Russia Profile - Rosneft

Share Price (1st March 2007 (LSE)): $7.95. Market Cap $74.2 billion. Consolidated Financial Statements(06/06) here

Chairman of the Board: Igor Sechin, Deputy Prime Minister of the Government of the Russian Federation

Board of Directors:
Kirill Androsov, Deputy Minister of Trade & Economic Development
Andrei Kostin, President, Chairman of the Mangement Board, Vneshtorgbank
Sergei Bogdanchikov, President of Rosneft
Hans-Jorg Rudolf, Chairman of the Management Board, Barclays Capital
Sergei Naryshkin, Director of the Russian Federation Government Administration
Andrey Reus, Deputy Minister of Industry and Energy
Gleb Nikitkin, Head of Department, Federal Agency for the Management of Federal Property
Alexander Nekipelov, Vice President, Russian Academy of Sciences.

Appointemnt: Sergei Makarov has been appointed head of Rosneft's financial services. In 2005, Makarov was managing director of state-owned Vneshtorgbank, Russia's second-largest bank and a successor of the Soviet Union's bank for foreign trade. Before that he had worked as a financial chief of state-run OboronProm, a subsidiary of state arms exporter RosOboronExport, and the general director of OboronProm's leasing branch. Peter O'Brien, finance vice president and the head of its financial strategy team, no oversees development strategy, asset purchases, mergers and acquisitions, and restructuring.

Standard & Poor's raised Rosneft's long-term credit rating to BB+ from BB and removed it from the CreditWatch list. In July 2006 Standard & Poor's Ratings Services raised its long-term corporate credit and senior unsecured debt ratings on Rosneft to 'BB' from 'B+'. The outlook is stable.

In order for Rosneft to be listed as an A class company on the Russian Trading System, its ownership structure must be diversified. To meet RTS criteria the government may transfer a 50% stake in Rosneft to the Federal property management Agency or split Rosneftegaz into two companies, dividing the stake in Rosneft between them. (source: Vedomosti). Prior to the IPO, 99.999% of Rosneft shares were owned by Rosneftgaz, which was in turn 100% owned and controlled by the Federal Property Management Agency, which also retained 1 Rosneft share. Presidential Aide, Igor Shuvalov, confirmed that tha state would continue to reduce its stake in Rosneft.

Rosneft’s authorized capital (following the consolidation of its 12 subsidiaries) amounts to RUR 105,981,778.017 (approx. $4.1m), it is divided into 10,598,177,817 common shares with a nominal value of RUR 0.01. Rosneftegaz has a 75.16 percent stake, the rest is held by a broad range of strategic, institutional and individual investors.

Revenues: Net profit of Rosneft grew 57 percent in the second quarter of 2006, according to Russian accounting standards and reached 36.695 billion roubles compared with 23.322 billion roubles in the first quarter of 2006. For the first 9 months of 2005 Rosneft’s net income amounted to $3,702 million. For the year 2004 net income of the company was $837 million, compared to $386 million in 2003. Rosneft’s net profit in the first quarter of 2006 stood at $802 million under US GAAP, 10.77% more than in the same period last year.

In the first half of 2006 Rosneft subsidiaries produced 38.46 million tonnes of oil (including the production by consolidated subsidiaries, as well as the production of 50% of OOO Polar Lights Company and 20% share in Sakhalin-1 project), an increase of 8.2% over the 35.54 million tonnes produced during the same period in 2005. The greatest production increases took place at Yuganskneftegaz, which produced 26.86 million tonnes (24.76 million tonnes in 1H 2005); Severnaya Neft, which produced 2.75 million tonnes (2.22 million tonnes in 1H 2005); Sakhalinmorneftegaz, which produced 976,600 tonnes (897,600 tonnes in 1H 2005) and Stavropolneftegaz, which produced 546,300 tonnes (447,600 tonnes in 1H 2005).

Natural gas production during the first half of 2006 totalled 6.7 billion cubic meters, an increase of 9.5% over the 6.1 billion cubic meters produced during the first six months of 2005. In the first half of 2006, the Company drilled (not including the shares in Polar Lights Company and Sakhalin-1 project) 661,600 meters in exploration and development wells, an increase of 30.6% over the 506,700 meters drilled during the same period in 2005. This figure includes 630,800 meters of exploration drilling. In total, the Company commissioned 118 oil producing wells with an average well flow of 98.4 tonnes per day, as well as 51 injection well. As of July 2006, approximately 7,000 tonnes of pipes had been put in storage at the Vankor oilfield for the construction of a pipeline to Pur-pe in the Yamalo-Nenets Autonomous District, which is expected to be connected to the Transneft system.

In the first six months of 2006, 987,000 tonnes of oil were produced at the Sakhalin-1 project, in which Rosneft has a 20% interest. Natural gas production at Sakhalin-1 stood at 313.1 million cubic meters. On June 28, 2006 a second well was successfully tested at the Chumakovskoye field (Krasnodarneftegaz), which was discovered in 2005.

USD million                                                      3Q 2006    3Q 2005    9M 2006    9M 2005
Revenue                                                              9,165         7,080        25,521       16,944
EBITDA                                                                2,217        2,325         6,395        5,627
Net income                                                         1,051        1,208          2,930        3,594
Net income before minority interest
adjusted for the sale of CJSC
Sevmorneftegaz                                                1,074         1,268         3,027        2,978
Net cash provided by operating
activity                                                                  3,560        1,985
Interim Consolidated Financial Statements As of and for the three and six months ended June 30, 2006 and 2005

RTS Stock Exchange (statistics for period 31.03.05 – 21.06.06)

Moscow Interbank Currency Exchange

Ownership structure: In July 2006, Rosneft succesfully placed 13% of its share capital, worth over $10.4 billion on the Russian Trading System (RTS) and the London Stock Exchange (LSE). The Offering is the biggest ever of a Russian company. Rosneft's US GAAP figures to 31st March 2006 can be found here. The company is consolidating its 12 subsidiaries, including Yuganskneftegaz, formerly the main production arm of oil company YUKOS.

On June 2 2006, shareholders of Rosneft’s subsidiaries approved the company’s consolidation program, and on June 7th 2006, Rosneft’s general meeting passed a resolution to issue 7,438,514,449 additional ordinary shares with a nominal value of RUR 0.01 through the conversion of ordinary and privileged shares in the subsidiaries. Rosneft’s shareholders also approved an additional issue of 400 million ordinary shares with a nominal value of RUR 0.01 by private offering to J.P.Morgan Europe Limited and/or Rosneftegaz. Authorized capital of RUR 90.922 million is divided into 90.922 million ordinary shares with a nominal value of RUR 1 each. ABN Amro, Dresdner KleiwortWasserstein (DrKW), Morgan Stanley, JP Morgan, all of whom were involved in the IPO, also worked on the consolidation program, completed on 1st October 2006. The consolidation broughtRosneft-Krasnodarneftegaz Oil Company OJSC, Rosneft-Purneftegaz Oil Company OJSC, Rosneft-Sakhalinmorneftegaz Oil Company OJSC, Rosneft-Stavropolneftegaz Oil Company OJSC, Yuganskneftegaz OJSC, Severnaya Neft OJSC, Selkupneftegaz OJSC, Rosneft-Komsomolsk Refinery Oil Company OJSC, Rosneft-Tuapse Refinery Oil Company OJSC, Rosneft-Arkhangelsknefteprodukt Oil Company OJSC, Rosneft-Nakhodkanefteprodukt Oil Company OJSC, and Rosneft-Tuapsenefteprodukt Oil Company OJSC within company structure.

Rosneft shares dropped 2.4% on the RTS (Russian Trading System) on its first day of trading, trading at $7.42. The single largest Rosneft trade (under restricted conditions two days before the free float) saw 220,542,260 shares bought at $7.55, a total trade of $1,665,094,105 (source: digitallook.com)

IPO: Having successfully raised $10.4 billion in July's IPO, Rosneft repaid a $7.5 billion loan owed to a consortium of western banks, which it used to buy Yuganskneftgaz.

BP, Petronas and CNPC (China National Petroleum Company) bought almost $2.6 billion worth of shares in Rosneft during the IPO. Three 'oligarchs' invested over $1 billion each in shares on the LSE (Roman Abramovich, Vladimir Lisin and Oleg Deripaska). BP Chairman Lord Browne also confirmed BP had taken a $1 billion stake in Rosneft. "I think it's important to support Rosneft, it's about enhancing our relationship with a country, something we have done in the past in China." BP already has a partnership with Rosneft on the Sakhalin-5 project. TNK-BP, its Russian venture, works with Rosneft at the Verkhnechonskoye field in Siberia.

Petronas also secured $1 billion in Rosneft, while CNPC (China National Petroleum Corp)secured $500 million, despite press reports that the company had sought a $3 billion position. CNPC paid $4.2 billion for PetroKazakhstan in 2005 and paid a cash-strapped Rosneft $4 billion up front for 50 million barrels of oil over 4 years in 2003. Despite such strong partnerships, only $500 million was allocated to the company. Rosneft President Sergei Bogdanchikov said foreign institutional investors from 46 countries bid for $6 billion of shares, with Russian institutional investors seeking shares worth $1.6 billion. The greatest foreign demand came from British investors.

On 14th July 2006 Rosneft comfirmed it would offer shares at $7.55, valueing the company at close to $80 billion. A $79.8 billion valuation gives Rosneft an enterprise value of about $90.6 billion, implying the company trades at about 12 times 2006 earnings before interest, tax, depreciation and amortisation. In contrast, Lukoil’s enterprise value, debt plus equity, is about 6.8 times 2006 Ebitda.

The week befpre the IPO The British Financial Services Authority authorised the floation of Rosneft shares on the London Stock Exchange despite an appeal from Yukos. Yukos claimed that allowing the Rosneft IPO would be tantamount to facilitating the sale of stolen goods, referring to the manner in which Yukos' main production platform, Yuganskneftgaz, was taken from the group following a $33 billion back-tax claim levelled by the state. The Kremlin had anticpated the Rosneft flotation would take place on Friday 15th July, coinciding with the first day of the G8 Summit in St Petersburg, but the FSA approved the flotation for wednesday 19th July. Indian Foreign Minister M.S. Srinivasan confirmed that Indian steel giant ONGC sought a 5% stake in Rosneft, the market capitalisation for which they expect to be about $60 billion. Hans Jorg Rudolff, Barclay's Capital chairman and Rosneft board member confronted Russia-skeptics in an interview with the London Times (click here).

The Financial Times Australia reported Rosneft had offered a $2 billion stake to BP, but that the response to the offer had been "cool". The paper also reported that experts had viewed the valuation of Rosneft in the run-up to the IPO as excessive. Rosneft announced a market capitalization value between $60 and $80 billion based on an initial share offering of between $5.85 and $7.85 per share, announced monday 26th june, in which 12% of the company would be floated abroad in the hope of raising between $8 and $10 billion. The pricing rates Rosneft at approximately 1.5 times the comparable rate used for Lukoil. If Rosneft were priced at a similar rating to Lukoil the government would need to sell a 24 per cent stake to raise the $8.5bn required to repay loans to European Banks, used to purchase Yuganskneftgas.

Vedomosti reported that Morgan Stanley and Troika Dialogue valued the company at $63 billion, while Uralsib and Deutsche UFG valued the company at $117-120 billion (article here). In April, the company announced that it had hired U.S. investment banker Peter O'Brien, who had been working on the IPO for underwriter Morgan Stanley, as vice president and chief financial officer. The company took on its first three independent board members, from Vneshtorgbank, Barclays Capital and the Russian Academy of Sciences, in June 2006 (see above).

Key Questions: A central question is how the market valued Rosneft, which had a capital value of $8 billion before the $9 billion Yuganskneftgaz acquisition, at around $60 billion. Another key issue in evaluating Rosneft is how efficient the company is, notwithstanding its ownership of the massive Yuganskneftgaz. Rosneft has histroically been regarded as notoriously inefficient (the graph below illustrates the negligible effect incorporating Yuganskneftgaz into the group has had on overall figures) but it is likely that the attraction of buying into the Gazprom group, plus strategic purchasing by Rosneft's competitors, will fill the offer-books before flotation.

Subsidiaries: Purneftegaz, Yuganskneftegaz, Sakhalinmorneftegaz, Grozneftegaz, Stavropolneftegaz, Tuapsenefteprodukt, Kubannefteprodukt, Krasnodarneftegaz, Tuapse NPZ, Vostoknefteprodukt, Nakhodkanefteprodukt, Altainefteprodukt, Murmansknefteprodukt, Komsomolsk Oil Refinery, Kurgannefteprodukt, Smolensknefteprodukt

Regions: Rosneft currently comprises over 40 subsidiaries located in almost all of Russia’s regions, although the company’s main strategic regions are the North-West (Murmansk, Arkhangelsk, Usinsk, Smolensk and Moscow); Siberia (Salekhard, Gubkinsky, Nefteyugansk, Krasnoyarsk, Kurgan, Barnaul); the Far East (Okha, Nogliki, Komsomolsk-on-Amur, Yuzhno-Sakhalinsk, Khabarovsk, Nakhodka) and the South of European Russia (Krasnodar, Tuapce, Stavropol, Cherkessk, Neftekumsk, Nalchik, Grozny, Vladikavkaz, Makhachkala).

Yuganskneftegaz, Purneftegaz, Selkupneftegaz and Severnaya Neft are Rosneft's principal resource and productive base. Selkupneftegaz is developing the Kynsko-Chaselskaya group of fields, which, along with the Kharampur field (Purneftegaz), forms the basis of the Company's gas strategy.

Krasnodarneftegaz, Sakhalinmorneftegaz and Stavropolneftegaz operate mature fields in an advanced stage of development, and enjoy good economies of scale and logistics due to their proximity to export terminals on the Black Sea and at De-Kastri, as well as to the Komsomolsk and Tuapse Refineries. Moreover, Sakhalinmorneftegaz owns 11.5% of Sakhalin-1, one of Rosneft's priority projects.

The Komsomolsk Refinery is strategically located in the Far East and benefits from its technological integration with Nakhodkanefteprodukt, while the Tuapse Refinery is noted for its favorable location on the Black Sea coast and is part of an integrated complex with Tuapsenefteprodukt.

Arkhangelsknefteprodukt has its own transshipment facilities in Privodino, enabling 100% of the oil produced by Severnaya Neft to be exported.

Major Projects/News/Locations:

Rosneft signed a protocol with Chinese National Petroleum Corporation (CNPC), creating Vostok Energy Ltd in October 2006. The JV, in which Rosneft has a 51% stake and CNPC 29% aims at exploring and obtaining lisences to develop Russian oil fields. The board comprises three members from Rosneft and two from CNPC.

Following a government auction in July 2006, Rosneft obtained a 25 year exploration and production license for the western part of the Kaurunaniskaya zone near Sakhalin Island. The licensed area's reserves are projected at 1.5 million tonnes of oil and 2.5 billion cubic meters of natural gas. Under the license terms, Rosneft should present results of its studies and provide estimates of oil and gas reserves in case it discovers a mineral deposit before 2011.

Siberia: Kharampurskoe oil-and-gas field, Kynsko-Chaselsky block of fields, Vankor oil-and-gas field, Priobsky Oil Field, Malo-Balyksky Oil Field, Mamontovsky Oil Field, Prirazlomny Oil Field (the Khanty-Mansijsk Autonomous District), Verkhnechonsk Deposit

Far East: Sakhalin-3 (Veninsky sector), Sakhalin-4 (Zapadno-Shmidtovsky sector), Sakhalin-5 (Vostochno-Shmidtovsky sector), Sakhalin-5 (Kaygansko-Vasyukansky sector), West Kamchatka Shelf Development, Recostruction of Komsomolsk Refinery, Severnaya Neft, Polyarnoe Siyanie Company, Reconstructions of Tuapse Refinery, Caspian Pipeline Consortium

Kazakhstan: Adaysky Sector: As of July 2001, Rosneft has held a 50% share in the promising Adaysky sector exploration project. The Adaysky sector is located in the Atyrausky region of Western Kazakhstan. The sector’s main prospects are connected with sub-salt deposits which are both regionally producing deposits and connected with oil deposits of the large fields discovered in this region (Tenghizsky, Karaganchaksky, etc.). At the same time, the Adaysky sector is of interest in terms of the discovery of oil deposits in an above-salt complex. The Atyrausky region located in the Caspian Sea basin ranks amongst the leaders in Kazakhstan’s oil-bearing regions in terms of estimated reserves and other features. Recoverable oil reserves at the Adaysky sector are estimated at 75-100 million tons.

Kurmangazy: For a long period, oil-and-gas research works could not be undertaken at the previously discovered Kurmangazy structure due to unresolved problems on the line marking the boundary between the Russian and Kazakh territories. On May 13, 2002, the Russian President Vladimir Putin and the Kazakh President Nursultan Nazarbaev signed a Protocol to the Treaty on the Demarcation of the Northern Part of the Caspian Sea Bottom for the Exercise of the Countries’ Sovereign Rights to Subsurface Use. This allowed the countries to begin the joint development of hydrocarbon resources of both the Kurmangazy structure, and two other objects with previously unresolved territorial problems: the Khvalynsky deposit and the Centralny structure.

In signing the Protocol, Russia and Kazakhstan agreed on the distribution of subsurface use in the northern part of the Caspian Sea, and joint development of the structures and the deposit on a fair basis.

RN-Kazakhstan is a branch enterprise of Rosneft, authorized by RF Government (Decree No. 1094-r dated August 8, 2003) to participate in the Kurmangazy structure development and to finance the Russian share in the project.

Udmertia: The Chinese company Sinopec won a tender for former TNK-BP subsidiary, Udmurtneft, bidding $3.5 billion in July 2006. In turn, Rosneft declared its intention to acquire 51% of Udmurtneft shares under an option agreement which it concluded with Sinopec in May 2006. Rosneft and Sinopec signed a protocol on management procedures in Udmurtneft upon Rosneft's purchase of 51% shares of Udmurtneft under the option signed on July 13th 2006. Udmurtneft shares will be owned by a Holding Managing Company, in which Rosneft will hold a 51% interest and Sinopec 49%. The Board of the Managing Company will have equal representation from Rosneft and Sinopec. Udmurtneft's current business will be run by an a Management Commission, a General Director of which will be appointed by the Managing Company's BOD from candidates proposed by Rosneft. Udmurtneft's BOD will consist of 7 members, four of them representing Rosneft and three - Sinopec. Representatives from Rosneft and Sinopec will fulfill functions of the BOD Chairman by turns. Udmurtneft's current business will be run by a Managerial Board of 6 members (3 members from Rosneft and 3 members from Sinopec). Rosneft and Sinopec will have equal representation in the Company's Auditing Committee, its Chairman being a representative of Sinopec. According to resolutions taken by Udmurneft's BOD on August 10, Mr. Gani Gilaev was elected General Director of Udmurneft. Mr. Gilaev had earlier been First Deputy General Director for Production - Chief Operating Officer of RN-Krasnodarneftegaz LLC.

Udmurtneft is the largest oil and gas company in Udmurtia. At December 31, 2005, the Company's proved reserves totaled 551 million barrels of oil, its proved and expected reserves amounted to 922 million barrels. The current daily output is 115 thousand barrels, or 16.35 thousand tonnes. In 2005, Udmurtneft produced 5.98 million tonnes of oil. In April, shortly before it was sold, Udmurtneft's shareholders paid dividends of RUR 16.8 billion for 2005 and 1Q of 2006.

Algeria: Rosneft and Stroytransgaz have formed Rosneft-Stroytransgaz Ltd., an operational partnership for cooperation in hydrocarbon development and production in this territory. Shares in the authorized capital of the newly formed partnership were distributed equally between its founders. On March 24, 2001, Rosneft-Stroytransgaz signed a contract for exploration, development and production of hydrocarbons with Sonatrak, an Algerian state-owned oil and gas company, which has entered into effect pursuant to a decree of the Algerian President dated May 13, 2001.

Turkmenia: Rosneft and two Russian companies, Zarubezhneft and ITERA, are interested in conducting joint activities for the exploration and development of hydrocarbon deposits on the Caspian Sea Shelf on the Turkmenistan coast. The parties intend to use a joint company, ZarIT, as the project operator, with stakes in such company divided as follows: Rosneft — 37%, Zarubezhneft — 26% and ITERA — 37%.

Other projects: Development of Transport Infrastructure, Reconstruction OC Rosneft — Nefteproduct

History: During the 1990s privatization a state-managed and vertically integrated joint stock oil company was created to act in the strategic interests of its stockholders, i.e., the state itself. RF Government Decree No. 971 dated September 29, 1995 established Rosneft Open Joint Stock Oil Company as the successor to the USSR Ministry of the Oil Industry. It incorporated non-privatized oil and gas production enterprises, oil refineries, and companies distributing oil, gas and oil products.

In its first years, Rosneft faced considerable difficulties and was unable for a long time to join the new market environment due to the commercial inefficiency of the company’s structure. The first three unsuccessful years following Rosneft’s creation led to comprehensive changes being made to the management mechanism.

Rosneft’s difficulties culminated during the 1998 crisis, when the whole existence of the company as an integrated holding was placed in doubt. As a result of the crisis, Rosneft suffered grave financial losses with almost uncontrollable assets including main industrial facilities. The threat of the holding structure’s collapse was aggravated by the overall industrial decline in all spheres of the company’s activities. Not only was oil production using almost obsolete Soviet-era resources, but the oil refinery business was performing to only one third of its potential, and marketing and distribution enterprises were drastically losing their positions in the regions. Equipment and production technologies were obsolete. By the end of 1998, despite comprising 30 large-scale enterprises and having at its disposal natural resources for the next 60 years, Rosneft was valued at only US$500 million.

The government had to resolve the dilemma of whether to liquidate the business by selling it as a whole or in parts, or whether to take urgent measures to increase its efficiency. By the end of 1998, a new management team had been appointed to turn the company around and achieve gradual growth.

The first and most urgent task was to study the situation comprehensively and bring basic order to the company’s management. It took a whole year to complete the review of assets and contain destabilizing factors. However, by the end of 1999, the main assets were again under control, management mechanisms were running smoothly, and the holding structure started to conduct a centralized industrial and economic policy. As a result, the company realized a profit in 1999. In 2000, the company strengthened its formerly weak positions in the market. Rosneft’s industrial and production activities developed substantially.

Through a series of takeovers and purchases (89 oil production subsidiaries in 2003/04), most notably the former Yukos platform Yuganskneftgaz, Rosneft has become Russia's second largest oil producer (1.6 million barrels per day) with 30 year reserves. Prior to the July 2006 IPO, the company had debts of approximately $11 billion, $7.5 billion of which was used to secure the government's controlling stake in Gazprom. Rosneft cleared its debt a week after the IPO, on 23rd July 2006. It is expected Rosneft will also seek to pick up some pieces of the Yukos groups, as the company became a ward of The Federal Bankruptcy Court following a creditors meeting in July 2006.

Recent Articles:
Morals & Investment, The China Standard (Opinion) 14th August 2006
Interview with Sergey Bogdanchikov, London Telegraph, 23rd July 2006.
China seeks oil security with stake in Russia firm
Rosneft IPO 'for the people' leaves Russians divided, The London Times, 30th June 2006
Russia economy: Rosneft IPO—high price, higher risks, Economist Intelligence Unit, 28th June
The Book of World Controversies - Kommersant, July 5th 2006
Stock Market Shares Courtesy of the Kremlin - Der Spiegel, 29th June 2006.
The People's IPO - Dow Jones Online article on share sales 26th June 2006
Kremlin Counting on a Gusher, - General overview on IPO. The LA Times, 26th June 2006.
profile compiled by Julia Sokhatskaya & Ivor Crotty