OAO Rosneft (ROSN)’s $55 billion takeover of TNK-BP creates an empire stretching from Russia’s Far East to Venezuela that pumps almost 5 percent of the world’s crude.
As Chief Executive Officer Igor Sechin integrates Russia’s largest and No. 3 oil companies, he will steer an upgrade of Soviet-era refineries, a drilling program in uncharted Arctic waters, the creation of a natural gas business and a global alliance with Exxon Mobil Corp. (XOM:US)
The new company, created yesterday, will be about 70 percent-owned by the Russian state and will employ 218,000 people, more than Exxon and Royal Dutch Shell Plc (RDSA) combined. Rosneft sales per employee will be $729,000 this year, compared with more than $5 million at Shell, representing the scale of potential cost savings. Sechin plans to find $10 billion of efficiencies through the TNK-BP deal.
“This is the biggest acquisition in history in terms of production and reserves,” said Daniel Yergin, author of “The Prize,” a history of the oil industry, who will sit on an integration committee overseeing the takeover. The companies “recognize the scale and complexity, but they also see the scale of opportunity.”
Buying TNK-BP stretched Rosneft’s finances, racking up $31 billion in loans, and the company is funding part of the deal by selling oil in advance for as much as $10 billion to Glencore International Plc (GLEN) and Vitol SA, the world’s two biggest independent oil traders. Moody’s Investors Service and Fitch Rating Ltd. both put a negative watch on Rosneft’s credit after they announced the deal.
“The plans are ambitious and capital-intensive,” said Valery Nesterov, an oil and gas analyst at Sberbank Investment Research in Moscow. “It will need to create a modern, advanced company and not a traditional one that it is now.”
The spending includes investments in the upgrade of refineries, estimated at $25 billion for Rosneft’s own plants, as well as $2.5 billion for TNK-BP’s projects.
Sechin will also seek to accommodate the interests of BP Plc (BP/), the U.K.’s second-largest oil company, which became Rosneft’s second-biggest shareholder through the deal to sell its half of TNK. BP will have a 19.8 percent holding in Rosneft and CEO Bob Dudley will sit on the board.
“The Russian oil industry has tremendous potential both onshore and offshore,” Dudley said at a press conference in London yesterday. “This is the beginning of a very long-term relationship.”
BP will buy back $8 billion of shares from investors after the deal, returning to its shareholders an amount equivalent to the value of the original investment in TNK-BP in 2003, the London-based producer said today.
As part of the deal, BP bought a further 5.7 percent stake in Rosneft from state holding Rosneftegaz, which owned 75.16 percent of the Russian oil producer. The state’s stake in Rosneft is now 69.5 percent.
Rosneft’s ambition isn’t limited to Russia, where billions of barrels of crude remain untapped in Siberia’s Vankor field, on the island of Sakhalin in the east and in Siberia’s Bazhenov shale formation. Sechin has partnerships with Norway’s Statoil SA and Italy’s Eni SpA (ENI) to explore offshore areas and so-called tight oil fields.
Rosneft is also working with Exxon in the Gulf of Mexico, Alaska and Canada. The company has operations in Kazakhstan, Venezuela and the United Arab Emirates.
Sechin, a former Soviet spy and longtime Putin ally, said March 6 that the TNK merger will create at least $10 billion in cost savings, as well as giving Rosneft an additional $5 billion in cash from TNK’s balance sheet. Many of TNK’s fields lay close to Rosneft’s, creating economies of scale, he said.
Sechin has a track record of combining assets from other companies. As a deputy prime minister in Putin’s government responsible for energy policy, he built Russia’s largest oil producer in part with the assets of bankrupt Yukos Oil Co., whose former chief executive Mikhail Khodorkovsky remains in prison on tax charges.
“It’s a real challenge for Rosneft, primarily a management one,” said Cliff Kupchan, a senior analyst at Eurasia Group in New York. “Sechin will first have to focus on digesting TNK-BP assets. Next, the key will be to prioritize effectively. Tight oil and international partnerships offer relatively big and near-term payoffs.”
With TNK-BP, Rosneft overtakes Exxon and PetroChina Co. (857) in output. It will pump about 4.1 million barrels a day this year, the company said. While it has replaced more reserves than it’s produced every year since 2009, its market capitalization remains a quarter of Exxon’s.
“The list of company issues will expand because there is a simultaneous increase in the number of strategic goals and ambitions happening along with the company enlargement,” said Sberbank’s Nesterov.
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