There are plans in Russia to privatize part of state-owned Rosneft. But as Rosemary Griffin reviews in this week’s Oilgram News column, Petrodollars, that process is becoming more complicated.
While pessimism has increased over the Russian oil and gas sector’s prospects, government officials are still talking about privatizing part of the country’s largest crude producer, Rosneft. A falling share price, economic sanctions, and oil’s recent drop could make finding the right investors at the right price a challenge for the government.
But in early December the Russian government published details of an order covering the privatization of an almost 20% stake in Rosneft. The order reiterated plans to reduce the government’s stake to 50% plus one share by the end of 2016 and stipulates that shares in Rosneft should not be sold for less than they fetched at its initial public offering in 2006. At the time a 15% stake in Rosneft was sold for $10.6 billion, or $7.55/share.
For his part, Rosneft CEO Igor Sechin has indicated that shares should not go for less than $8.12/share, which is in line with the price paid for Rosneft shares as part of the TNK-BP deal in 2013. A sale at that price could bring in $16.8 billion to the Russian government, according to Sechin’s estimates, which explains partly why the government remains interested in the sale.
But as 2015 begins, the company’s actual stock value is a long way off from the government’s and Sechin’s valuations. On January 2, Rosneft shares closed at $3.34/share on the London Stock Exchange, after taking a hammering in 2014.
In additions to sanctions and oil price uncertainties, potential investors have to be concerned about decreasing production. Despite the TNK-BP purchase and other smaller acquisitions made in the past two years, in the first 11 months of last year, crude output fell 0.9% on the year to 184.9 million mt, as the impact of greenfields and increased production from recent acquisitions failed to fully offset declining output at brownfields. The TNK-BP deal also added significantly to Rosneft’s debt portfolio. If this was a cause for concern before this year, since the 2014 summer it has become a much more prominent issue.
Rosneft was one of the companies named directly in sanctions and has seen its access to Western capital markets disappear at a time when it is facing major debt refinancing obligations over the next year. It has already turned to the government for financial support to deal with the current poor economic climate in Russia and could seek further state support in the future.
But it’s not all doom and gloom, and if the economic situation were to improve significantly or the government were to lower its price expectations, there are some companies who may be interested in purchasing the government’s stake. Analysts tend to compare the likelihood of three groups of investors taking a stake in the company—fellow Russian oil and gas producers, foreign majors, and Russia’s increasingly close allies at Chinese state-owned companies.
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So, why would they buy? Rosneft boasts impressive proven reserves, estimated by DeGolyer & MacNaughton at 33.014 billion barrels of oil equivalent at the end of 2013. It recently forecast it would add 450 million mt of oil equivalent to its estimated reserves at the end of this year, and is in a prime position to receive any new licenses to explore and develop in Russia’s most promising areas in the future.
Rosneft’s close links to the government are also an enticement to a potential suitor as it guarantees smooth development of new projects, financial backing if it needs a cash infusion and help to foreign investors working in Russia, including securing a favorable tax regime and resolving potential environmental disputes.
These factors were a crucial draw to its biggest foreign stakeholder BP, which was happy to break up its JV with Russian partner AAR for access to sizeable reserves and the prospect of working in Russia with a partner that can get things done.
But BP has already said it is not interested in increasing its stake in Rosneft beyond its current 19.75% portion, and the recent fall in oil prices is likely to put other international majors off investment in a Russian producer in the near term. This leaves Russian investors and China. Analysts pointed to cash-rich Surgutneftegaz as a potential buyer if the government moves for a deal to keep ownership of the privatized stake in Russian hands.
The surge in Russian cooperation with China this year has also led some commentators to say that a Chinese state-owned company is the most likely buyer if the government meets its deadline of privatizing the stake by the end of 2016.
China has so far been happy to cut deals with Russia in return for guaranteed future resources. Furthermore China has stayed out of the spat between Russia and Western countries over the conflict in Ukraine, and could use that to drive a hard bargain in the face of limited interest from Western majors. — Rosemary Griffin in Moscow