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Prepare For Another Shift In Mood In Oil Markets

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Although fundamentally nothing really changed…

Hasty Rosneft Privatization Deal Defies Expectations

Igor Sechin

The much anticipated plan on the privatization of the Russian oil giant Rosneft’s 19,5% stake was surprisingly declared completed on the night of December 7, as the company’s CEO Igor Sechin reported the 10.5 billion Euro deal ($ 11.37 billion US) to the Russian president Vladimir Putin on Wednesday evening.

Despite the industry experts’ predictions betting on Rosneft buying back its own shares through Rosneftegaz, the deal has emerged, with the key stakes buyers turning out to be a consortium of a Swiss-based commodities trading company Glencore and the Qatar sovereign wealth fund. The news sent Rosneft’s share price soaring 6.5%, to 380 Rubles per share the morning following the deal, setting new record highs in the company’s history

As Rosneft’s CEO Igor Sechin pointed out to media, the deal included an oil supply contract with Glencore through a commencement of a 50% - 50% joint venture between the Swiss-based company and Qatar to invest in both Russian and international projects.

Italian bank Intesa Sanpaolo (ISP.MI) in a consortium with a syndicate of four or five other key banks would provide 7 billion Euros of financing, while the remaining balance of 2.8 billion Euros is to be funded by Qatar Investment Authority (QIA).

Related: A Real Opportunity For An Oil Price Recovery

Earlier last week when the deal was announced, Glencore reported that it committed to invest €300 million in equity financing, which implies that the syndicated bank loans would substantially insulate Glencore’s risks of acquiring the stake in Rosneft. Also, as Glencore shared in a press release on Saturday, Russian banks will guarantee up to 1.4 billion euros of financing but no names were disclosed.

As part of the agreement, Glencore has agreed to a five-year supply plan. According to this plan, Rosneft will supply 220,000 barrels a day to be traded by Glencore. The agreement also envisages “other additional opportunities, including infrastructure, logistics and global trading”, as Bloomberg reported.

It is worth pointing out that Rosneft and Glencore have had long existing relations. In 2012 Glencore concluded a contract with Rosneft for the delivery of up to 46, 9 million tons of oil (190 thousand barrels a day) through its trading arm over the course of five years.

However the supply of oil to Glencore under 2013 contract was executed in accordance with advance payment terms, whereas Rosneft was getting 10 billion of USD in prepayment. Similar deals were concluded by Rosneft with other trading companies, such as Vitol and Trafigura, but sanctions imposed on Russian banks by the U.S. and European countries have since significantly complicated payment and delivery conditions.

Slammed by the economic slowdown, Glencore incurred a substantial debt. Its net debt in the middle of 2016 amounted to USD $23,6 billion, and only just last week, Glencore’s CEO, Ivan Glasenberg announced that it had completed its latest planned asset sales to bring its debt load down to $17 billion by the end of the year, and the company was ready to make acquisitions again.

Related: Which Oil Majors Are Most Exposed To The OPEC Deal?

For Qatar however, this deal isn’t a small one either. The Gulf nation’ Investment authority provides the reckoned funding of 2.8 billion Euros for Rosneft, making this investment the third largest the Qatari Wealth fund has made after only Qatar National Bank SAQ and Volkswagen, according to data compiled by Bloomberg.

It’s worth noting that Qatar played a central role in securing Russian support for the OPEC output deal. Although Russia and Qatar have often had political standoffs, and they are major competitors in global natural gas supply with both trying to exert their influence in the Middle East, buying a stake in Rosneft could give Doha more leverage with Moscow to settle the differences.

Qatari representatives have not released any comments pertaining to the deal so far. Although Gulf investors are known to abstain as much as possible from making open public statements.

Although the deal came as a surprise, a number of industry analysts and experts expressed their positive outlook on the deal. Bank of America Merrill Lynch analysts led by Jason Fairclough wrote in a note to Bloomberg, that the “supply deal could deliver annual trading profits of about $80 million’, and they said the view the deal “positively.”

Related: How Long Can OPEC Remain United For?

However, just a few weeks ago, most industry watchers had very little hope for a foreign investor to be found for Rosneft, especially when the government signaled that the company could buy their own shares through RosNeftGas.

When Rosneft issued domestic bonds for 600 billion rubles ($9.4 billion US) earlier on Wednesday December 7, many assumed that was to fund the buyback of its shares in view of a lack of an adequate outside investor.

But later, it appeared that in parallel, Sechin and his team were trying to carve out a deal to land a foreign investor.

Rosneft had been under tremendous pressure from Kremlin to secure a sale of the stake to plug big holes in the cash-strapped state budget caused by the international sanctions and the slump in oil prices.

Unfortunately for the Russian government, the sale of Rosneft’s stake has come at a time of low oil prices, when the value of oil assets is far lower than before the bust.

According to Reuters calculations based on publicly-available data, Russia sold its share in Rosneft's oil production for about half the price Rosneft has previously paid for the acquisition of the domestic oil production assets.

On the other hand, the deal could boost Russia’s image and add weight to its position of the global oil market player, especially in the face of the sectoral sanctions. As Chris Weafer, senior partner at Macro Advisory Ltd., a Moscow-based consultancy pointed out to Wall Street Journal: “It’s diversification in political relationships and investment, it shows that there is more than one buyer in town and that Russia doesn’t have to just sell cheaply to China or India.” he said.

By Ekaterina Pokrovskaya for Oilprice.com

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