Rosneft Rushes to Repay Loans

By Ivan Shlygin, April 19, 2014

complexity of refining is not stimulated by existing taxes and duties.

Following the peak of capital construction, adds Debelov, Rosneft could increase its free cash flow by reducing costs and boost revenues. This process will be hampered by the growing cost of maintaining output at depleting fields. Ideally, capital expenditures will be halved, with an annual 1-2 percent output drop at mature assets. Under such scenario, Rosneft would have a free cash flow of about $10-12 billion a year, which could then be spent to service the debt. “In this case, it would take about four years to repay the loans raised for the TNK-BP purchase, and Rosneft’s total debt could be paid out in about seven years,” notes Debelov. Unfortunately, adds the expert, reality, as a rule, hardly follows the ideal script as any new initiative to consolidate assets or ramp up oil output would delay the final liquidation of the debt.

Chinese Accent

For Rosneft, oil exports to China are currently one of the key revenue sources. The company already signed three supply contracts with Chinese partners. In 2011, Rosneft and CNPC inked the first agreement for annual supply of 15 million tons of crude via the Skovorodino-Mohe pipeline over 20 years. The second agreement worth $270 billion for the supply of 365 million tons over 25 years was signed last June at the Economic Forum in St. Petersburg. In mid-January, CNPC furnished the first $20-billion down payment under this contract, and by mid-2015 the Chinese company is expected to pay about half of the total amount of the contract. The third agreement was signed last October with China’s Sinopec. According to the $85 billion contract, Rosneft will supply 10 million tons of oil annually over a 10-year period. Sinopec pledged to furnish a down payment totaling about 25-30 percent of the contract amount. Under the deal, Rosneft can supply both crude oil and oil products to Sinopec. New contracts suggest that, after closing the TNK-BP purchase, Rosneft’s oil exports to China will double to about 30-31 million tons per year.

Obviously, Rosneft’s drive to boost revenues would require expansion of its operations, stronger competition with other market players and build-up of the company’s positions in the gas market, too. Gazprom will undoubtedly retain the dominating role, but Rosneft plans to step up significantly its gas production. Speaking to an audience of international investors at a London conference last April, Rosneft Vice President Vlada Rusakova said that by 2020 the Russian giant planned to increase gas production to 100 billion cubic meters per year. In 2013, the company’s natural gas production surged to 38.17 billion cubic meters, surpassing the 2012 figure of 16.39 billion cubic meters more than twice. 

Rosneft’s plans to develop the gas business have been aided by the new law liberalizing LNG exports, which went into effect on Dec. 1, 2013. Previously, Gazprom held a monopoly on LNG exports, but now this right is granted to producers whose licenses on Jan. 1, 2013 included commitment