Rosneft Oil (RTD:ROSN)

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Rosneft (RTS:ROSN, FTSE:ROSN, MICEX:ROSN) is a Russian vertically integrated state run (75.16%) oil and gas company with upstream and downstream (petroleum products are refined) operations.

Its key exploration (Eastern Siberia, Far East, Southern Russia) and producing properties (Western Siberia, Sakhalin, North Caucasus, Arctic Russia) as well as 7 large refineries are all in Russia (West and East Siberia, South and Central Russia and Timan-Pechora). There are also exploration projects in Kazakhstan and Algeria. The Sakhalin-1 project which ConocoPhillips runs and Rosneft has a 20% interest in, is part of a production sharing agreement. It also has interests in oil and gas condensate deposits through affiliate companies (OJSC Verkhnechonskneftegaz and Taihu Ltd) as well as strategic alliances with Russian major oil company Gazprom (which it almost merged with in 2004).

Proved Reserves[1][2]	Oil mil boe	Natural Gas bil 3	Total mil boe
Jan 2010	18,058	28,801	22,858
Jan 2011	18,110	27,931	22,765
2011 SEC classification	13,747	8,709	15,199

Contents 1 Company Overview 1.1 Business & Financials 2 Refining 2.1 Refining output product mix 3 Production 4 Trends 4.1 49% Rosneft Owned Tianjin Refinery will get 70% of its oil from Russia 4.2 Fall 2010 considers buying up oil refineries in Germany 4.3 Sept 2010 Tax Breaks Extension in Russia for Rosneft's main source of oil 5 References

Based on production (2.18 mln bpd in 2009 (5 times more than 2004), 12 billion cubic meters of natural gas), refining (leader in Russia with 365 mln barrels in 2009), resource base (22.858 billion barrels of oil equivalent) and market capitalization (83 billion US in 2010 was 8th highest among oil and gas companies) it is one of the largest oil and gas companies in the world.^[1][3] Despite the fact that Russia is also home to Gazprom one of the Oil & Gas Majors, Rosneft continues to lead Russian oil and gas companies in production and possibly even proven oil reserves (18.058 bil boe compared to less than 17 bil at Gazprom (Gazprom Neft 7 bil boe, Gazprom under 10 bil boe in natural gas)).^[1][4] Refining throughput remained nearly the same for each of its major refineries from 2007 to 2009. In 2009 Rosneft partnered with Gazprom and Turkish utility company Aksa Energy to build heat and power plants and sell gas in Turkey and elsewhere.^[5]

In 2010 Rosneft maintained its overall petroleum reserves despite near record production (the oil replacement ratio ended up being 106%) which is great news for the company that experienced large decreases in reserves as recently as 2008, when proved oil reserves fell 33%.^[6] New licenses regarding oil exploration in the Arctic Shelf have helped boost both 2P and probable reserves. According to the company (February 2011) it has at the least enough oil to continue producing at current rates for another 67 years (25 years for hydrocarbons).^[2]

Rosneft produced 2.322 million barrels of oil per day and over 6,000 boe per day of natural gas in 2010, more than 3% of global production.^[7]

Company Overview

The company is made up of 3 business segments

• Upstream- exploration, production of crude oil and natural gas
• Downstream - refining (mainly oil transformed into petroleum products, processes about 1 million bpd), marketing (includes over 1700 gas stations), distribution (runs shipping and pipeline companies) and transportation (of its own oil, gas and refined products as well as those purchased from third parties)
• Services related to drilling, construction and finance.

svg version of the graph to the right

Business & Financials

Exchange rates and inflation in Russia directly affect the company's results as most of its revenue from crude oil and petroleum products is in US dollars whereas expenses are paid in Russian rubles. So, an appreciation in the value of the ruble is bad while depreciation helps.

Even though revenue took a dive in 2009 (down 40.35%) sales volumes were up across the board. The reason is that oil and gas prices were down significantly. EBITDA was up in the 1st half of 2010 by 57% year on year (proportional to increases in revenue) despite appreciation of the ruble and increased taxes and transportation costs (taxes were 49% of revenue compared to 41% in the previous period). In 1QFY10 it was the highest for a quarter since 2008.

Key Financial Metrics (US$ million)	2005	2006	2007	2008	2009	1HFY09	1HFY10	Change (%)	2010[8]
Revenue	23,863	33,099	49,220	68,990	46,830	19,211	30,192	57.2%	60,047
EBITDA	7079	7263	14,459	17,108	13,565	3859	6514	68.8%	19,203
Net Income	4159	837	6497	10,449	6472	3678	5048	37.2%	10,442(adj)
Market Capitalization	na	na	76,560[9]	77,940[10]	34,070[11]	na	83,190[12]	na	na
EBITDA per boe of production	11.49	11.09	17.96	22.07	17.00	na	na	na	22.66
ROE (avg equity)	49.2%	23.0%	25.6%	30.6%	15.2%	na	na	na	20.7%
Total Costs and Expenses	18,341	27,495	38,495	55,986	37,698	15,352	23,678	54.2%	49,548
Transportation Costs	2321	3226	4226	5673	5414	2503	3516	40.5%	6980
CAPEX	1944	3462	6780	8732	7252	3387	3845	13.5%	8931
Total Assets	30,016	46,790	74,805	77,513	83,232	78,240	86,967	11.2%	23,043(current)

• Data 2005 from 2006 Annual Report^[13] 2006, 2007 from 2007 Annual Report^[14] 2008, 2009 from 2009 Annual Report^[15]

The boost in sales volumes of oil and gas as well as petrochemical products the the company had in 2009 and continue to see in 2010 is finally starting to show up on the company's financial statements. Revenue growth has been substantial mostly due to improved oil and gas prices. 2010 shareholders equity was US$54.535 billion 21.9% more than at the end of 2009 (US$45.537 billion) and 40.2% more than 2008 (US$39.598 billion).^[8]

Petroleum products and petrochemical sales make up 42.3% of total revenue (US$26.66 billion, 2010). Prices for petrochemical products helped earnings (overall revenue was 34.6% higher in 2010, petrochemical revenue was 28.6% higher (difference of US$5.924 billion). Support services and other contributed US$1.62 billion of revenue in 2010 (27.6% higher than 2009 when it made up 27.1%). 2010 oil and gas sales revenue was 40.1% higher than 2009 (US$34.767 billion compared to US$24.820 billion).^[8]

Crude oil production in 1HFY10 was up 8.8% due mainly to increases at the Vankor and Verkhnechonsk fields in Eastern Siberia despite reserves being close to depletion.

Between 2008 and 2010 Western Siberian production has been supplied with steady oil from 3 oil fields, on average 85% of the oil production comes from Yuganskneftegaz, 9% from Purneftegaz and 6% from the joint venture it has in Tomskneft (37.67 mil bbls in 2010).

Refining

Refining operations include 7 large refineries (Komsomolsk, Tuapse, Achinsk, Angarsk and the Samara Group which contain the Novokuibyshevsk, Syzran, Kuibyshev refineries) with an annual capacity of 391 mln barrels (2009 estimate) and 4 mini refineries (Western Siberia, Eastern Siberia, Timan-Pechora and the southern part of European Russia) with an annual capacity of 4.4 mln barrels. Output is sold internationally however refinery products are generally sold to the market nearest their locations (one in the black sea focusses on Russia's southern disctrict while those in Kuibyshev, Novokuibyshevsk and Syzran deliver to central Russia and the European market by way of pipelines and loading terminals on the Volga river). Output from the Angarsk, Achinsk and Komsomolsk refineries are sold in Siberia and the Far East including Mongolia and China. Products include lubricants like motor oil (annual capacity at lubricant plants is 450,000 tonnes). The Komsomolsk refinery is one of the oldest having been part of the company since it was founded.

Refining output product mix

Diesel and fuel oil have traditionally made up the largest fraction of crude oil-processed refined products. Until 2009 diesel made up the largest portion (35.9% of total output in 2008 (16.69 million tonnes), 36.1% in 2009 (17.01 million tonnes) and 35.2% in 2010 (16.84 mil T) but that changed in 2009 when fuel oil took the lead (went from 33.7% in 2008 (15.65 mil T) to 36.1% in 2010 (17.01 mil T). Together they make up 71.3% (2010) of all refined output. High octane gas (10.3%, 4.92 mil T) and Naphtha (6.5%, 3.13 mil T) make up 58.5% of the rest of output (the other 11.9% is represented by low octane gas, jet petrochemicals (combined 6.8%) and other (5.1%).^[8]pg.13

2010 refinery throughput was 1.8% higher than 2009 (2009 was 1.3% higher than 2008) helped by lower light fractions content and less demand for products requiring fuel oil. Russia within Europe produced output at the Kuibyshev, Novokuibyshevsk and Syzran refineries in the Samara region, the Asian portion of the country produced in Russian Far East, the Achinsk and Angarsk refineries in Eastern Siberia. Petroleum products and petrochemical sales make up 42.3% of total revenue (US$26.66 billion, 2010). Prices for petrochemical products helped earnings (overall revenue was 34.6% higher in 2010, petrochemical revenue was 28.6% higher (difference of US$5.924 billion).

Production

	Refining and Production	2007	2008	2009	1HFY09	1HFY10	2010
Crude Oil Production (000 bpd)		2027	2127	2182	2118	2301	2322
Gas Production (000 m3 per day)		43,041	33,918 12.38bcm	34,740 12.68bcm	na	na	12.34 (bcm)
Total Petro Product Output (mln tonnes)		38.39	46.44	47.06	23.25	23.22	47.89
Avg Flow Rate of Oil Wells (bpd)		104	105	114	na	na

Rosneft has been Russia's leading crude oil producer since 2007 when acquisitions in Samaraneftegaz, Tomskneft, Udmurtneft, and East Siberian Oil and Gas Company (119.1 mln barrels of annual crude oil production from the new companies at the time as well as 1.23 billion cubic meters of natural gas) which directly contributed 20.4% of growth in crude oil production that year helped the company become Russia's leading crude oil producer. Also in 2007 Rosneft's share of production at Sakhalin Island operations (27.6 million) more than doubled due to its 20% stake in the Sakhalin-1 project. In 2008 about 3/4 of the company's crude oil reserves were in Western Siberia.

• 1 m3 = 35.314 ft3, 1 boe = 5800 ft3 natural gas, 1 boe = 164.24 m3
• Data for 2010 First Half^[16]

Crude oil production in 1HFY10 was up 8.8% due mainly to increases at the Vankor and Verkhnechonsk fields in Eastern Siberia despite reserves being close to depletion.

Between 2008 and 2010 Western Siberian production has been supplied with steady oil from 3 oil fields, on average 85% of the oil production comes from Yuganskneftegaz, 9% from Purneftegaz and 6% from the joint venture it has in Tomskneft (37.67 mil bbls in 2010).

Trends

49% Rosneft Owned Tianjin Refinery will get 70% of its oil from Russia

The newly constructed 200,000 bbls/d refinery in Tianjin is one of many refineries being built in China to feed China's enormous demand (up by 5.1 million bbls/d since 1995). Tinjin is a $4.5B joint venture between Russia's Rosneft (China is a top 4 destination of Russian crude) and CNPC of China. Rosneft owns 49% of the 200,000 bpd refinery that will be 70% fed by oil from East Siberia.^[17]

Fall 2010 considers buying up oil refineries in Germany

Rosneft is in process of making the its largest acquisition of Western European assets. The oil refineries involved are part of Ruhr Oel (owns two refineries and indirect ownership in two others) controlled by Petroleos de Venezuela (considers buying out the company's 50% share for USD 1-2 billion according to Europe's Wall Street Journal) the other company with an interest is BP oil which threatens to block the deal unless Rosneft gives BP something (the offer involves oil exploration in the Arctic ocean).^[18]

Sept 2010 Tax Breaks Extension in Russia for Rosneft's main source of oil

Rosnefts chairman is also the lead energy official in Russia and that has paid dividends for the company as it has given it a voice in the Kremlin. Igor Sechin asked V. Putin for an extension on tax breaks until the end of 2013 and the Prime Minister gave it consideration. The request is being reviewed by the finance and economy ministries.^[19]

References

1. ↑ ^{1.0 1.1 1.2} APS Review Oil Market Trends:Russia:Rosneft (2010-08-23).
2. ↑ ^{2.0 2.1} Rosneft fully replaced its oil reserves in 2010 (2011-12-17).
3. ↑ The Global 2000 2010
4. ↑ Rosneft makes East Siberia hit
5. ↑ Aksa Energy to form joint venture with Rosneft; Deal In Brief
6. ↑ Rosneft's proven oil reserves down 33% in 2008 (2009-03-02).
7. ↑ BP-Rosneft Oil Partnership Breaks New Ground (2011-01-18).
8. ↑ ^{8.0 8.1 8.2 8.3} Rosneft Oil 2010 MDA Operations Report (2011).
9. ↑ Forbes Global 2000 2007
10. ↑ Forbes Global 2000 2008
11. ↑ Forbes Global 2000 2009
12. ↑ Forbes Global 2000 2010
13. ↑ 2006 Annual Report
14. ↑ 2007 Annual Report
15. ↑ Rosneft 2009 Annual Report
16. ↑ Rosneft Posts 9% Growth of Crude Oil Production, 56% Growth of EBITDA, Reduces Net Debt by USD 2.7 bln in the First Half of 2010
17. ↑ Russia, China negotiate increased oil deliveries to joint refinery (October 12, 2011).
18. ↑ Russia's Rosneft poised to snap up stake in German oil refineries (2010-08-27).
19. ↑ 'Rosneft could save billions on tax break' (2010-09-16).