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Rosneft takes final steps to oil pinnacle; Closes $56 billion TNK-BP deal ahead of schedule

Russia's Rosneft has realized its ambition of becoming the world's biggestpublicly traded oil and gas producer, with the closure March 21 of its $56billion deal to buy TNK-BP.

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The enlarged company, in which UK major BP now owns nearly 20%, controls some40% of Russia's total crude output of more than 10 million b/d, and has alsobecome a major Russian refiner, with control of 11 plants totaling some 1.6million b/d, nearly a third of Russia's total refining capacity.

It is a far cry from the old Rosneft, which before taking over the mainassets of former oil giant Yukos in 2005, produced only around 275,000 b/d ofoil at the start of the last decade.The new Rosneft produces above 4.7 million b/d of oil equivalent comparedwith ExxonMobil's average of 4.24 million boe/d in 2012.

The official deadline set for the completion of the deals - under whichRosneft is to buy 50% stakes in TNK-BP from BP and a Russian group ofshareholders - was the beginning of the second quarter, meaning the dealshave been closed well ahead of schedule.

"We welcome BP as a strategic investor in Rosneft and look forward to theirinvolvement in forming the future strategic direction of the company throughits representation on the Rosneft board of directors," Rosneft chief IgorSechin said in a statement.

"We are closing the deal of acquiring BP's share in TNK-BP earlier than wepreviously planned and we want to thank our partners from BP for theircooperation throughout the process," he said.

BP CEP Bob Dudley also praised the deal closure. "This is a historic day forBP in Russia. BP has invested in Russia for more than 20 years and for adecade we have been Russia's largest foreign investor through our involvementwith TNK-BP. We aim to continue that success with today's transaction, whichincreases our stake in Rosneft."

"We hope to help Rosneft to deliver synergies through its acquisition ofTNK-BP and to grow production and reserves through brownfield, greenfield andunconventional opportunities as Rosneft strengthens its position among theworld?s leading global energy companies," Dudley said.

The synergy effect from the mega deal is estimated at least $10 billion, withthe enlarged company's financial performance expected to increase by 60-70%.

The joint development of Rosneft and TNK-BP assets located in the sameregions would be a major source of synergy, allowing for the optimization ofexpenses and a focus on the best assets in the merged portfolio.

One such area is the Vankor region in the northern part of East Siberia,which is becoming the center of a new oil province.

Integrated development of greenfield projects in the Vankor region, wherecombined 3P reserves of the two companies are estimated at 6.6 billion boe,can generate about $4-$5 billion of additional value, Sechin said in February.

Other significant benefits can be achieved through the joint development ofthe Yurubcheno-Tokhomskoye, Kuymbinkoye and Verkhnechonskoye fields, to thesouth of East Siberia, near to Russia's eastbound crude export pipeline EastSiberia-Pacific Ocean (ESPO).Apart from those Greenfield projects, Rosneft and TNK-BP both have projectsin West Siberia - the key producing region for both companies.

MAJOR PLAYER

The acquisition of TNK-BP - coupled with Rosneft's strategic partnership withinternational oil majors to develop offshore and unconventional reserves inRussia and elsewhere in the world - has paved the way for the remarkabletransformation of the Russian state-run company into a major player on theglobal market, analysts say.

"These factors combine to make Rosneft a leading emerging market oil and gasplayer, and confirm it as a gem oil supermajor," analysts at UBS said in arecent note.

Rosneft recently teamed up with ExxonMobil, Italy's Eni and Norway's Statoilto develop offshore and tight oil reserves, and is discussing similarcooperation with Chinese and Japanese companies as the company looks toexpand into new areas, including LNG production.Rosneft owns a total of 41 licenses in Russia's hydrocarbon-rich continentalshelf.

Initial recoverable resources at those licenses are estimated at 275 billionboe, with total investments within the partnership with ExxonMobil, Eni andStatoil at an exploration stage set to exceed $14 billion.

While Rosneft will remain effectively a government-controlled company - itwill retain 69.5% in Rosneft - BP is set to have a major role to play in thecompany's development.

Following the Rosneft/TNK-BP deal, BP will become Rosneft's second largestshareholder with a near 20% stake.

The new tie-up with Rosneft allows BP to revisit its plans on operations inRussia after an initial strategic partnership deal between Rosneft and BP toexplore several blocks in the Arctic waters failed in 2011.

Dudley has said he is excited about his company's role in the development ofRussia's vast oil and natural gas reserves. BP is happy with its role as ashareholder, he said in early March.

"There is enormous scope for increasing Russia's production - throughenhanced recovery in brownfield developments in Western Siberian and theVolga Urals fields and also through exploration and production in greenfielddevelopments in Eastern Siberia and the Yamal Peninsula," said Dudley.

"Russia also has the potential to develop its own shale and tight oil," hesaid.Dudley also said BP supports Rosneft's efforts on cooperation with othercompanies. The two companies are also negotiating new joint ventures for whenthe TNK-BP acquisition is completed.

Rosneft expects the full integration of TNK-BP to take a year after all thenecessary legal documents have been signed, although actual integration workhas already started.

INTEGRATION CONCERNS

But the enormous scale of the merger raises concerns over whether the companywould be able to incorporate TNK-BP's operations as smoothly as it would likewhile also maintaining stable work during the transition period.

"Of course, there is execution risk, with TNK-BP widely regarded as highperforming within the Russian oil and gas sector, hence there is a risk thatsome people/skills/know-how are lost," UBS said in a separate note.

"In any event, companies of the scale of the new Rosneft present considerablemanagement challenges, which Rosneft must address," it said.

Rosneft's significantly increasing debt burden also raises concerns as thecompany has said it plans to get up to $30 billion in loans from banks tohelp finance the acquisition.

Rosneft intends to fund the deal through a combination of its own cash, aswell as TNK-BP's money, loans from Russian and international banks as well asproceeds from issues of debt securities in and outside Russia.

Apart from bank loans, Rosneft has also inked several pre-paid long-termcrude supply deals, with the proceeds widely expected to be used forfinancing the acquisition.

These include a $10 billion pre-payment deal with Glencore and Vitol, underwhich Rosneft is to supply a total of 67 million mt of crude to the twocompanies over five years starting this year.

Another similar deal is a $15 billion contract with Polish refiner PKN Orlenfor supplies of 18 million mt of crude over three years, effective fromFebruary.

Analysts noted that high borrowings put greater pressure on Rosneft'sleverage and liquidity, which could weaken the company's financial position,despite the expected operational synergies.

"Part of the financing is likely to be of a semi-permanent nature and assumesrefinancing in the short term. This would create higher-than-average oil andgas sector liquidity risks for Rosneft, particularly during periods ofvolatility in the capital markets and given the increased vulnerability ofthe global banking system," Moody's rating agency said in late November.

But others believe Rosneft's unparalleled government support means it will beable to rely on the Kremlin to support its financial risk profile.

And regardless of how the risk of a $56 billion takeover is perceived, onething is for sure: Rosneft's rapid climb to the very top of the world's oilproducer league is unlikely to be repeated elsewhere anytime soon.

--Nadia Rodova, nadia_rodova@platts.com--Stuart Elliott, stuart_elliott@platts.com--Edited by James Leech, james_leech@platts.com