23.02.2006 BIRTH OF THE SUPERNEW RussNeft is recognized as the most rapidly growing Russian company, which is backed by the facts of manifold growth of its oil production and doubling of its crude reserves within 3 years since it was founded.
Acquisition of downstream and mid-assets in 2005 has placed the RussNeft among other vertically integrated companies of Russia.
However, with Russia’s mature oil and gas sector and promising oilfields already well shared, the company develops by acquiring assets applying leftover principle. It limits its oil production growth and accrual of new reserves. The company counts on buying foreign assets expecting that they will make the most part of its new upstream.
Yet, Western Siberia is not to be discounted as its to-be-developed hydrocarbon reserves may prove viable for the long-term functioning of the company.
Olga Vinogradova Commentator
Appearance of a new oil company these days is remarkable in itself. The fact that within three years it has acquired features giving it the status of a vertically integrated entity makes the company unique, one might say. RussNeft is a private company, its owners as of October 2005 are three Cyprus legal entities (50.3% stake), Evangelika ZAO (20%), as well as Industrial and Financial Corporation BIN (9.7% plus 20% in nominal holding). 70% part is under practical control of former president of Slavneft Mikhail Gutseriev, the rest is handled by his relatives and friends. If compared with other vertically integrated companies RussNeft has a fundamentally different footing, which implies “tail end” consolidation of assets of various profiles and placing rejected by their former owners. The main “nutrient medium” was provided by three companies, which, due to different reasons and within a short period of time, put up for sale a great number of their assets, these companies were Slavneft, Yukos and TNK-BP.
The Vertical of Gutseriev
The company’s coming-to-be started with $200 million purchase of Varieganneft in the end of 2002, which was followed by active merging of upstream assets reaching its peak in 2004. The company’s last acquired asset was Saratovneftegaz OAO bought from TNK-BP in the end of December last year. By the beginning of the new year, the company integrated 30 upstream entities developing more than 100 oilfields. Its oil production grew from 2 million tons in 2003 to 6.7 million tons in 2004 and further to 14.5 million tons in 2005, according to the data of RussNeft, or 12.1 million tons, according to the data of the Centralized Control of Russia’s Fuel and Energy Complex (See ‘Upstream Business of RussNeft’). According to the statements of the company, its crude oil reserves have increased up to 630 million tons against 300 million tons at the beginning of 2004. The year of 2005 proved a break-through in the course of establishing the production vertical of the company because in December the company agreed about purchasing 75% stake of Krasnodarekoneft Refinery and completed a deal with TNK-BP on the purchase of Orsknefteorgsintez Refinery, Neftemaslozavod and Orenburgnefteprodukt with a network of tank farms and petrol stations. Before that, RussNeft processed its crude oil under processing agreement with the Syzran Refinery and via its subsidiary Slavneftekhim ZAO at the Mozyr Refinery in the amount of 3 million tons and 1 million tons in 2005, respectively. The rest was exported to CIS and other foreign markets via Transneft routes, by railway and using mixed transportation schemes (See ‘RussNeft Got Loaded’, Oil&Gas Vertical, ¹11’05). NK RussNeft-Bryansk OOO and RussNeftetransport ZAO represent the transport sector of the company. RussNeft-Bryansk operates the oil-loading terminal built by RussNeft to enable crude oil deliveries by railway to the Republic of Belarus, Baltic States and Eastern Europe. The terminal’s transshipment capacity is 5 million tons a year; it is situated close to the railway station of Zhecha. The terminal was placed in operation last June. The project required a total of $90 million of investments. In the infrastructure of the terminal, there is a 19.7 km oil trunk-pipeline and a tank battery designed for 60 thousand tons of crude oil. RussNeftetransport is involved in the rail freightage transit of crude oil and petroleum products, petrochemicals and gases to the North-West of Russia, Baltic States and Finland. Its flow of traffic amounts to 5-7 million tons a year. The company also has shaped its own retail sector. It includes metropolitan fuel network ‘Association Grand ZAO’, Corus-Petroleum OOO (Moscow and Moscow region and 5 petrol stations in the Smolensk region), Enticom-Invest OOO (the Vologda region) and Orenburgnefteprodukt (the Orenburg region). Altogether, the company has 300 petrol stations, most of which are found in Moscow and its province. In this promising area, RussNeft plans to take up 25% of the fuel market.
Finances
Net wealth of the company, according to the reports by RAS, was estimated as RUR 5.7 billion at the beginning of 2005. By the middle of the year, its value grew to RUR 6.4 billion. The receipts amounted to RUR 27.5 billion (without VAT, excise tax and other compulsory payments), net profit was RUR 4.74 billion. In 2003, these figures were approximately five times lower equaling RUR 6.27 and RUR 881.7 billion, respectfully. In accordance with RussNeft data, 2005 receipts of the company must be somewhere at $3.5 billion by IAS against $1.1 billion in 2006. EBITDA has doubled to $600 million against $300 million in 2004, and in 2006, it is expected to reach $730-750 million. The company’s backlog at the beginning of 2005 amounted to RUR 28 billion of which 63% fell on short-term credits. The company’s strategic partner, Swiss-registered Glencore International AG involved in trading various feeds and products worldwide, provides most of the financial support. RussNeft took credits on the security of stocks and share fractions at bought-out companies including 40% stake at Varieganneft OAO and 49% stake at the head company itself. RussNeft pawned nearly 70-75% of the total amount of its export receipts to guarantee the credits, but 49% stake of the head company has been redeemed by the present time. Moreover, there is an agreement that, for ten years beginning from January 1st 2004, all the crude oil produced by the entities of the company and subject to export shall be sold directly to Glencore. In February2005 Glencore via its subsidiaries came into possession of 39.8%-49% stakes at three enterprises of RussNeft, they are Varieganneft, Ulyanovskneft and Nafta-Ulyanovsk.
Plans
The stated policy of the company is aimed at increasing crude oil production volumes through both enhancing its resource basis and acquiring new assets including use of railway transport, reproduction of resource basis, modernization and improving crude oil conversion at the refineries, as well as further development of the sales network. The company is going to do the restructuring of its assets by merging its enterprises into bigger structures in order to spare expenses and improve corporate governance. It is planned to establish four regional sub-units, such as Russneft-Povolzh’e, Khanty-Mansi-Russneft, Udmurtneft-Russneft and Tomsk-Russneft. M. Gutseriev declares his intention eventually to bring the oil production of the company to 100 million tons, mostly at the expense of foreign assets. The President of the company expects that 5 million tons can be obtained from Libya, 3 million tons from Yemen and another 3 millions from Mauritania. Some hopes are pinned on Iraq, Algeria, and Kazakhstan out of the CIS countries. In the company a foreign economic service has been organized and by the end of the year RussNeft may acquire an international status. One of the company’s first purchases abroad may become 49% stake at Slovakian Pipeline Company ‘Transpetrol’ possessed by Yukos. Transpetrol owns Slovakian section of the Druzhba Pipeline 512 km long. The cost of the stake is estimated as about $100 million. Over the territory of Russia RussNeft is ready to buy core assets in those regions where it already has its upstream business. At this, there are no plans to raise new credits. Funds to make new acquisitions and develop existing enterprises are expected to be raised through IPO. In December the company floated bonds to the amount of RUR 7 billion (7 million bonds at a nominal value of RUR 1000 with 5 years of maturity period). By the middle or end of the year, the company means to change over to international standards of financial accountancy.
Vulnerability
RussNeft recognized as the most rapidly growing company has two weak points. The first one pertains to the location of its assets. Its upstream, downstream and mid-asset enterprises are found in 17 regions of Russia and CIS scattered from Saint Petersburg to Sochi and from Novosibirsk to Minsk. But for all that, most of the crude oil comes from KhMAO, Urals and Volga region. The refineries are found in the Orenburg and Krasnodar regions, petrol stations are mostly in the area of Moscow. Such extensive geography prejudices the entire system of the company questioning whether the enterprises can operate successfully within a united structure. The second sore is associated with its low growth reserve, dispersion of numerous small oilfields scattered over a wide area of 8 regions (See ‘Reference Location of Reserves and Upstream at RussNeft OAO’). The rapid expansion of RussNeft in horizontal and vertical directions accompanied by the growth of oil production, reserves and profits is a sure sign of growth. Still there is a question about the nature of this growth and to which extent it accounts for the increase of oil production at already existing oilfields and in what way it is associated with new acquisitions. Comparing the data of 2004 and 2005 reveals that the old producers cover 50% growth of the company’s oil output. In 2004 and 2005, more than 100 exploratory wells were opened up throughout the company. Such active drilling resulted in the growth of oil production at most of the enterprises; it was especially high at Belye Nochi OOO, JV Chernogorskoye, Mokhtikneft OOO and others. In 2006 it is planned to increase drilling and come up closely to 20-25 million tons of annual oil production. This is the limit. To continue extensive development through new acquisitions is limited and at a loss. Further increase inside the company is unlikely due to meagre reserves, red ink and low profitability of the oilfields, no matter how much one drills. At Varieganneft OAO with the largest reserves, the oil production in 2005 went down, moreover, the results of 2004 reported a loss of RUR 576.172 million. Oil production at Benodet Investments Ltd. proved twice as low against what had been planned. Overall, 2005 oil production throughout RussNeft did not come to the expected 16 million tons. 2006 oil output has been revised as well followed by a reduction from 25 million tons to 20.6 millions. Making up the oil production with new reserves is limited due both to objective (low potential of RussNeft territories) and subjective reasons (according to 2005 data of the Central Dispatcher’s Supervisory Control, development of the capital investments allotted to exploration drilling is reported only by Varieganneft). For example, the administration of the Tomsk oblast pointed out that the three subsidiaries of RussNeft showed no growth of reserves in 2005. The main difference between RussNeft and other Russia’s vertically integrated companies lies in the absence of a big production center, which might serve as a moderator. To keep the oil production at a level of 25 million tons at least one more-or-less big reserve will be required. However, in the regions there are no such reserves, because the Urals and Volga region are depleted and Western Siberia is shared. Judging by the statements of the President, the company counts on developing upstream abroad. However, this is a matter of distant and uncertain future. At the same time in Russia lies fallow the land of Eastern Siberia. According to some data, meetings of Mikhail Gutseriev with Vladimir Bogdanov, head of Surgutneftegaz, have lately become more frequent. Maybe, the leaders meet to discuss the possibility of joining the efforts of the two companies in the region, which will become a bridgehead for Surgut to expand its business and a key for RussNeft to keep up its vitality for a long period of time.
14368 (subject to full annual oil production of all the companies)
According to the Fuel and Energy Complex Centralized Control, oil production amounted to 12172 thousand tons, subject to the dates of affiliation with RussNeft
Reference Region-Wise Location of Reserves and Upstream at RussNeft
Number of enterprises
Reserves in millions of tons
Crude oil recovery in millions of tons
KhMAO
9
330
7,6
Republic of Udmurtia
6
107
4
Ulyanovsk region
2
25
0,75
Penza region
1
6
0,2
Saratov region
1
22
1,2
Tomsk region
3
53
0,7
Novosibirsk region
1
2,5
0,08
Republic of Komi
1
9,5
0,2
According to the data of the Fuel and Energy Complex Centralized Control via Interfax, reserve estimates are informal and cited basing on incomplete information from RussNeft and other sources of N&GVertical.
