RUSSIA’S ROSNEFT EYES EAST SIBERIAN EXPANSION

Rosneft, Russia’s state-run petroleum firm, has promised multi-billion dollar investments to increase its crude oil production in Eastern Siberia. However, the economic viability of Rosneft’s plan remains a matter of debate, as the energy giant appears to be facing a cash shortage despite high international oil prices.

Despite its considerable volumes of oil production and valuable assets, Rosneft appears to be struggling to finance its short-term debt. On February 22 Rosneft announced it had secured $3 billion in loans from a consortium of 16 lenders led by Deutsche Bank. Rosneft reportedly had a deadline of March 19 to refinance $5 billion of the $22 billion loan it used to acquire assets of the bankrupt oil firm Yukos. The new loan will be secured by crude oil export contracts, Rosneft said in a statement (Interfax, Prime-Tass, February 22).

Back in 2004, Rosneft took over the Yukos main production unit, Yuganskneftegaz for $9.4 billion through a non-transparent financial transaction. Rosneft’s daily production leapt from about one million barrels of oil to more than 1.5 million after it took over Yuganskneftegaz. In July 2006, Rosneft raised more than $10 billion in its stock market float, although it had been originally planned to raise up to $18 billion. After the IPO, Rosneft remained controlled by the state.

In May 2007, Rosneft placed a winning $6.8 billion bid at an auction for the Siberian assets of Yukos, including Tomskneft, the East Siberian Oil and Gas company (VSNK), and other units. Most of these assets are based in Eastern Siberia. The acquisition allowed Rosneft to overtake privately owned Lukoil in terms of oil production capacity and become Russia’s largest oil company.

Yet despite its significant financial burden, Rosneft has reiterated its ambitious plans for expansion. Rosneft aims to pump 160 million tons of crude oil in 2015 and 170 million tons in 2020, up from an estimated 111-112 million tons this year, Rosneft CEO Sergei Bogdanchikov told a meeting in Krasnoyarsk on February 15. The company aims to produce about 40-50 million tons of crude in Eastern Siberia by 2020 (Interfax, RIA-Novosti, February 15).

Rosneft has been pursuing a very aggressive policy aimed at boosting its clout in Eastern Siberia. In November 2005, Rosneft acquired a 25.94% share in Verkhnechonskneftegaz, with estimated reserves of some 200 million tons of crude and nearly 100 billion cubic meters of gas, reportedly for some $80 million. In December 2005, Rosneft paid some $260 million for a license to develop the East Sugdin oil and gas field, with reserves of some 200 million tons of oil and more than 40 billion cubic meters of gas.

In order to achieve significant production growth, Rosneft plans to invest 50 billion rubles ($2.04 billion) in Eastern Siberia this year, and up to 600 billion rubles ($24.5 billion) through 2020, Bogdanchikov said. Rosneft expansion plans for Eastern Siberia largely rely on the Vankor oil deposit, which has estimated reserves of 500 million tons, he said. However, Bogdanchikov complained that the company’s investment resources were limited, as it faced a tax burden of some 60%, while oil companies outside Russia pay about half that amount (Interfax, February 15).

The Vankor field is due to start oil production in 2008 regardless of any possible delays with the Eastern Siberia Pacific Oil pipeline (ESPO) pipeline, Bogdanchikov said. Rosneft has already invested 70 billion rubles ($2.86 billion) to develop the Vankor deposit, and it will spend up to 380 billion rubles ($15.5 billion) there eventually, he said (Interfax, February 15).

In July 2007 Transneft’s former head, Semyon Vainshtok, claimed that Rosneft had promised unexpectedly high volumes of crude for the ESPO — 25 million tons in 2009 from the Vankor oilfield. Vainshtok’s claim, never confirmed by Rosneft, came as a surprise, because Rosneft had not been expected to raise crude output at Vankor oilfield up to 25 million tons until 2014.

Meanwhile, Rosneft appears struggling to cooperate in Eastern Siberia with yet another state-run energy giant, Gazprom. Earlier this month, First Deputy Prime Minister – and presidential frontrunner – Dmitry Medvedev ordered Gazprom and Rosneft to finish talks regarding the Sakhalin-Khabarovsk gas pipeline project so as start gas supplies to Vladivostok by 2011. Medvedev made it clear that Gazprom and Rosneft must build the Sakhalin-Khabarovsk gas pipeline by no later than 2011. In response, Gazprom executives claimed that Rosneft, which owns the Sakhalin-Komsomolsk-on-Amur section of the pipeline, has been slow to accept Gazprom’s proposal to join the project (Interfax, February 7-8).

Apparently acting as vehicles of the Kremlin’s drive to boost control over the country’s energy sector, Rosneft and Gazprom have allowed the Kremlin to control roughly a third of Russian oil and the bulk of the country’s natural gas supplies. However, despite similar strategic goals Gazprom and Rosneft are yet to reconcile conflicting interests. The rivalry was understood to follow the attempted merger of Gazprom and Rosneft, as the Kremlin once aimed at creating a global energy player by uniting the two companies. But in May 2005 the Russian authorities announced that no merger between Gazprom and Rosneft would take place.

Subsequently, Rosneft management suggested improving ties with the gas monopoly. Rosneft and Gazprom should cooperate in developing off-shore projects, notably Sakhalin-3, Bogdanchikov said. Rosneft already owns 2,600 kilometers of pipelines in the Far East, while Gazprom has infrastructure facilities in Sakhalin, hence both companies can cooperate in the region, he said (Interfax, February 15).

Therefore, Rosneft may still acquire new licenses, but developing new oil and gas fields in Eastern Siberia would require billions of dollars in investments. Therefore, it remains to be seen whether Rosneft’s expansion could prove economically viable in the longer term.