Rosneft to Replace Gazprom as Energy Driver on TNK Deal

Photographer: Alexander Zemlianichenko Jr./Bloomberg

Rosneft has relied on Sechin’s access to Putin, who he’s worked with for more than 20 years, as the Kremlin strengthened control over the energy industry and pushed oil output to a post-Soviet high. Close

Rosneft has relied on Sechin’s access to Putin, who he’s worked with for more than 20... Read More

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Photographer: Alexander Zemlianichenko Jr./Bloomberg

Rosneft has relied on Sechin’s access to Putin, who he’s worked with for more than 20 years, as the Kremlin strengthened control over the energy industry and pushed oil output to a post-Soviet high.

(Corrects story originally published on Oct. 19 to remove allegation in final paragraph.)

OAO Rosneft (ROSN)’s proposed acquisition of TNK-BP will accelerate the state oil company’s eclipse of OAO Gazprom (OGZD) as the dominant force in Russia’s energy industry.

President Vladimir Putin used Gazprom, the world’s biggest natural gas producer, to assert Russia’s energy power during the past decade, winning pipeline deals and controlling former Soviet allies. With the U.S. shale-gas boom and domestic competition, Gazprom is losing ground as Rosneft, run by Putin’s ally Igor Sechin, dominates the country’s oil output.

Absorbing BP Plc (BP/)’s Russian venture would raise Rosneft’s crude production to about 4 million barrels a day, more than any Middle East country except Saudi Arabia, and boost its market value to rival Gazprom’s 3.7 trillion rubles ($120 billion). Putin, who returned for a third presidential term this year, needs Rosneft to help maintain Russia’s record oil production as he uses energy taxes to fulfill election spending promises.

“Rosneft will be a dominant player, with other oil companies losing heft in comparison,” Cliff Kupchan, senior analyst at Eurasia Group in New York, said by e-mail yesterday. “We’re in a time of transition in the Russian energy sector. Rosneft is a rising power, poised to become the sector’s primary driver, while Gazprom is a declining power.”

Officials at Rosneft and Gazprom declined to comment on comparisons between the companies.

Preliminary Deal

Rosneft submitted a bid yesterday to buy BP’s 50 percent of TNK-BP for a mix of cash and shares that values the whole venture at $50 billion to $56 billion, a person with knowledge of the matter said. Rosneft already has a preliminary accord with BP’s billionaire partners, who own the other half of the company, another person said.

Rosneft has relied on Sechin’s access to Putin, who he’s worked with for more than 20 years, as the Kremlin strengthened control over the energy industry and pushed oil output to a post-Soviet high. Sechin, as chairman from 2006 to 2011, helped transform Rosneft into Russia’s biggest crude producer with assets from bankrupt Yukos Oil Co. He’s also ensured Rosneft gets access to untapped oil reserves in the Arctic offshore, which is restricted to state-controlled companies.

Higher Target

“Rosneft is helping Putin achieve a greater state share in Russian oil production, while also being in the forefront of driving future production growth from the Arctic,” said Julia Nanay, a director at Washington-based PFC Energy.

Ending the TNK-BP venture and acquiring Rosneft shares may open the way for BP to revive cooperation with the state-run producer after its TNK partners blocked their plans for an Arctic alliance last year.

Rosneft raised its output growth target for this year to 2 percent from 1 percent initially planned after first-half results, Dmitry Avdeev, finance vice president, said in an August conference call. Should it buy all of TNK-BP, its output would jump 10-fold since 2004, before buying Yukos assets.

With the state as a majority owner, Rosneft will be interested in spending money on new projects and increasing output to ensure budget revenue through taxes, said Sergey Vakhrameev, senior analyst at IFC Metropol. Russia gets about half of its government revenue from the oil and gas industry.

Gazprom Slide

Gazprom’s output may drop more than forecast this year after demand shrank in debt-laden European economies, Vsevolod Cherepanov, head of the production division at Gazprom, said on Oct. 9. The gas company has seen output slide since reaching a record 9.95 million barrels of oil equivalent a day in 2006.

Gazprom’s performance has been depressed since the 2008 economic slowdown as success extracting gas from shale formations in the U.S. transformed markets by reducing America’s need for imported fuel and prompted European customers to seek revised contract terms. Global production and trade of liquefied natural gas, where Gazprom is still gaining experience, increased.

The European Commission last month opened an antitrust probe into Gazprom’s pricing in central and eastern Europe.

At home, independent producers such as OAO Novatek have been winning supply deals at the expense of Gazprom as the government encourages more competition. Rosneft teamed up with independent gas producer OOO Itera this year to develop its natural gas business.

National Champion

Putin granted Gazprom a gas-export monopoly and helped secure the Nord Stream pipeline project to Europe. Gazprom gained control over Belarus’s pipeline network and struck a gas-price deal with Ukraine that extended Russia’s lease of a Ukrainian Black Sea port used as a naval base.

Putin sought in September 2004 to create a single national energy champion for gas and oil by folding Rosneft into Gazprom. The $7.6 billion takeover plan fell apart as Gazprom and Rosneft openly disagreed over its terms. Since then, Rosneft’s market value has grown to about $75 billion.

“This reflects Putin’s ideas about the need for a leading role of the state in the energy sector,” Fyodor Lukyanov, an analyst at the Moscow-based Council on Foreign and Defense Policy, said. “The fact that the state is acquiring more control is going to increase Putin’s self-confidence.”

Should Rosneft buy all of TNK-BP, the combined company’s market value may total 3.52 trillion rubles, shy of Gazprom’s 3.68 trillion rubles, based on yesterday’s closing prices, including TNK-BP’s traded unit.

Rosneft’s acquisition of TNK-BP shares shouldn’t increase Russia’s influence over the energy industry as the state plans to reduce its 75 percent stake in the coming two years, First Deputy Prime Minister Igor Shuvalov told reporters today.

Differences between the oil and gas markets may make it hard for Putin to assert influence in international affairs through Rosneft, Konstantin Simonov, president of Russia’s National Energy Security Foundation. Oil is a buyer’s market controlled by traders, while gas remains “much more monopolized,” he said.

To contact the reporter on this story: Anna Shiryaevskaya in Moscow at ashiryaevska@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net

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