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Streetwise Professor

February 18, 2013

Rosneft: Supermajor Wannabe

Filed under: China,Commodities,Economics,Energy,Politics,Russia — The Professor @ 2:13 pm

Rosneft is scrambling to finance its acquisition of TNK-BP.  The means it is resorting to speak volumes about the gulf between its aspirations to be a supermajor and reality, and also about the risks that lenders perceive in dealing with Russia (and perhaps Rosneft specifically).

Rosneft is raising $10 billion through an oil pre-pay deal with Vitol and Glencore.  Rosneft agreed to sell the oil forward, with deliveries starting this year, and Vitol and Glencore used those contracts as collateral for loans for $10 billion.  The money goes from the banks, through Vitol and Glencore, and then on to Rosneft which will use it to pay AAR and BP.  The use of oil to secure the Rosneft-Vitol/Glencore deal is interesting.   Rosneft cannot borrow the money on its own promise to repay: it did borrow $15 billion from banks on that basis, but individual banks were not willing to take more than $1 billion in exposure to the Russian company: that limited appetite for Rosneft credit risk (which given its asset base is driven by political and legal risk) is quite telling.

Rosneft has to use prepays-a kind of financing usually extended to less creditworthy commodity traders, producers, or processors-to get additional funds.  Big commodity houses like Vitol and Glencore frequently use prepays and offtake agreements to provide funding to smaller producers and refiners.  It’s not the way real supermajors secure credit.

Oil is particularly useful as collateral, because if Rosneft tries to renege on its commitment to the Swiss houses (as it might be tempted to do if oil prices spike well above the agreed price), it will have a difficult time selling the oil as anything it tries to sell would be subject to seizure.  It’s a lot easier to seize oil in tankers or in storage facilities in Rotterdam to collect on a debt than it would be to try to seize a refinery in Russia.

Rosneft is also going back to the China well.  It has approached CNPC for $25-$30 billion dollars, again backed by sales of oil at fixed prices.  It originally denied it was in talks with CNPC, but this appears to be a “meaning of is” thing.  It might not have been in talks right at the instant that the Reuters reporter called them last week, but today Igor Sechin is in Beijing talking to the Chinese about a deal.  That’s not the kind of thing that is stitched up over a weekend.

This is a reprise of a $25 billion loan from CNPC and the China Development Bank to Rosneft and Transneft to fund construction of a pipeline extension to China negotiated at the depths of the crisis in 2009.  As I predicted at the time, that deal soon unleashed conflict between the Chinese and the Russians over the price of the oil that the Russians sold to secure the loan, and the transportation cost. The battle raged for several years, until the Russians agreed to sell the oil at a $1.50/bbl discount to the price they charged other customers buying off the ESPO pipeline.

Again, doing a large loan secured by oil, especially with a counterparty with whom the Russians have had numerous pricing disputes (they still haven’t negotiated a price in a gas deal that was first inked in 2006), is hardly the mark of a supermajor.

I fully expect that any new deal with China will spark future price disputes.

The quite evident limits on Rosneft’s borrowing capacity will constrain its ambitions to expand production in Russia, especially in offshore projects in the Arctic.  Hence, it will be very reliant on JVs with companies like Exxon who will no doubt drive very hard bargains.

The means that Rosneft must resort to in order to finance its purchase of TNK-BP says a lot.  It can’t borrow agains the assets it is acquiring, or its other assets.  Beyond the $15 billion syndicated loan, the only thing that lenders feel comfortable lending against is the oil that Rosneft must sell.  That’s the way middling-to-marginal commodity firms get funding, not supermajors.

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