Russia’s Rosneft Expanding Global Presence

For analysts nervously contemplating the Russian Federation’s growing global energy presence, bête noire #1 is the state owned natural gas giant Gazprom.

Rosneft is an integrated oil company whose majority interest is owned by the Russian government. Proving that no anti-corruption case doesn’t have a silver lining, Beginning in 2004, Rosneft became Russia's leading extraction and refining company after purchasing assets of former oil giant Yukos at state-run auctions, following the conviction of former Yukos President Mikhail Kodorkovsky on fraud charges, a practice that Yukos has alleged included illegal auctions, bogus bankruptcy fire-sales and outright expropriation of Yukos assets.

With the benign blessing of the Kremlin, Rosneft is expanding its global footprint.

An even cursory review of Rosneft’s activities gleaned from the recent Russian press include: hoping to open a new oil and gas province in the Russian Federation’s Arctic Kara Sea in 2014; acquiring a 30 percent share in an ExxonMobil Gulf of Mexico project; lining up ExxonMobil, Italy’s Eni S.p.A. and Norway’s government majority owned oil and natural gas Statoil company for possibly investing $14 billion in Rosneft offshore exploration projects; receiving up to $5 billion from TNK-BP accounts; receiving $10 billion prepayment for oil supplies from Anglo–Swiss multinational commodity trading and mining company Glencore International plc, and ramping up potential liquefied natural gas production.

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All in all, a most impressive portfolio.

Want a taste of the action? The U.S. government’s Energy Information Administration in its “Russia – Analysis” study notes blandly, “While foreign companies can invest in Russia, this is generally done with a Russian company, usually Rosneft.”

A wise observation, as the Russian government owns 75.16 percent of Rosneft.

Rosneft’s current operations in the Russian Federation are impressive, including the Western Siberian Priobskoe Basin fields, extracting more than 800,000 barrels per day. Another Rosneft asset is the Vankor field in Krasnoyarsk’s Turukhansk district in eastern Siberia, which began production in August 2009. Vankor has estimated reserves of 520 million metric tons of oil and 95 billion cubic meters of natural gas and is now producing 367,000 barrels per day. Vankor has dramatically increased production in the Russian Federation’s east Siberia region and has been a significant contributor to Russia's increase in oil production since 2010, being the largest discovery in Russia in the last 25 years.

After Rosneft’s acquisition of Anglo-Russian TNK-BP for around $55 billion in a cash-and-stock deal, expected to be completed by June 2013, Rosneft will become the world’s largest listed oil producer with hydrocarbon output of some 4.6 million bpd per day, which would leave the company producing more oil than OPEC’s second largest producer, Iran.

For downstream activities, of the Russian Federation’s 40 oil refineries with a total crude oil processing capacity of 5.4 million bpd, Rosneft, the largest refinery operator, controls 1.3 million bpd and operates Russia's largest refinery, the 385,176 bpd Angarsk facility.

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The upshot of all this?

The Russian Federation will be a major player in the global hydrocarbon market for decades, as new fields like Vankor and Arctic ocean fields come online. As of January 2012 Russia's proven oil reserves stood at 60 billion barrels, with most of the reserves located in western Siberia, between the Ural Mountains and the central Siberian plateau, the Volga-Urals region extending into the Caspian sea, and up and coming eastern Siberia, which as yet has had little exploration.

The second lesson to be learned from all this is that the easiest road for foreign oil companies to exploit these riches leads through the Kremlin via Rosneft. Despite the muffled Western investor screams when Yukos was broken up, the hard reality is that in the rampant privatization in the wild, wild East following the collapse of the Soviet Union in 1991, many energy deals were shady in the extreme, allowing Putin when deemed necessary to unleash the Russian government’s most feared weapon – the tax police. For better or for worse, dealing with either Gazprom or Rosneft shields foreign investors form a capricious nuking by Russian fiscal entities.

Given Saudi Arabia’s closure to foreign investment and the declining output of such superfields as Ghawar, Russia’s importance, combined with rising global demand, especially from China and India, will see it go from strength to strength. The only question for foreign investors is the terms the Kremlin is offering.

By. John C.K Daly of Oilprice.com