Rosneft (MM:ROSN) Plans to Boost Share Value

Brian Hicks

Written By Brian Hicks

Posted April 26, 2013

Clash of the state-run oil companies begins in Russia.

State-run oil giant Rosneft (MM:ROSN) is planning an Arctic expedition for liquefied natural gas (LNG), a valued commodity in Asian markets. The project is on a long-term basis, with planned exports to the Far East by 2018. CFO of Rosneft Svyatoslav Slavinsky told Bloomberg he is enthusiastic about the Arctic campaign and the value it can add to shareholder interests.

RosneftCEO Igor Sechin has a goal of boosting Rosneft market value up to 60 percent within the next two years, to a value of approximately $120 billion. This would surpass rival state-run gas exporter Gazprom’s (MM:GAZP) projected value of anywhere between $73 to $90 billion.

Gazprom has long held a monopoly over gas exports abroad with the help of government policies. Other oil and gas companies have been prevented in exporting gas abroad.

But Rosneft is hoping that government officials will change their tune once they hear from the company, along with many others from the oil and gas industry. Sechin is an ally of Vladimir Putin and expects the president to end the Gazprom monopoly and bestow tax breaks to Rosneft for the Arctic campaign.

Sechin has made it his company’s mission to beat its rival. At an investor meeting in London, Sechin made it perfectly clear that he wants to beat Gazprom by increasing the Rosneft domestic market from 9 percent to anywhere from 19 to 22 percent, according to Russia Today.

The first step in doing so required the purchase of TNK-BP from BP (NYSE:BP) for $55 billion in March of 2013—a company with diversified investments in Russia, Ukraine, and Siberia and one of the top ten private oil companies in the world.

Another way Rosneft plans to one-up its rival is by teaming up with ExxonMobil (NYSE:XOM) in a joint-venture expedition in Iraq. An Iraqi delegation will arrive in Moscow on May 10 to extend negotiations.

Rosneft will also be entering into a joint venture with PDVSA, Venezuela’s largest state-run oil company, through a 40 percent share and a set license for 25 years, with wiggle room for future extensions. Both companies will explore more territory in Venezuela’s Orinoco belt region—the richest oil reserves in South America and among the top petroleum sources in the world.

By utilizing Russia’s well-established political and business ties with Venezuela, Rosneft is well on its way to future growth. Oil Minister of Venezuela Rafael Ramirez estimates that Russian and Venezuelan deals will amount to $50 billion by 2019.

And Rosneft has entered into a memorandum of cooperation on an LNG project in East Russia, titled Vladivostok, according to UPI News, where Gazprom currently has the only LNG plant in Russia on Sakhalin Island.

There is no indication that Russian officials will halt Rosneft’s planned expansion into the gas market, but the Russian government would be foolish to disallow an extra channel of LNG exports to energy-hungry Asia, given Russia’s current economic situation.

Russian Economy

As Gazprom and Rosneft try to one up each other in the future, this will no doubt flood government coffers with more revenue, which will benefit the entire nation.

Russia is currently balancing a fine line between slower-than-expected growth and recession. Russia is not in dire straits on the level of Western Europe, but many analysts and Russian politicians are getting worried.

The slump in Russia’s economy is largely due to the economic perils of Western European countries, and since Europe makes up half of Russia’s foreign trade, Vladimir Putin is looking for ways to secure higher growth.

According to Forbes, the Russian economy is expected to grow by 3.4 percent this year, compared to earlier projections of 4 percent.

The current budget for 2013 has a deficit of 0.8 percent.

The new standard for retail sales may be 4.3 percent annually, a downgrade from a previous forecast of 5.4 percent. Due to higher inflation, Russians are making fewer purchases.

The good news for Russia is that oil and gas comprise half of budget revenues. By looking beyond Europe and steering toward expansive Asian markets, Rosneft will not only benefit shareholders but will also play a part in boosting the Russian economy as a whole.

Rosneft reps believe lifting restrictions on the Russian gas market will give the Russian economy the kick it needs.

From Russia Today:

“Rosneft expects to produce more than 40 billion cubic meters (bcm) of gas in 2013, over 60 by 2016 and 100 bcm in 2020, half of which will be produced in new projects. The company is also on Gazprom’s heels in LNG development, as both companies are looking to expand their influence, particularly in exports to China.”

The current deal in Russia is more important than many realize because these deals will have broader implications on the future of Russia’s economy.

Russia & Abroad

Many investors abroad and domestically see Russia as the Titanic in the midst of sinking, and many are jumping off board. Investors were not enthused by Russia’s lackluster results in the economy, and the situation has Putin and the Central Bank of Russia worried, according to Forbes.

But there is a ray of sunshine with Russia’s oil sector.

Regardless of the region, from Texas to Norway, the oil industry can improve just about any economy with the right policies.

No one knows how the government will respond in lifting its favor on Gazprom, but Rosneft’s plans of exporting LNG to Asia has a strong chance of going unimpeded.

Pay special attention to natural gas and LNG exports not just in Russia but in other parts of the world as well.

Many oil and gas companies in the United States are finding it more profitable to export natural gas abroad because of low prices at the domestic level.

Australia is another nation that exports natural gas and LNG to Asia. With multiple regions of the world focused on Asia, many nations like India and China will get more than enough fuel sources while oil companies will get what they need in the form of rewarding shareholders and contributing to state coffers. 


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