Rosneft Sanctions Boost Reliance on China Loans for Oil
OREANDA-NEWS. July 31, 2014. Rosneft (ROSN), the world’s biggest publicly traded oil producer by volume, will rely on deals with China to withstand the latest U.S. sanctions against Russia.
The state-run company is scheduled to receive USD63 billion of advance payments under long-term crude-supply contracts from 2014 to 2018, mostly from Chinese clients, Andrey Polischuk, an energy analyst at Raiffeisenbank in Moscow, said by phone today. That covers almost all of Rosneft’s USD 65 billion in debt, he said, after sanctions announced yesterday limited the producer’s access to U.S. debt markets.
“Rosneft would never have received such generous funding without China,” Polischuk said. “It’s an obvious dependence. There are few other alternatives.”
The most aggressive sanctions yet will prevent Rosneft from accessing U.S. equity or debt markets for new financing with a maturity beyond 90 days. They don’t otherwise prohibit U.S. companies or individuals from doing business with sanctioned Russian firms, which also include gas producer Novatek (NVTK) and Gazprombank.
Shares of Rosneft closed 4.3 percent lower in Moscow, the biggest decline since May last year. Its Eurobonds maturing in 2022 plunged the most on record.
Rosneft and China National Petroleum Corp. signed a USD 270 billion, 25-year supply agreement last year to diversify exports to the world’s second-biggest crude-consuming nation as European demand fell. The deal includes prepayments estimated by President Vladimir Putin at about USD 70 billion. In October, Rosneft also agreed to an USD 85 billion, 10-year oil-supply deal with China Petrochemical Corp. (1314)
Follow Suit
The major threat is that Europe “may follow suit and impose the same limitations on borrowing from European banks,” Alexander Kornilov, an Alfa Bank analyst in Moscow, said today in an e-mailed note. Rosneft has the highest debt burden among Russian oil companies, he said.
The sanctions are illegal because Rosneft has no role in the Ukraine crisis, Rosneft’s Chief Executive Officer Igor Sechin told reporters in Brasilia. They will damage U.S. banks cooperating with Rosneft without having an impact on the Russian producer, he said.
Rosneft can afford “not to attract emergency loans” to finance projects, according to Sechin.
Rosneft should get about USD 143 billion of operating cash flow in the next five years excluding prepayments, Polischuk said. Its five-year investment program and about USD 21 billion in dividend payments “could both be easily covered,” he said.
Commodity Traders
The sanctions could make it more difficult for commodity traders to strike prepay financing deals with Rosneft, threatening a key source of guaranteed crude flows for Swiss trading firms.
Vitol Group, Glencore Plc (GLEN) and Trafigura Beheer BV agreed last year to give Rosneft a total of USD 11.5 billion in financing in exchange for guaranteed oil supplies. Vitol and Glencore, which have major trading operations in Switzerland, secured syndicated loans with lenders that included U.S. banks to pay for the Rosneft deals.
Rosneft won’t be able to win new financing from European traders in exchange for oil if future deals have the same structure as previous agreements, said Matthew Parish, a lawyer with Holman Fenwick Willan LLP in Geneva.
“In theory, they couldn’t be done in exactly the same way,” Parish said in an e-mailed response to questions.
Future prepayment deals involving Rosneft and commodity trading firms may, however, be able to sidestep sanctions depending on how they are structured.
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