Russia’s oil giant closes in on half of the country’s production. But is the future necessarily all bright for the company?
Thanks god the nightmare is over. Or so must think BP, after Rosneft confirmed its intention to snap up the entirety of the British group’s share in TNK-BP. The joint venture had brought sizeable dividends to BP, but bitter rows with AAR, BP’s partner in the project, also caused its management massive headaches. With Rosneft also ready to pay a lump of cash to AAR’s for its stake in the partnership, both parties can now claim they are exiting the deal on a bright note.
Things look even better for Rosneft. Back in 2004, the company was Russia’s eighth-biggest producer and an awkward shell holding the last non-privatised assets of the country’s extractive industries. It was then valued at $6bn. But its decision to acquire 100 per cent of TNK-BP – a deal valued at $55bn – will make it the world’s largest oil and gas producer by volume. It will also complete the Kremlin’s takeover of the hydrocarbon industry, initiated by Vladimir Putin more than a decade ago.
But power and glory won’t come for free. The acquisitions will pump Rosneft’s net debt up to $65bn, or 2.21 times its EBITDA, from the current 1.06 times. And that is if oil prices stay at $110 a barrel. If oil prices fall to $90 a barrel, a more realistic benchmark according to many experts, net debt to EBITDA ratios could climb up to three times. It would then take 14 years for Rosneft to pay off its debts.
The deal also sees the company cede two seats on its board, as well as a 20% of its shares, to BP. This will hardly put the authority of Rosneft’s biggest shareholder – the Russian state – into question. But it will still give BP some clout over Rosneft. And if anything, it will shed light on the company’s opaque decision-making process. This could bring Rosneft – and the Kremlin – unwelcome publicity further down the line.
More important still are fears that the Russian giant might be over-extending itself. Over the past two years, Rosneft has agreed to momentous partnerships with a number of Western majors, including ExxonMobil, Statoil and ENI. These involve ambitious plans to develop fields in East Asia, and start drilling in the Arctic. Worried investors hint that any of these projects by itself is already a big chunk to swallow. Rosneft, they say, is trying to do them all; it could soon finds it has too many pots on the stove.
Igor Sechin recent moves may assuage such concerns. Rosneft’s chief executive has poached senior managers from Exxon, TNK-BP and Morgan Stanley to instill private expertise and efficiency in the state-owned company. This will probably convince minority shareholders to stay on board, and help raise the funding needed to finance the company’s aggressive growth.
But Sechin’s efforts will not remove the most resilient of investors’ reasons for unease: the possibility of harmful interference by the Russian state. With 70 per cent of Rosneft still in the Kremlin’s hands, Putin will indeed continue to call the shots. This doesn’t mean that the company shouldn’t be hoping for a rosy future. Just that this future, for the time being, will remain intimately aligned with the interests of people close to Moscow’s Red Square.