Rosneft – The new star of Russian energy

Source: TurkWeek
In Energy Strategy-2030 of Russia, enacted at the end of 2009, it was stated that Moscow would put emphasis on the Asia-Pacific region in its energy exports in the coming years. Petrol and petroleum exports going to this region were targeted to be raised from 6% to 22-25% of total exports, and currently non-existing natural gas export to this region to 19-20% scale of total natural gas export. This Asia-Pacific opening is part of Moscow’s strategy to increase national revenues while promoting economic development in East Siberia and the Russia Far East, and, as well as to stem these regions’ chronic emigration problem. Also, increasing negotiating margin in its economic cooperation with EU by operating new oil and gas pipelines to the East also constitutes an important column of this strategy.

 

Rosneft, Russia’s newest energy giant, is a key pillar of this initiative. As one of Putin’s favoured firms, Rosneft owes a great deal of its success to Kremlin’s state-centred energy strategy — itself a part of a larger strategy to re-establish Russia as a global power. In that context, efforts to develop the company seem to have gained pace over the past years, and Russia’s currently rank, first with its 12.7 share in world oil production as of 2012, would likely to stay same, at least in short term.

Monopoly in oil, rival in gas…

First of all, Rosneft, winning the licenses for the petroleum reserves at Vankor, Verhne-Chonskoe and Yurubchenko-Tokhomskoe, is to expand petroleum reserves in Eastern Siberia — close to the Asia-Pacific region. At the end of May, Rosneft secured operating rights in the Albanovsky and Varneksky regions of the Barents Basin, competing in this area with Gazprom. Energy reserves in the Barents Basin include 2.2 billion tons of crude petroleum and 1.2 trillion cubic meters of natural gas. Secondly, Rosneft is also looking to vary the cooperation it undertakes with international energy companies. The company is interested in prospecting for new reserves and technology transfers. It has signed new North Pole exploration agreements with American Exxon Mobil, petroleum extraction contracts in the Sea of Ohotsky with Japanese Inpex, and agreements with the Chinese State Petroleum Company (CNPC) on petroleum exporting and energy cooperation in several different areas of Russia. Under an agreement signed in 2009, Rosneft is annually exporting 15 million tons of petroleum to China through the Eastern Siberia-Pacific Ocean pipeline. This volume is anticipated to rise to 50 million tons over the next three to five years as a result of the expansion of the existing pipelines, new ones coming online, and more active use of ports such as Kozmino.

Russian oil export and production by year (million tonnes)

Source: This table is drawn by compiling the data from Russian Ministry of Energy and Central Bank statistics.

Thirdly, along with its efforts to clinch dominance in the petroleum production and export market, Rosneft is simultaneously trying to get command of the natural gas industry, enjoying strong support from the Kremlin. Last March, Rosneft bought Russia’s second largest petroleum exporter, TNK-BP, at a price of $44.4 billion dollars. It is now making plans to buy the remaining shares of Itera, the country’s third largest natural gas producer, after having taken a 51% stake in it in 2012. Its market share in petrol has now risen to 40% and the company plans to produce 210 to 215 million tons of petroleum and 50 billion cubic meters of natural gas in 2013. Apart from becoming a hegemonic power in petroleum production, Rosneft would like to have a monopoly in petroleum exports along the lines of Gazprom’s monopoly in natural gas exports. Rosneft is currently engaged in talks with the government on this matter. Company officials say that for the moment being one of the players in the natural gas sector is enough, but that it aims to have a 20% share of the domestic natural gas market by boosting its output to 100 billion cubic meters annually by 2020.

Shares of the Oil Export and Production Companies in Russia in 2012

Export    Production

Source: Tables are drawn by compiling the data from Russian Ministry of Energy statistics.

In addition to this, the Russian Ministry of Energy is trying to raise the share of liquefied natural gas (LNG) exports from the current level of around 7% to 15% of Russia’s total natural gas exports by 2020. The ministry’s perception is that Gazprom — which exported only a total of 11 billion cubic meters of LNG between the years of 2005 and 2012 — has not done enough in this area. So it is behind Rosneft’s entering the LNG market. During its talks with Ministry and Kremlin authorities aimed at ending Gazprom’s monopoly in LNG exports, Rosneft is also determining how it can be active in eastern markets, making plans to open with Exxon Mobil in Eastern Siberia an LNG production plant, and conducting feasibility studies on shale gas production. Gazprom officials are not pleased with Rosneft’s ambitious entrance into the natural gas market. But the Kremlin is ensuring that Rosneft will not get in the way of Gazprom’s activities and is currently helping the two companies establish their positions in a competitive environment.

The Sechin Factor

Igor Sechin, Rosneft’s chairman, has played a major role in the company’s recent rise. Sechin was identified by Time magazine as the “oil titan” in its list of the 100 most influential people in the world in 2013. He was the only Russian included in the list. In the past, Sechin worked for the KGB, the Soviet Union’s intelligence service. His close friendship with President Putin led to his becoming deputy chief of the Kremlin Presidential Administration in the early 2000’s. Early in 2004, Putin appointed Sechin to the board of the state company Rosneft, at that time only the sixth largest petroleum company in Russia. The move was part of Putin’s bid to consolidate state power over the energy sector. When Sechin was appointed as the chairman of the Rosneft’s board of directors, he maintained his powerful position within the president’s administration. At this time, Yukos, then the largest petroleum company in Russia was having its assets transferred to Rosneft, a process which continued until 2007. And Sechin was one of the main actors in the Kremlin’s energy policy in this process.

Between 2008 and 2012, Sechin served as a deputy prime minister during Vladimir Putin’s premiership. He worked as Putin’s assistant on energy and industry matters. As such, his function was to make Rosneft’s policy expansion easier. When Putin returned to the Kremlin for his third term in office, Sechin became chairman of Rosneft.

Sechin is largely responsible for Rosneft’s rise to what Forbes magazine described as Russia’s second largest company. Only Gazprom (17th worldwide) edged out Rosneft (59th) within Russia. In 2012, Rosneft’s net profits rose sharply by 7.2% over the previous year, to reach $11.2 billion. In Ria Novosti’s ranking of Russia’s 100 largest companies, according to capital, Rosneft rose by 26.9% (i.e. $95.2 billion) to take second place after Gazprom. Sechin’s policies have been an important factor in the company’s surging growth, including its acquisition of the biggest share of the world’s petroleum reserves.

To sum up, energy politics and “pipeline diplomacy” which aimed Russia to regain its “global power” position in international arena seem to keep their vital importance still for long as key instruments of Kremlin’s foreign policy. During 2000’s, Putin’s this state-centred energy strategy allowed Gazprom to become a giant company in both the domestic and international natural gas markets. And now, it is being reapplied to clinch Rosneft’s dominance over the petroleum production and exporting sector. Rosneft is taking on important duties for the Kremlin, and it looks as if it will be one of the vital pillars of Russia’s transformation into an energy superpower.