Denis Pinchuk St Petersburg
RUSSIA’S Rosneft has agreed to a $270 billion (R2.7 trillion) deal to double oil supplies to China, as the Kremlin energy champion shifts its focus to Asia from saturated and crisis-hit European markets.
The deal, one of the biggest in the history of the global oil industry, will bring Rosneft $60bn to $70bn in upfront pre-payment from China, the holders of the world’s largest foreign exchange reserves.
It will also allow Rosneft, the world’s biggest publicly listed oil firm, to steeply cut its heavy debts and develop new remote Arctic fields.
“The estimate of the sum of the contract in today’s market prices is absolutely unprecedented – $270bn,” President Vladimir Putin told an economic forum in St Petersburg after the deal was agreed on Friday. It highlights a growing partnership between China, the globe’s top energy consumer, and Russia, one of the largest oil producers, and comes despite previously uneasy relations between Rosneft and Beijing over pricing.
Rosneft’s boss, Igor Sechin, a close ally of Putin, said his group would supply China with 300 000 barrels per day (bpd) over 25 years, starting in the second half of the decade, on top of the 300 000 bpd it already ships to China.
Putin later said total supplies could amount to as much as 900 000 bpd.
The speed of change in Russian export patterns has been dramatic – switching huge volumes from Europe in only five years. Russia first started supplying China by railway and then by a new pipeline while opening a Pacific port, Kozmino, in 2009.
Together with supplies to Kozmino, it is already exporting about 750 000 bpd to Asia, or 17 percent of its overall exports of 4.4 million bpd.
Europe has lost out. A decline in deliveries in the past few years partially contributed to Russian Urals crude oil often trading at a premium to benchmark dated Brent.
Analysts have expressed doubts Rosneft can quickly boost supplies to China from depleted fields in West Siberia, the historic centre of Soviet and Russian oil production.
A source familiar with the China deal said it was timed to tie in with the launch of new streams of East Siberian crude to avoid a big redirection of existing flows, and allow time to expand export infrastructure.
Rosneft and oil pipeline monopoly Transneft secured $25bn from China in 2009 in upfront payments by pre-selling oil so as to accumulate cash to finance growth and new construction projects.
Rosneft’s debt burden has spiked this year after the company acquired Anglo-Russian producer TNK-BP in a $55bn cash-and-stock deal, the largest in Russian corporate history, making it the world’s largest publicly listed oil firm.
Industry sources have said Rosneft might secure up to $30bn in prepayment from China as part of the new deal. On Friday, Putin said pre-payments could total $70bn.
Analysts said the possible upfront payment from China would be a big positive for indebted Rosneft.
“If confirmed, this would be a transformational event for the company’s balance sheet,” JP Morgan analysts said in a note. “Rosneft could even potentially be able to show a net cash position, though working capital would be negative. The pre-payment could minimise financing risks for the leveraged state-controlled oil company.”
According to Standard and Poor’s, Rosneft faces large debt maturities in 2013, 2014, and 2015 of $6.6bn, $15.9bn, and $16.2bn, respectively.
Pre-payment from China would allow it to lighten the burden on its balance sheet by reducing debt to banks.
The company has also used other schemes to reduce its debt, including receiving $10bn from Glencore and Vitol, the world’s two largest oil trading houses, in exchange for five years of supplies.
The money was borrowed by the traders for Rosneft and gave the two Swiss trading houses unprecedented access to Russian crude supplies in Europe. On Friday, Swiss trading house Trafigura, the world’s third largest, agreed to a similar deal by pre-paying Rosneft $1.5bn for 10 million tons over five years.
Separately, Rosneft clinched a $7bn deal with Polish refiner PKN Orlen to deliver 8 million tons of crude oil to the Czech Republic via the Druzhba pipeline.
It also signed a preliminary deal with Vitol to sell liquefied natural gas from Rosneft’s planned plant in eastern Russia from 2019. – Reuters