in Rosneft to around 51%. "It means, maybe, in two or three years BP could buy a serious share in Rosneft and we would see Rosneft-BP instead of TNK-BP."

Ivan Khromushin, an analyst with Gazprombank, says Rosneft's investor day in April left him with "quite positive" impressions. "Rosneft management held an open dialogue with the market, outlined the potential of the combined company and addressed the key areas of the market's concern," he says.

Khromushin says the essential tasks for Rosneft are to present a comprehensive update of the company's strategy; provide production and capital expenditure guidance on key business segments; prioritise key groups of large-scale investment projects; and demonstrate progress in realising those synergies from the TNK-BP acquisition.

On 16 July, Rosneft duly obliged, with Sechin announcing that Rosneft would invest 52bn rubles ($1.6bn) in eastern Russian projects in 2013, where it has resources of around 14bn tonnes of oil equivalent in new fields. Rosneft is planning to explore 20 offshore exploration blocks, in the Okhotsk, Laptev and Chukotka seas of eastern Russia, in bilateral partnerships with ExxonMobil, Statoil, and Inpex.

"Rosneft's acquisition of TNK-BP gave it control of additional oil production in east Russia, such as that from Verkhnechonsk, which can eventually be exported to Asia via the [planned] Eastern Siberia-Pacific Ocean (ESPO) oil pipeline," says IHS Global Insight, a firm of analysts.

Looking to China

The key here is Asia, particularly China. Russian energy firms are, in the words of Renaissance Capital, "moving east". President Vladimir Putin has made it an explicit policy for Russian oil and gas firms to sell more of their output to Asia and away from economically struggling and politically peevish Europe, and has helped push big deals lately to achieve this.

In June, Rosneft signed an oil-supply deal with China National Petroleum Corporation (CNPC), under which it will transport 360m tonnes of oil over the next 25 years for an estimated value of $270bn.

Analysts say Rosneft should also be able to improve its realised prices due to stronger demand in the Asia-Pacific market.

Rosneft has already signed a deal with CNPC to explore three offshore Arctic areas in the Pechora and Barents seas, part of the Russian company's strategy to tie up with other majors such Eni and Statoil to develop the complex fields in the Arctic, large parts of which Russia claims are its sovereign territory.

Rosneft will receive between $60bn and $70bn in prepayments from CNPC, which would cover Rosneft's total indebtedness at the end of the second quarter of around $56bn at current exchange rates. To finance the acquisition of TNK-BP, Rosneft raised nearly $37 billion in new borrowings.

On 29 July, Rosneft released financial results that for the first time consolidated those of TNK-BP, which comfortably beat analysts' expectations.

Net profit during the second quarter was 35bn rubles ($1.07bn), though this was down from the 102bn ruble profit made in the first quarter, marred by huge foreign-exchange losses, a 6% decline in oil prices and high export duties. Revenue rose about 62% on year to 1.18 trillion rubles.

The bump up in production was most striking, rising 82.6% on year to 4.786m barrels of oil equivalent a day (boe/d) in the second quarter. Russian oil production hit a new post-Soviet high of 10.53m barrels per day (b/d) in June.

Rising gas production

Rosneft's gas production is also surging; in the first six months of the year, it more than doubled gas output to 15.28bn cubic metres (cm), up from 6.72bn cm a year earlier.

As well as TNK-BP, Rosneft's July purchase of the remaining 49% of independent gas company Itera for $2.9bn will help it reach its goal of producing 100bn cm of gas a year by 2020, up from just 13bn cm last year. By contrast, gas monopoly Gazprom produced 479bn cm in 2012.

Rosneft's assault on Gazprom's preeminent position in the gas market has a political dimension. Sechin, a trusted confidant of Putin, has lobbied successfully for Gapzom's monopoly on gas exports to be curtailed from next year, giving Rosneft the ability to commercially develop its prospective offshore projects - Sakhalin-3 and Sakhalin-5 - and send the liquefied natural gas (LNG) to China and the wider Asian region.

In April, Rosneft and Sakhalin-1 partner ExxonMobil said they were pushing ahead with a proposal to construct a $15bn LNG plant on Russia's Pacific coast to monetise that project's gas reserves and market LNG exports in the Asia-Pacific region.

The greater role of gas in its business, its acquisition of TNK-BP, plus the tie-ups with other majors such as ExxonMobil in Iraq are all part of efforts to raise the company's value to $120bn within the next two years, thus displacing Gazprom as Russia's largest company.

Sechin certainly has the ambition to turn Rosneft into an international energy supermajor. But will he allow the openness and transparency that this would require?

Table 1: Rosneft by the numbers

 

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