The state-run company is scheduled to receive $63 billion of advance payments under long-term crude-supply contracts from 2014 to 2018, mostly from Chinese clients, Andrey Polischuk, an energy analyst at ZAO Raiffeisenbank in Moscow, said by phone today. That covers almost all of Rosneft’s $65 billion in debt, he said, after sanctions announced yesterday limited the producer’s access to U.S. debt markets.
“Rosneft would never have received such generous funding without China,” Polischuk said. “It’s an obvious dependence. There are few other alternatives.”
The most aggressive sanctions yet will prevent Rosneft from accessing U.S. equity or debt markets for new financing with a maturity beyond 90 days. They don’t otherwise prohibit U.S. companies or individuals from doing business with sanctioned Russian firms, which also include gas producer OAO Novatek (NVTK) and OAO Gazprombank.
Shares of Rosneft closed 4.3 percent lower in Moscow, the biggest decline since May last year. Its Eurobonds maturing in 2022 plunged the most on record.
Rosneft and China National Petroleum Corp. signed a $270 billion, 25-year supply agreement last year to diversify exports to the world’s second-biggest crude-consuming nation as European demand fell. The deal includes prepayments estimated by President Vladimir Putin at about $70 billion. In October, Rosneft also agreed to an $85 billion, 10-year oil-supply deal with China Petrochemical Corp. (1314)
The major threat is that Europe “may follow suit and impose the same limitations on borrowing from European banks,” Alexander Kornilov, an Alfa Bank analyst in Moscow, said today in an e-mailed note. Rosneft has the highest debt burden among Russian oil companies, he said.
The sanctions are illegal because Rosneft has no role in the Ukraine crisis, Rosneft’s Chief Executive Officer Igor Sechin told reporters in Brasilia. They will damage U.S. banks cooperating with Rosneft without having an impact on the Russian producer, he said.
Rosneft can afford “not to attract emergency loans” to finance projects, according to Sechin.
Rosneft should get about $143 billion of operating cash flow in the next five years excluding prepayments, Polischuk said. Its five-year investment program and about $21 billion in dividend payments “could both be easily covered,” he said.
The sanctions could make it more difficult for commodity traders to strike prepay financing deals with Rosneft, threatening a key source of guaranteed crude flows for Swiss trading firms.
Vitol Group, Glencore Plc (GLEN) and Trafigura Beheer BV agreed last year to give Rosneft a total of $11.5 billion in financing in exchange for guaranteed oil supplies. Vitol and Glencore, which have major trading operations in Switzerland, secured syndicated loans with lenders that included U.S. banks to pay for the Rosneft deals.
Rosneft won’t be able to win new financing from European traders in exchange for oil if future deals have the same structure as previous agreements, said Matthew Parish, a lawyer with Holman Fenwick Willan LLP in Geneva.
“In theory, they couldn’t be done in exactly the same way,” Parish said in an e-mailed response to questions.
Future prepayment deals involving Rosneft and commodity trading firms may, however, be able to sidestep sanctions depending on how they are structured.
“It would not be difficult for a clever lawyer to restructure the financing facilities so that they have much the same effect yet avoid the sanctions by working around the definition of long-term loans,” Parish said.
As competition for crude has increased among trading houses the biggest players have used their financial muscle to win prepayment deals and secure streams of oil and products. Previous agreements between Rosneft and trading firms won’t be affected by the new sanctions.
Rosneft signed a $1.5 billion prepaid deal with BP Plc (BP/) last month guaranteeing to supply as much as 12 million tons of oil or oil products to the U.K. company. BP, which trades oil and oil products in addition to producing and exploring, owns a 19.75 percent stake in Rosneft.
“BP will study these recently introduced sanctions carefully and will continue to comply fully with all applicable sanctions,” said David Nicholas, a London-based spokesman.
BP shares fell 1.9 percent to 496.8 pence at the close in London trading, the biggest decline since March 3.
Vitol, the world’s largest oil trader, was in advanced discussions to lend Rosneft an additional $2 billion in exchange for guaranteed oil product supplies, the Financial Times reported in March. A $2 billion prepay finance deal between Vitol and Rosneft is to be signed by the end of the month, Trade Finance Magazine reported July 15, ahead of the latest sanctions.
Andrea Schlaepfer, a Vitol spokeswoman, wouldn’t comment on questions related to Rosneft and finance deals when contacted by Bloomberg News. Spokesmen for Glencore and Trafigura also declined to comment.