ROSNEFT EYES NEW FIELDS IN EASTERN SIBERIA AND BEYOND

Rosneft, Russia’s state-owned oil titan, has been pursuing a very aggressive policy in recent months in order to boost its clout in Eastern Siberia. In the meantime, Rosneft’s pro-active approach has been seen as a part of the Kremlin’s broader strategy to rely on major state-controlled energy companies.

Last December, Irkutsk regional authorities and the TNK-BP oil consortium settled their differences over an 11.29% stake in Verkhnechonskneftegaz. Now the stake is expected to go on the auction block for some 2.1 billion rubles (about $70 million) in the first quarter of 2006, while Rosneft is widely expected to place the winning bid.

Verkhnechonskneftegaz holds a license to develop the Verkhnechonsk oil and gas field in Irkutsk region, with estimated reserves of some 200 million tons of crude and nearly 100 billion cubic meters of gas. TNK-BP now owns a 62.71% stake in Verkhnechonskneftegaz, while Rosneft hold 25.94%.

In November 2005, Rosneft acquired a 25.94% in Verkhnechonskneftegaz from Interros. Financial details were not revealed, but the deal reportedly cost Rosneft about $80 million.

Rosneft’s drive to take over the Verkhnechonsk field will face some significant hurdles. For example, top TNK-BP executive Viktor Vekselberg has announced that his company is not planning to reduce its controlling stake in Verkhnechonskneftegaz and the Verkhnechonsk field.

Nonetheless, in December 2005 Rosneft placed a winning bid of 7.47 billion rubles (some $260 million) in an auction for a license to develop the East Sugdin oil and gas field, which is adjacent to the Verkhnechonsk field. The company agreed to pay nearly 25 times the initial offering price for the field, which has estimated — but unproven — reserves of some 200 million tons of oil and more than 40 billion cubic meters of gas.

Following the East Sugdin auction, Rosneft deputy directed Nikolai Borisenko announced that his company’s winning bid to take over the oil and gas field was “part of its strategy to raise its oil and gas potential by developing promising reserves in the Eastern Siberian region.”

Rosneft has emerged as Russia’s second-largest oil producer thanks to its late 2004 acquisition of Yuganskneftegaz, once the core production unit of embattled oil giant Yukos. In 2005, Rosneft pumped about 75 million tons (about 1.5 million bpd) of crude and some 13 billion cubic meters of gas. Rosneft anticipates strong output growth in the years to come and plans to boost production by 8% in 2006 to 1.63 million bpd and to 2 million bpd by 2009.

To achieve these ambitious goals, Rosneft would need to invest $17.4 billion from 2006 to 2010, excluding new major acquisitions. Rosneft is now also mulling over some $4 billion in new acquisitions, possibly including the Sakhalin-3 field and the Lodochny oil deposit in East Siberia.

Not surprisingly, Rosneft now faces a cash shortage and hopes to raise up to $20 billion when it offers 30% of its shares on Russian stock exchanges and in London this year. Rosneft’s 12 major subsidiaries will be fully consolidated in the first half of 2006, Rosneft announced in December. The company plans an initial public offering (IPO) in the second half of 2006.

Rosneft would raise $16-18 billion via placing Global Depositary Receipts in London and another $2-4 billion inside Russia by selling its shares on the Russian exchanges. Rosneft is expected to use the bulk of the initial public offering proceeds to repay its earlier debts. After the IPO, Rosneft is due to remain 64% state-controlled.

In the wake of Verkhnechonskneftegaz major acquisition, Rosneft has reviewed its IPO plans, according to Russian Federal Property Agency head Valery Nazarov. He said that Rosneft had to re-evaluate its assets in the wake of the Verkhnechonskneftegaz deal. The earlier estimate had put Rosneft’s value at $58 billion with subsidiaries and $48 million without subsidiaries (Interfax, December 28).

Following the re-evaluation of its assets, as the Verkhnechonsk, the East Sugdin, and other fields were added, Rosneft now reportedly expects its market capitalization to rise above $70 billion soon after the IPO. The number is significantly higher than the market capitalization of Russia’s top oil company Lukoil, now estimated at $50 billion.

Apart from that, Rosneft is now seen as moving towards a major new takeover. It has been rumored as moving towards yet another mega-deal: acquisition of a controlling 62% stake in Surgutneftegaz for some $20 billion before 2008.

In the meantime, Rosneft’s aggressive expansionism also appears to be part of the government’s policy to rely on state-controlled companies. “To face competition from fast-growing China, Russia has to speed up development of its mining and energy resources in the Far East,” Russia Finance Minister Alexei Kudrin announced in June 2005. “This comes as a national priority and the government will be pursuing this goal relying on major state-controlled companies,” he said.

But Rosneft plans to do more than just compete with China. The oil company also plans to double its oil deliveries to China. Rosneft said it had delivered 4.4 million tons of oil to China since it began exporting to the world’s biggest crude oil consumer in February 2005 (RIA-Novosti, December 29).