Rosneft to Replace Gazprom as Energy Driver on TNK Deal

(Bloomberg – bloomberg.com – Anna Shiryaevskaya – October 19, 2012)

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 over 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, tightens its grip on the country’s oil output.

Absorbing BP Plc (BP/)’s Russian oil venture would raise Rosneft’s crude production to about 4 million barrels a day, more than any Middle East country other than Saudi Arabia, and boost its market value close to 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.

“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.

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 a conference call in August. Should it buy all of TNK-BP, it’s output would jump 10-fold since 2004, before buying Yukos.

Budget Revenue

With the state as a 75 percent shareholder, 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 energy industry.

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.

Antitrust Investigation

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.

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.

Leading Role

“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 would 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.

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.

Still, Rosneft’s contribution to the state coffers will make it vital to Putin’s political future.

“In the last decade, Gazprom was transformed from the milk-cow of the state budget to the cash-cow of contractors and intermediaries,” Mikhail Korchemkin, head of Malvern, Pennsylvania-based East European Gas Analysis, said by e-mail. “The main tax burden was put on oil companies. In other words, Putin needs Gazprom to feed friends and Rosneft to feed the state budget.”

Article also appeared at http://www.bloomberg.com/news/2012-10-18/rosneft-to-replace-gazprom-as-putin-energy-driver-after-tnk-deal.html