Global Insight Perspective | |
Significance | Russia's top energy firms, which have seen their share prices drop precipitously in the past few months due to the twin impacts of an easing of oil prices and a worsening global financial crisis, have jointly addressed a request to the government for loans to help them pay debts and finance long-term investment projects. |
Implications | The request for loans is not a bailout per se but rather an attempt by Russia's top energy companies to secure access to credit and ensure their ability to finance their operations and fund long-term investment projects as credit markets have frozen up in the current global financial crisis. |
Outlook | Dow Jones reported that the letter was "perceived positively" by the Russian government, and given the importance of the energy sector to the Russian economy, it appears likely that the government will respond to the energy firms' request favourably. |
Energy Firms In Trouble?
Russia's leading oil and gas firms—Rosneft, Gazprom, LUKoil, and TNK-BP—have jointly addressed a letter to the government seeking billions of dollars in loans to help them pay off debts, finance long-term investments, and secure access to credit to fund their operations, according to news reports. The existence of the letter, which was apparently sent at the end of September, was only made public yesterday, with both Dow Jones and Russian business daily Kommersant reporting that the country's top energy firms have appealed to the government for financial assistance in the midst of the still-unfolding global financial crisis.
LUKoil, Russia's number two oil producer, is reportedly seeking between US$2 billion and US$5 billion to refinance existing loans, as well as finance new long-term investment projects. Gazprom, the country's dominant gas company, said in a statement that the loans would only be used for force majeure situations, noting that the gas giant has "no need for any additional financing over earlier planned volumes". Nevertheless, Gazprom said, "in current conditions of the growing crisis in the world financial markets, the presence of such mechanism of crediting in force majeure situations is important for Gazprom, its shareholders and investors. Besides, Gazprom considers reasonable the use of the state funds inside of Russia to finance new long-term investment projects in energy sector."
Neither Rosneft nor TNK-BP elaborated on the joint letter to the government, but all indications are that the request is more of a precautionary measure, geared to secure access to credit in the current financial crisis, rather than any plea for a government bailout. Still, the appeal to the government comes as the country's top energy companies are clearly hurting, with Gazprom shares having lost 61% of their value over the past three months, while LUKoil's stock has dropped 59% over the same period. This sharp decline is mainly a function of the parallel downward spiral in crude oil prices over that time, which have plummeted from record highs in mid-July at near US$150/b to the US$90/b range now. At the same time, however, Russian oil firms, in particular, have seen their stock prices suffer over concerns about their growth potential, with output stagnating this year and the country's total oil output for 2008 now widely expected to drop year-on-year for the first time in a decade.
Loans for the Future
The government earlier this year passed legislation to provide tax breaks to the oil sector to help stimulate exploration and new production, hoping to stimulate new output growth. The oil companies, for the most part, welcomed the US$4.2-billion package of tax breaks, but collectively called on the government to go further with additional tax breaks and incentives. Although the Kremlin (the presidential administration) is continuing to debate the merits of additional tax cuts for the all-important oil sector, from the start of this month the government did implement an emergency measure to cut crude oil and petroleum product export tariffs, ensuring that oil exports from Russia remain profitable given the drop in crude oil prices and the typical lag in setting export duties (see Russia: 19 September 2008: Government Moves to Ease Burden on Russian Oil Firms with Huge Reduction in Export Tariffs).
In the meantime, the global financial crisis has continued to spread, and with credit markets tightening up, even Russia's top energy firms are feeling the effects. LUKoil president Vagit Alekperov said yesterday that the company needs an oil price of US$105/b or more to maintain capital expenditure plans in 2009 and grow production, noting that below that oil price the Russian firm will have to reduce its investments in long-term projects and can only promise flat output growth. The slide in oil prices is causing the flow of windfall revenues to Russian oil firms to dry up, reducing money available for them to invest in long-term projects to bring new output online, while the tight credit market is blocking these companies from accessing other sources of financing to fund new projects that could help Russia replace declining output from existing fields with production from greenfields—hence the request for financial assistance from the Russian government itself.
Outlook and Implications
The appeal by Rosneft, LUKoil, Gazprom, and TNK-BP to the government for loans comes as President Dmitri Medvedev yesterday promised more than US$35 billion in five-year loans to support the country's biggest banks and help unfreeze credit markets. Although the government has yet to make a decision on the energy companies' request for loans, Dow Jones reported that the letter was "perceived positively", and given the importance of the oil and gas sectors to Russia's overall economic health, it seems reasonable to expect that the Kremlin will respond favourably to the appeal.
Not that the leading Russian oil and gas firms necessarily need to draw on loans from the state, but the alternative is not at all appealing for the government. The prospect that the country's oil and gas production could continue to stagnate—or decline at a faster rate—if Russia's leading energy companies cannot access credit in the current financial crisis would only make a bad situation worse. Were the frozen credit markets to deny Russian oil firms from securing financing to fund new long-term projects geared to bring new production onstream from greenfields, Russia's economy as a whole would suffer. The recent downward trend in oil prices—and the potential for further declines in the context of the ongoing global financial meltdown, with the prospect of a widespread economic recession further affecting oil demand—gives Russian oil firms little hope of generating additional revenues for long-term investments from increased oil sales, so access to credit from the government is clearly of increased importance for the oil sector's growth potential.