RUSSIA’S ROSNEFT CLAIMS MARKET LEADERSHIP

Russia’s state-run oil company Rosneft pledged to maintain its self-proclaimed role of market leader. It now appears that the company’s acquisition-based model of expansion will be put to the test.

Rosneft emerged as leader of Russia’s energy sector in 2007, and the company was set to continue leading the industry, Rosneft board chairman Igor Sechin said in his address to the annual general meeting (AGM), released on May 16. Rosneft results in 2007 disproved claims that state-controlled companies were unable to operate efficiently, he said. Rosneft viewed its Eastern Siberian and Far Eastern ventures, including Kamchatka, as strategic projects, according to Sechin (Interfax, May 16).

Rosneft board recommended re-investing 145 billion rubles ($6.1 billion) of the company’s 2007 net profit, and paying 17 billion rubles ($714 million) in dividends, including 12.75 billion ($536 million) to the state-controlled OAO Rosneftegaz. By the beginning of this year, Rosneft estimated its reserves at 2.4 billion tons (17.5 billion barrels) of oil and 711 billion cubic meters (25.1 trillion cubic feet) of natural gas (Interfax, RBK, May 13).

In his address to the AGM, which is officially due on June 5 but has been published in advance, Rosneft CEO Sergei Bogdanchikov pledged to turn Rosneft into what he described as “Russia’s national oil company.” Last year, Rosneft produced more than 100 million tons of crude, 25 percent up on the previous year, and in 2007, Rosneft acquired stakes in 146 Russian and foreign companies in deals totaling 660 billion rubles ($27.7 billion), according to Bogdanchikov (Interfax, May 16).

The company’s recent expansion was firmly based on takeovers. In May 2007 Rosneft placed a winning $6.8 billion bid at an auction for Siberian assets of the former oil giant Yukos, including Tomskneft and the East Siberian Oil and Gas company (VSNK). Rosneft’s daily production started to go up after it took over Yukos’s main production unit, Yuganskneftegaz, for $9.4 billion through a non-transparent financial transaction in 2004. These acquisitions enabled Rosneft to overtake privately-owned Lukoil in terms of oil production capacity and become Russia’s largest oil company.

Subsequently, Rosneft indicated ambitious expansion plans. The company pledged to pump 160 million tons of crude oil in 2015 and 170 million tons in 2020, up from estimated 111 to 112 million tons this year. By 2020 production in Eastern Siberia will reach 40 to 50 million tons.

In the meantime, Sechin’s mention of Kamchatka among Rosneft’s strategic projects made an important point. Rosneft now faces the task of extending its license to develop East Kamchatka off-shore deposits, which expires on August 1. Earlier this year, the gas monopoly Gazprom reportedly requested the government not to renew the license of Kamchatneftegaz, owned 60 percent by Rosneft and 40 percent by K.K. Korea Kamchatka Co. Gazprom was understood to be want the license for itself.

Relations between Gazprom and Rosneft have apparently been uneasy since the flawed merger between the two state-run giants three years ago. In February Bogdanchikov suggested improving ties with Gazprom and cooperating in the development of off-shore projects, notably the Sakhalin-3 field.

Subsequently, Rosneft has moved to solidify its position. On May 16 Rosneft announced that it had extended licenses to develop Veninsky deposit (Sakhalin-3), East Schmidt and Kaigano-Vasyukansly off-shore blocs (Sakhalin-5). Rosneft has a 74.9 percent stake in Sakhalin-3, while China’s Sinopec has 25.1 percent. The Russian company controls 51 percent of Sakhalin-5, and BP holds a 49 percent stake in the project (Interfax, May 16).

Gazprom’s apparent intention to take over East Kamchatka off-shore deposits, however, brought the differences between Gazprom and Rosneft to the surface. Rosneft’s ongoing drive to acquire new assets and licenses may eventually face some formidable opposition from Gazprom.

Rosneft’s vision of expansion, however, is not limited to Russian energy projects. On May 16 Rosneft also announced that the Zarit project had requested Turkmen authorities for permission to develop two more off-shore blocs, 21 and 22, in the Caspian.

Rosneft and gas trader Itera each have a 37 percent stake in Zarit, while Zarubezhneft has 26 percent. The Zarit venture was formed in 2004 to develop three off-shore blocs–29, 30 and 31–but the project was stalled. Talks with the Turkmen authorities resumed last year. In April of this year, Itera board chairman Vladimir Makeyev reportedly expressed the hope that a formal production sharing agreement on Zarit projects could be signed by the end of 2008 (Interfax, RIA-Novosti, May 16).

Highlighting the growing clout of state-run companies, Zarubezhneft, which used to be the government’s operator of overseas projects, moved to expand its Russian operations. On May 16 Zarubezhneft said that it would start oil production at the Central Khoreiversky deposits in Nenets autonomous region by 2011. With total reserves of some 80 million tons of oil, the production of crude would peak by 2020 at 6.4 million tons per year, the company said (Interfax, ITAR-Tass, May 16).

Thus, Rosneft continues to forge partnerships with state-run companies like Zarubezhneft in order to pursue its acquisition-based expansion in Russia and overseas.