March 29, 2012
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№ 3 (March 2012)

Russia’s Oil Companies Make Plans for the Future

   For Russia’s oil producers, the 2011 has been the “overseas year” – there, they are actively acquiring.

By Galina Starinskaya

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   Yet many industry players faced difficulties on the domestic market: some produced less oil, some failed to upgrade refineries in time, others did not get the tax incentives for field development, while the last spring’s “gasoline crisis” has drawn sharp criticism from government officials. This year, both problems and priorities will largely remain the same.

Rosneft Pumps into Refining

   Rosneft got tops on all major directions: production, processing, sales – notes the company’s head Edward Khudainatov on the 2011 results. Hydrocarbon production edged up 2.6 percent to 2,586,000 BOE/day. In the Q4 2011 the company produced the record 2,622,000 BOE/day; by nine months’ results Rosneft has overtaken ExxonMobil as the world’s leading oil producer. Oil and gas condensate production for the year grew to 122.5 million tons (+2.5 percent on 2010), natural gas production – to 12.8 billion cubic meters (+3.6 percent).
Last May the state-owned producer acquired stakes in four German refineries of Ruhr Oel GmbH, boosting its refining 15.6 percent to 55.4 million tons Interestingly, BP did join the Rosneft in this project, though the companies failed to smith a strategic alliance for entering the Arctic shelf. In that, the company replaced the Brits by ExxonMobil. The company also planned to buy a network of filling stations in Europe for selling the products of German refineries.

   Still, this year Rosneft should brace up for significant spending in Russia. The state has set a challenge for the oil companies – a phased (by 2015) switching of all refineries to light oil products. The 2011 turned out to be a crisis year for the Russian oil industry – the companies failed to comply with a new drafted by the state white-paper on winding down production and circulation of Euro-2 fuel – this, in turn, led to last spring’s shortage of gasoline on the domestic market. This problem is most challenging for Rosneft – the company owns seven refineries in Russia, and all require major upgrading. For this Rosneft has already set aside about one-third of its record investment program of $15.5 billion. This significant boost of spending figures did not please the investors – within a week (from 3 to 10 February) the company’s shares fell 9 percent on MICEX RTS. Investment banks expect reduction of Rosneft’s cash flow, which means that shareholders should not rely on high dividends, they warn.

   In addition to upgrading its refineries, the company is yet to solve issues linked to the development of Yurubcheno-Tokhomskoye deposit (second-largest project of this producer in eastern Siberia, after the Vankor). Rosneft is waiting for tax incentives for field development and so far holds back the investment decision on the project, constantly postponing the launch date.

   This year the officials should finally resolve their polemic on whether or not Rosneft will be privatized. Igor Sechin, Deputy Prime Minister in charge of energy segment, believes that this issue should be put on hold. Sechin argues that the company is facing serious investments in Russia, which caps its investment appeal and the value of Rosneft shares. Ministry of Economic Development holds a different view, suggesting selling of state-owned stake right away.
Rosneft’s privatization isn’t on the cards for this or the next year, holds Andrei Polischuk, analyst at BKS. The market is unfavorable and the company’s shares are cheap (220 rubles on the MICEX, RTS, as of 22 February 2012). For comparison, during Rosneft’s IPO in 2006 the shares sold for 206 rubles apiece. “In two years it will be clear, just how effective the refineries’ modernization is. Only then the market will value the company for buying the stake in Rosneft, argues the analyst.

LUKOIL Digs Into Iraq

   For LUKOIL, 2011 was the worst of the past five years. Almost all of company’s key performance indicators declined. LUKOIL produced 112.7 million TOE, 4.6 million TOE less than in 2010. Oil production fell 5.5 percent to 90.7 million tons, including 84.7 million tons of Russia-produced oil, though natural gas production grew 3.2 percent to 22 billion cubic meters. Decline of company’s Russia-based production is due to depleting Western Siberia fields and the geological error on one of LUKOIL’s deposits in the Timan-Pechora province (Lukoil ended up with lesser than expected prospective resources). At the same time, by 2017 Lukoil production level will grow to 101.5-102 million tons per year, up 13 percent, says head of the company Vagit Alekperov.

   This year LUKOIL is planning to invest a massive $13.9 billion (over 70 percent – in E&P projects), while investment total for the next 10 years is set at mind-blowing $155 billion. Much of this record for LUKOIL investment will be injected into West Qurna-2, the company’s project in Iraq, as well as into development of field im. Filanovskogo (Caspian Sea), Pyakyahinskogo field (Western Siberia) and the Kandym group (Uzbekistan).

   In 2009 LUKOIL and Statoil consortium placed the winning bid for West Qurna-2 development tender: $1.15 payment per each barrel produced over the 1.8 million barrels per day ceiling. The Russian company owns 56.25 percent stake in the consortium, Statoil – 18.75 percent; the remaining 25 percent is owned by North Oil Company, Iraqi state-owned producer. First oil production on the project is expected in 2013, the target production level of over 1.8 million  barrels per day planned for 2017. Recently LUKOIL got a notification from the Norwegian partners about possible withdrawal from this Iraq-based project. The deal has already been approved by Iraq Government.

   Analysts of Uralsib Capital negatively evaluate the possible growth of LUKOIL stake in the West Qurna-2 project. The additional 18.75 percent stake will mean growing capital investments (by at least $1 billion in 2012–2013 and $5 billion over 2012–2017), say the experts. Analysts forecast 2012–2015 LUKOIL capital investments at $12-14 bn per year. “Statoil’s pullout could mean significant risks of the project. Given the potential risk growth, that is, $5 billion increase of capital costs on the background of only a slight gain in profits, stake acquisition per se will have a negative impact on LUKOIL evaluation. We hope that LUKOIL will be able to find a new partner instead of Statoil without increasing the stake in the project,” note the experts.

TNK-BP Taps Into International Projects

   TNK-BP, marred in 2011 by yet other conflict of majority stakeholders (BP and the AAR consortium), is actively acquiring foreign assets. The issue of access to foreign markets (TNK-BP operated only in Ukraine) was behind the corporate “stakeholders’ war” in 2008. Now the company has projects in three new countries. In Vietnam it owns 35 percent of natural gas and gas condensate producer operating on the block 06.01 and 32.67 percent of Nam Con Son pipeline and terminal, as well as 33.3 percent of the Phu My 3 power plant.
In June last year TNK-BP has closed the deal on acquiring BP’s assets in Venezuela, becoming the owner of interests in three joint companies with PDVSA – PetroMonagas (16.67 percent), PetroPerija (40 percent) and Boqueron (26.7 percent).

   In Brazil the company acquired 45 percent in oil and gas project in the Solimões region from HRT O&G company, majority owner and operator. The project includes 21 geologic blocks. First production on the fields is scheduled for this year.

   The company estimates that by 2020 the projects will account for some 10 percent of its upstream. Other large Russian oil producers also plan to expand its presence abroad. Gazprom neft plans to produce the same volume, while LUKOIL will boost its stake to 30 percent.

Surgutneftegaz Recovers Production

   Surgutneftegaz is the fourth largest – and the most closed – Russian oil producer. The company does not publish financial statements according to international accounting standards, does not disclose the ownership structure and operates only in Russia, though it did accumulate some $28 billion on its accounts.

   The last year was the most successful for the company over the past five years – it managed to stop the decline of oil production. Oil production reached 60.8 million tons, up 2.1 percent on 2010 figures. The growth was supported by Talakanskoye and Alinskoye deposits in Sakha Republic (Yakutia); within a year, oil production on the fields jumped 62 percent to 5.4 million tons, and this year the company expects another 1.2 percent production growth (to 61.5 million tons of oil). At the same time, natural gas production at Surgutneftegaz fields continues to decline. In 2011 the company produced 12.9 billion cubic meters of natural gas, down 3.7 percent on 2010 levels.

   The main objective of Surgutneftegaz is to ensure the required reserves growth, experts say. The last year the state decided against privatization of the large fields (“at stake” are the im. Shpilmana, Lodochnoye, Imilorskoye fields, etc.), so the company was forced to acquire modest-sized deposits. The analysts argue that, given the generally position of the state towards Surgutneftegaz, in the future the company may expect getting at least one of the few remaining major oil projects.

Gazprom neft Braces Up to Replace Gazprom

   In 2011 Gazprom’s oil producing subsidiary Gazprom neft boosted its hydrocarbons production to 421.63 million BOE, 7.4 percent up on 2010 levels (57.3 million BOE, mainly due to continuously growing production at Priobskoe field, start of natural gas production at Muravlenkovskoe and Novogodnee fields, and acquisition of Orenburg assets (eastern part of Orenburg field, Tsarichanskoye and Kapitonovskoye fields). This year the company is also expecting a 4 percent production growth.

   Gazprom neft is set to take over all of the Gazprom’s oil assets including offshore projects, as stated in the relevant program. The company will soon get to develop the Pechora Sea deposits, Prirazlomnoye (estimated launch time – Q1 2012) and Dolginskoye (2018-2020), as well as Novoportovskoye field in the Yamalo-Nenets Autonomy.

   Yet the company, similarly to Rosneft, is a hostage to the decision on providing tax incentives for the projects. Currently the government is discussing the possibility of introducing lower export taxes for the Prirazlomnoye project. The company holds that Messoyahinskoe, Novoportovskoye and Kuyumbinskoye fields must be included in the concessionary list, too. In the absence of a positive decision, Gazprom neft says that lack of positive decision would mean capping the projects already in 2013.

   The state is currently unprepared to introduce complex discounts for oil producers, says Dmitry Alexandrov, head of the analytical studies at Univer Management Company. “The officials could give a nod if the Russian oil market dives into the red, for example, if there is a threat of lower production levels,” says the expert.

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