Buying TNK-BP will give OAO Rosneft production and reserves that surpasses Exxon Mobil Corp., the world’s largest publicly traded oil company.
The similarities between the biggest Russian and U.S. oil producers end there. An enlarged Rosneft will employ more than 210,000 people, almost three times as many as Exxon. Rosneft’s oil and natural gas reserves will be 7 percent larger, while the traded value of Russia’s state-run oil company will be $292 billion less than Exxon.
Rosneft Chief Executive Officer Igor Sechin says the partnership with BP Plc, part of yesterday’s $55 billion TNK-BP acquisition, will allow the Russian company to close the gap with global rivals. Rosneft wants BP’s technology to extend the life of aging fields, experience gained from Alaska to the North Sea and proven in Siberia at TNK-BP. There BP turned an $8 billion investment into $19 billion in dividends and helped raise production at the company’s biggest field 40 percent.
“BP’s experience and effectiveness demonstrated in TNK-BP will allow us to also strengthen Rosneft,” Sechin said today in an investor briefing on the deal, which will give BP a 19 percent stake in his company and two seats on the board.
Exxon’s net income last year of $41 billion was more than twice the combined total of Rosneft and TNK-BP. Rosneft, reliant on fields and refineries built in the Soviet era, invests twice as much of its revenue in capital projects as Exxon, data compiled by Bloomberg show.
Rosneft’s profits lagged TNK-BP, based on oil and gas production. Rosneft pumped 2.59 million barrels a day last year and reported a profit of 316 billion rubles ($10.2 billion), while TNK produced 1.99 million barrels and made $9 billion.
Most important to Rosneft is the group of fields around Yugansk. Acquired as the state forced the bankruptcy of Yukos Oil Corp. through tax claims, the fields produce 1.3 million barrels a day from an area of swampland in western Siberia, accounting for more than half the company’s current output.
“What it really needs is better technology for brownfields,” Alexei Kokin, an analyst at UralSib Financial Corp., said of Rosneft. “They need a boost for Yugansk. These are relatively young fields, but now it’s on the verge of decline. It’s really important to prevent that.”
Rosneft wants to avoid the plight of OAO Lukoil, Russia’s second-largest producer. Production from its main unit, Lukoil West Siberia, has dropped 10 percent from 2009, according to Energy Ministry data.
Yugansk is getting more expensive to operate with the same output costing $3.6 billion this year, compared with $2.9 billion in 2008, according to Rosneft.
“We can influence governance and management and all the other things we put in place at TNK-BP,” BP Chief Financial Officer Brian Gilvary said in a phone interview yesterday.
BP’s investment in TNK-BP turned around the Samotlor field in Siberia, where production collapsed after the end of the Soviet Union. The company used horizontal drilling and hydraulic fracturing to improve oil recovery rates, raising 2009 output to more than 500,000 barrels a day, or 40 percent above its 1990s low, according to TNK-BP’s website.
BP will get a 19 percent stake in Rosneft and two seats on the board under the $26.8 billion plan to sell its half of TNK-BP announced yesterday. Rosneft also has a preliminary accord to buy the other 50 percent from BP’s billionaire partners for $28 billion.
Rosneft’s largest new development, Vankor in east Siberia, will reach peak production of 500,000 barrels a day next year, after which it will fail to mask declines elsewhere, according to the company.
The next new big project, Yurubcheno-Takhomskogo, starts in 2016 and peaks at a fifth of Vankor’s rate.
Combining the two companies’ production, refining and retail operations may create cost savings of between $3 billion and $5 billion, Sechin said today.
Rosneft’s acquisition will allow TNK-BP fields in the Yamal region to use pipelines and infrastructure at Vankor, Sechin said today. Meanwhile, meeting Rosneft’s commitment to supply oil to China oil from TNK-BP’s Verkhnechonsk field instead of Vankor will save payments for several thousand kilometers in transit, Sechin said.
“The first upgrading of Russia’s fields took place 10 years ago,” said Roland Nash, head strategist at Verno Capital, which holds Rosneft shares. “To go through the next wave of technological improvements and to invest into new fields they need the technology that BP brings.”
Rosneft’s oil and gas reserves were 17.6 billion barrels at the end of last year, according to data compiled by Bloomberg. Combined with TNK-BP’s 9.1 billion barrels, that would give a merged company 26.7 billion barrels, compared with Exxon’s 24.9 billion.
After the takeover, the merged company will produce more than 4.6 million barrels of a day, overtaking Exxon, according to data in second quarter financial statements from Rosneft and TNK-BP.
Rosneft has an agreement to explore the Arctic with Exxon, Eni SpA and Statoil ASA, where untapped deposits may hold 200 billion barrels of oil, the company said in an investor presentation. Oil won’t flow from the region for more than a decade, however.
“The hype around those Arctic areas is very long term and has very little to do with the next 5 to 10 years,” said UralSib’s Kokin. “Rosneft will really remain an onshore company for a while.”
Rosneft and its subsidiaries employed 160,837 people at the end of last year. Outside Russia, the company also has projects in Germany, Venezuela and North America. TNK-BP employs 50,000 people mostly located in Russia and Ukraine, according to the company website. It also has operations in Venezuela, Vietnam and Brazil.
The two companies have operations in neighboring areas of Russia, giving the opportunity for cost savings on staffing, transportation and procurement, said Alexander Nazarov at OAO Gazprombank.
“Production oriented initiatives are deadly serious,” Cliff Kupchan, an analyst at the Eurasia Group, said by phone. “The extent that the BP deal is viewed by the Kremlin in that vein is significant.”