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 The sanctions imposed on Russia by the United States and Europe in
response to its military action in Ukraine have cut Rosneft's access
to Western financing and technology, complicating the servicing of
its $55 billion debt and closing the way to cutting-edge industrial
science it needs to keep developing its energy resources.
Few doubt that Rosneft will be able to withstand the pressure
medium-term - its earnings amount to $30 billion a year and billions
more are still available via Chinese credit lines and Russian state
coffers in case of emergency.
But the world's biggest listed oil producer - which produces more
oil than OPEC members Iraq or Iran - faces unprecedented challenges
to its long-term expansion and modernization plans.
Last week Rosneft said it would cut staff to reduce costs:
Kommersant business daily said Rosneft's Moscow headquarters would
see cuts of up to 25 percent from the current 4,000.
These would be the first significant job losses at a company that
swelled via the acquisition of rivals such as YUKOS, pushed into
bankruptcy some ten years ago by the government of President
Vladimir Putin.
Since then Rosneft's output has risen 10-fold to exceed 4 million
barrels per day or four percent of global supply. But last week it
reported a 1.3 percent production drop in August, as production in
West Siberia regions declines.
The firm, which alongside gas monopoly Gazprom <GAZP.MM> is a top
contributor to the Russian budget, needs to invest heavily to bring
new east Siberian fields online - a costly endeavour now made more
difficult by the sanctions squeeze.
In a sign of the challenge such a project now presents, Putin said
last week Rosneft would welcome China buying a stake in the prized
Siberian Vankor field. It was a major about-turn given the Kremlin's
long resistance to allowing its powerful neighbour access to such
deposits.
"Rosneft's decision to offer China a stake in the mega Vankor oil
field in East Siberia signals that Moscow's bargaining position has
been further weakened by sanctions and that it needs the capital
infusion," said Emily Stromquist, analyst at Eurasia.
"CREDIT STOPPED"
Rosneft needs to invest more than $21 billion annually until 2017 to
launch new fields and upgrade refineries.
It also needs to repay $12 billion by year-end and another $17
billion next year, after it borrowed heavily to buy rival TNK-BP for
$55 billion last year - a deal that included BP taking a 20 percent
stake in Rosneft.
Rosneft should be able to access some of the money it needs from
short-term credit lines via Western banks as the United States
sanctions only prohibits them from providing loans with maturity
longer than 90 days.
But with the European Union expected to impose similar lending bans
soon, Rosneft boss Igor Sechin under personal sanctions owing to his
closeness to Putin and any resolution to the Ukraine crisis a long
way off, all Western lending to Rosneft has in fact stopped, finance
and industry insiders say.
"The credit has stopped. All conversation has become purely
theoretical. People fear everything is following the patterns of the
Iranian (sanctions) scenario when credit and then oil flows were
getting progressively hurt," said an executive with a Western
trading house and a major buyer of oil from Rosneft.
Over the past year, BP and trading houses Vitol, Glencore and
Trafigura provided Rosneft with $20 billion worth of loans
syndicated by banks and guaranteed by oil exports.
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But Rosneft's attempts to borrow more from them in recent months
have stalled or been drastically curtailed because the banks refused
to syndicate new deals.
Rosneft CEO Sechin was forced to ask for $40 billion in state help
from one of Russia's sovereign wealth funds and Prime Minister
Dmitry Medvedev said the company could get it.
"The company needs to maintain its production levels, because
Rosneft is a major source of tax revenue," Medvedev told Vedomosti
business daily on Monday. "As such, we should help it maintain its
level of investment".
A Rosneft source told Reuters the company had no plans to borrow for
the next 12-18 months and that credit lines offered by China's state
oil firm CNPC meant the company had enough liquidity to see it
through.
"We are planning to cut debt further without reducing capex. We need
to maintain huge investments to launch new East Siberian fields.
After 2017 capex will drop," the source said.
MONEY BUT NO KNOW-HOW
Though the Russian state and Chinese allies may keep money flowing
to Rosneft, they cannot supply vital technology.
Rosneft said last week it planned to replace all equipment and
technology imports from the West as the U.S. and EU sanctions halted
all trade with the firms upon which it usually relies for such
essentials.
In the meantime however it will struggle to find what it needs to
develop shale and deep water Arctic oil because Russia has made
little progress in building its own services sector.
Just last May, Energy Minister Alexander Novak asked Putin to boost
funding of domestic equipment producers because a quarter of all
equipment used in oil output enhancement was imported.
Russia is particularly dependent on the West for catalysts, refining
equipment and gas turbine parts, meaning complicated refinery
modernisation works are seen almost impossible to achieve without
the access to Western know-how.
Rosneft plans to launch 10 new fields by 2020 in a bid to increase
its combined oil and gas output by a third to 6.4 million barrels of
oil equivalent per day. That plan looks set to be severely tested.
"Rosneft has a lot of cash. Its problems are long-term and
strategic," said a source at a Western bank that includes Rosneft
among its clients. "Its growth model is challenged."
(Reporting by Dmitry Zhdannikov; Editing by Sophie Walker)
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