Over the past 25 years, Rosneft – now Russia’s largest company by stock market capitalization – has expanded aggressively, thanks primarily to the savvy political maneuvering of the company’s executive leadership.
A worker of RN Purneftegaz, a daughter company of Rosneft, is seen here at the Barsukov oil field, Yamal Nenets Autonomous Area. Photo: Evgeny Biyatov / RIA Novosti
Rosneft is currently the world’s largest publicly traded oil company, no small feat given its haphazard development over the last 25 years. While in the early 2000s, it controlled only 4 percent of Russian oil output, it now dominates the domestic market with a 35 percent market share. In fact, it currently produces more oil than two of its main competitors, Lukoil and Surgutneftegaz, combined.
Most of this turnaround can be traced back to one person, Igor Ivanovich Sechin, a decades-long close associate of Vladimir Putin. Sechin became the company’s president in 2012, after an eight-year tenure as chairman of Rosneft’s board of directors. His involvement has ensured the support of the Kremlin in the company’s expansion activities.
A brief history of Rosneft
Just as Gazprom was created from the Ministry of Gas of the U.S.S.R., Rosneft, then functioning as a voluntary association of oil producers called Rosneftegaz, constituted a remnant of the Soviet Ministry of Oil.
However, in contrast to Gazprom, Rosneft was stripped of most of its major assets, among them TNK, Tatneft, Sibneft and Bashneft, and found itself marginalized against the background of the Yeltsin-era privatization initiatives. Evgeny Primakov’s short tenure as prime minister, then Vladimir Putin’s ascension to power, saved the company from long-awaited privatization and formed the basis of state-controlled Rosneft’s gradual recovery of clout and market share. A strong, state-controlled oil company was to become one of President Putin’s instruments to counterbalance the all-pervasive Russian oligarchy’s sway over the energy sector.
The initial task was to regain control of all of Rosneft’s subsidiaries and to this end, as early as 2003, President Putin started talking about the necessity of increasing Rosneft’s production capacity and reserves. Rosneft bought Severnaya Neft with several oilfields in the Timano-Pechora region the same year. Having barely avoided a merger with Gazprom in 2004, Rosneft was propelled to nationwide prominence in the wake of Yukos’ bankruptcy.
Since Gazprom was effectively barred from participating in the ensuing Yukos auction by the U.S. court administering the process, it was Rosneft that bought Yuganskneftegas, Yukos’ major upstream holding. In 2006, Rosneft held its initial public offering (IPO) with the aim of selling 14.8 percent of its equity. The IPO was the fifth largest in corporate history, and the $10.7 billion raised was instrumental in propelling the company forward.
Despite the indisputable success of its IPO, Rosneft was propelled to its leading position after the acquisition of TNK-BP, another fast-growing oil company. The deal, announced in October 2012 and finalized in March 2013, was settled on generous terms with both previous owners: BP, as well as a group of four Russian oligarchs – Leonid Blavatnik, German Khan, Viktor Vekselberg and Mikhail Fridman. Apart from financial compensation, the agreement saw BP acquire a 19.75 percent stake in Rosneft.
By virtue of an energetic acquisition campaign, Rosneft managed to underpin its rise to preeminence with a 152 percent rise in oil production between 2005 and 2015, from 1.5 million barrels per day to the current 3.74 million barrels per day.
Rosneft’s global strategy
Rosneft is still several steps away from being a global oil company, although it has made steady progress in the worldwide expansion of its activities. Latin America – and especially Venezuela – plays a key part in Rosneft’s global strategy. For example, Rosneft has five joint ventures with Petróleos de Venezuela, S.A. (PDVSA), the Venezuelan state-owned oil and natural gas company. Given the fraught political and economic atmosphere in Venezuela after the defeat of the Chavistas in the December 2015 parliamentary elections, Venezuela’s political leadership might be willing to enlarge Rosneft’s footprint even further in exchange for a cash infusion.
Rosneft also has stakes in 5 European refineries, with four of them located in Germany, which is likely to remain the company’s main European market. In 2014 Rosneft solidified its footing in Germany by acquiring Total’s 16.67 percent stake in the Schwedt refinery. Rosneft also has a stake in the Sardinia-based Sarroch refinery, following in the footsteps of Lukoil, which owns a Sicilian refinery of similar capacity. As in the case of German refineries supplied by the Druzhba pipeline, both sides benefit from the deal.
Rosneft’s next step to raise its profile was an unprecedented oil supply deal with the Chinese National Petroleum Corporation (CNPC), valued at $270 billion at the time of its signing in 2013. The contract will see the company deliver 300,000 barrels of oil per day over 25 years, on top of an equivalent amount that is already flowing into CNPC. Heavily indebted after the TNK-BP deal, Rosneft concluded the deal with the proviso that CNPC disburses around $60-70 billion in upfront advance payments, of which the company has received close to $35 billion.
Rosneft is the second largest gas producer in Russia after Gazprom, with a 2015 output of 42 billion cubic meters (bcm). Reflecting the company’s increasing clout over matters of policy, Rosneft is increasingly vocal about being able to export its gas abroad via pipeline. According to consulting agency RBC, since October 2015 Sechin has stepped up the pressure on President Putin by writing a letter advocating the liberalization of access to Russia’s gas pipeline system. Unsurprisingly, Gazprom is against any sort of liberalization, asserting that any additional volume of gas exports to Europe would worsen its market positions and ultimately lead to a price collapse, bringing down Russia’s budget revenues.
The sanctions overhang
Rosneft’s dealings with Europe and, to a lesser extent, the United States, have been badly damaged by sanctions. 17 Rosneft subsidiaries have been placed under U.S. sanctions following the Crimean referendum of 2014, in addition to a joint U.S. and EU sector-wide ban on the export of goods, services and technology used in offshore, shale and deepwater oil production.
International cooperation was further compromised by Western companies’ fears of breaking sanctions, as in the case of ExxonMobil deciding to withdraw from a joint Kara Sea exploration drilling project in 2014. However, Rosneft’s ongoing lawsuit challenging the applicability of sanctions at the European Court of Justice might actually bear some fruit, as it tries to follow the example of Mellat Bank, an Iranian bank that had saw its assets unlawfully sanctioned in 2010.
As a result of aggressive financial maneuvering over the past decade, Rosneft now faces a balance sheet encumbered by massive debt. As a result of the $55 billion TNK-BP takeover, Rosneft’s indebtedness reached almost stratospheric levels and its consequences are still perceptible. As of January 2016, Rosneft’s debts exceed its current market capitalization, at $44 billion. In 2016, Rosneft will have to repay almost $14 billion, followed by $22.2 billion to be reimbursed between 2017 and 2021. After 2021, the Russian giant will be obliged to pay back $13.4 billion. However, advance payment deals, such as those arranged with CNPC, could help to offset some of this burden.
In the last days of 2015, the Russian Finance Ministry alluded to the fact that, in order to replenish the state budget, it might resort to the privatization of Rosneft. Putin’s aide Andrey Belousov spoke out in favor of selling 19.5 percent to a strategic investor, effectively bringing down the state’s share to 50 percent. There have been rumors that the Russian government might also opt for a placement of convertible bonds, which the state might redeem as oil prices bounce back. In all likelihood, it is the latter approach that will be implemented, considering that a 19.5 percent stake is currently valued at slightly below $9 billion.
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Rosneft remains an upstream oil company. While it is the leading oil producer among publicly listed companies, Rosneft’s exploration budget is only one-tenth of Royal Dutch Shell’s and one-half of Lukoil’s. Most of the low-hanging fruit has been picked and company’s current level of indebtedness would stymie any effort to step up exploration efforts. In this context, Rosneft announced it would raise its investment budget to an annual 1 trillion rubles (approximately $14.5 billion) between 2016 and 2018, partly to maintain current oil output levels against the background of maturing fields.
Much like Statoil or Petrobras, Rosneft represents a hybrid sort of national oil company: it has solid political support and ample possibilities to influence government policy, but it also aspires to play by market rules and create shareholder value. As long as Rosneft continues to enjoy the political support of the Kremlin, even massive indebtedness and geopolitical friction will not impede Rosneft from becoming one of the world’s leading oil companies.
The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.