• CNPC supply contract valued at $270 billion when oil at $100
  • Advances to Rosneft may already exceed entitlement under deal

Rosneft OJSC’s 25-year deal to supply oil to China National Petroleum Corp. has yielded billions of dollars of advance payments for the world’s largest traded producer. That funding risks drying up as the crude price slumps, according to Sberbank CIB.

Prepayment contracts, where producers get cash up front in return for a promise to repay with physical oil in the future, provide the Russian state-controlled company with alternative financing while guaranteeing flows of often discounted crude to customers.

Rosneft has probably already received about $35 billion in prepayments over the past three years from CNPC as part of deal to supply 325 million metric tons of oil by 2035, according to Alexey Bulgakov, a fixed income analyst at Sberbank CIB. When Russian President Vladimir Putin valued the deal at $270 billion in 2013, oil was trading at $100 a barrel. With crude slumping more than 70 percent since then, Rosneft may have exhausted its entitlement to advances that were capped at 30 percent of the contract value.

“I think that Rosneft’s borrowing capacity under the current contract with CNPC is already fully utilized,” Bulgakov said in an e-mail, adding that the settlement of existing prepayments will account for about half the contract volume.

First Installments

The press service of Rosneft declined to disclose the size of advance payments from CNPC. In January 2014, Rosneft confirmed the receipt of the first two installments from China’s biggest oil company, without giving details.

A spokesman for CNPC said the company couldn’t immediately comment.

Slumping crude prices and sanctions over Moscow’s support of separatists in Ukraine are complicating Rosneft’s ability to repay debt it took on to buy BP Plc’s local joint venture for $55 billion in 2013. The prepayments have helped the state-controlled company replace bridge loans that financed the deal and provide a buffer for debt payments.

A press officer at Rosneft this month said the company had built up cash and short-term financial holdings of $23 billion in the first nine months of 2015 compared with debt repayments of $13.7 billion due in 2016. While the company reported net debt of $24.5 billion in the third quarter, that doesn’t include prepayment obligations that totaled about $29 billion, according Rosneft documents.

Commodity Traders

Advances of $16.3 billion shown in Rosneft’s financial statement for the third quarter of last year, plus payments of $12.3 billion received in the first quarter of 2014 and $5 billion in the last quarter of 2013 were probably from CNPC, according to Bulgakov. 

Still, the China deal was only the biggest in an array of prepayments deals negotiated by Rosneft, including a number with commodity trading houses. Advance payments for crude from Glencore Plc and Vitol Group could total as much as $10 billion, Rosneft said in March 2013. Three months later, Rosneft Chief Executive Officer Igor Sechin announced prepayments for oil shipments of up to $1.5 billion from Trafigura Pte Ltd. 

In June 2014, Rosneft signed a five-year prepayment supply deal worth $1.5 billion with BP.

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