Rosneft Plans More Arctic Exploration to Boost Share Value

OAO Rosneft said a plan to step up Arctic exploration will help increase shareholder value at the same time the world’s largest publicly traded oil producer starts exporting liquefied natural gas.

Rosneft will export its first LNG from a planned Far East project in 2018. The producer, which is seeking to double gas output by 2020, is targeting clients in Asia, where prices for the fuel are higher.

LNG exports will “benefit the Russian economy,” Chief Financial Officer Svyatoslav Slavinsky said in an interview in London. “The development of the Arctic shelf is going to be one of the pillars of the expansion of shareholder value.”

Chief Executive Officer Igor Sechin wants to boost Rosneft’s market value by 60 percent to about $120 billion within two years on increased production, exploration and refinery modernization. Sechin, a long-time ally of President Vladimir Putin, expects the Russian government to grant Rosneft tax breaks to work in the Arctic and at hard-to-recover fields, and end OAO Gazprom’s monopoly on LNG exports.

“We can’t speak for the government, but we certainly expect they are going to be listening to various players including us,” Slavinsky said. Russia is the largest shareholder in Rosneft, followed by BP Plc, he noted. “We hope that the regime will change” regarding LNG exports.

Gazprom operates Russia’s only LNG plant at Sakhalin island. The world’s largest natural gas company, in which the state is the largest shareholder, was granted an export monopoly by law in 2006, restricting other producers to the domestic market.

Production Upside

Sechin has joined calls “for the liberalization of LNG exports,” analysts including Oleg Maximov at Moscow-based Sberbank Investment Research, wrote in an e-mailed report. “The company, interestingly, sees its production upside in the expensive offshore gas fields and not the onshore developments.”

Rosneft has set up ventures with Exxon Mobil Corp., Statoil ASA, Eni SpA and China National Petroleum Corp. to explore Russia’s Arctic shelf. BP CEO Bob Dudley said his company will be also interested to work with the Russian company in the region.

“Rosneft has a unique access to what it going to be the future of unconventional and more difficult to extract reserves,” Slavinsky said. “Rosneft will be interested in the markets where it can create value, so far we can see this value creation particularly in Asia.”

Rosneft, based in Moscow, has gas reserves totaling 5.8 trillion cubic meters, including 2.45 trillion cubic meters held by TNK-BP and 344 billion cubic meters from the OOO Itera unit it bought last year. That’s enough to supply the globe for about 20 months, according to Eni data.

Expected Savings

Rosneft closed its $55 billion takeover of TNK-BP from BP and a group of billionaires on March 21, in Russia’s largest acquisition. It expects $10 billion in “synergies” over 10 years, Slavinsky said.

Shares in TNK’s traded unit, OAO TNK-BP Holding, plunged 26 percent to a record on March 26 after Rosneft announced plans to borrow money from the company, possibly by ending TNK-BP’s dividend policy. TNK-BP Holding agreed to pay out about 60 percent of its earnings per share in dividends last year, according to Bloomberg data.

“Sechin believes that even if TNK-BP had not been sold, its previous owners would have had to change their generous dividend policy sooner or later because the company’s assets need considerable investments,” Alexander Kornilov, a Moscow-based analyst at Alfa Bank, wrote in an e-mailed report.

Rosneft is committed to a 25 percent dividend payout to shareholders, Slavinsky said. The company is in talks with TNK-BP minority shareholders about future distributions.

“Our job and our duty as management is to work for all shareholders in the company,” he said. “We are in discussions with various shareholders who happened to be minority shareholders at TNK-BP and Rosneft.”