Tim Gosling in Moscow -
Out of the blue, Rosneft agreed a strategic cooperation agreement with US major ExxonMobil on August 30. Although details remain sketchy, the signing attracted a host of top Russian officials who hope it will prove the fillip to the investment climate they thought would be provided by an aborted deal with BP.
The agreement will see the two companies launch a $3.2bn exploration joint venture on Russia's Arctic shelf, as well as other regions. Meanwhile, Rosneft will get access to Exxon projects in the US and other countries. The value of investment generated by the deal could swell to as much as $500bn, according to Russian Prime Minister Vladimir Putin - a figure he described as "scary," according to Bloomberg.
Analysts agree that due to the long time horizon on the projects - thought to be around 20 years or so for those in the Arctic - and the lack of a share swap element, the deal will do little to improve Rosneft's valuation for now, especially as details are lacking. Rosneft didn't disclose the source of funding, the structure of the new JV, or even the timing. As Alexei Zabotkin of VTB puts it: "the quantitative parameters of the deal are scarce and, hence, the impact on the fundamental value of Rosneft's investment case is still elusive."
Open for business
However, the news is clearly a boost for Russia's investment image, something the government had hoped to achieve from a similar deal struck with BP at the start of the year, but which was scuppered amidst an avalanche of negative headlines earlier this year.
That proposed deal earned BP the nickname "Bolshoi Petroleum" in some quarters in the US, and Oleg Maximov at Troika Dialog worries about similar resistance in Washington, suggesting "there will be some noise on the partnership from the US Congress on the back of the Yukos legacy, as we heard during the first deal with BP back in January."
Also positive for Russia is that the deal will bring international expertise to help develop the country's huge shale oil reserves, with Rosneft to work with Exxon on deposits in Texas and joint projects to exploit tight oil reserves in West Siberia.
At the same time, a side story to the deal is more worrying for investors. The sudden announcement came on the back of an 11% rise in Rosneft stock over the previous couple of days, apparently making a mockery of legislation against insider trading that was finally passed early in the year after years of waiting.
Second time lucky?
Rosneft opened the year announcing a $16bn deal with BP that would see the British company offer its experience in offshore drilling and access to international assets in return for a slice of Russian reserves in the Arctic. That deal was also heralded as a boost for Russia's investment image, as BP made a huge commitment to invest in Russia. Such a large deal illustrated how safe an investment destination the country is, so went the theory.
However, the dream quickly turned into a nightmare. The deal eventually collapsed after months of legal wrangling between BP and the oligarch partners in its existing Russian joint venture TNK-BP, producing a crop of headlines in the process about why no-one should be foolish enough to invest in Russia.
Hence, the smile on Putin's face as he welcomed another investment in the country by Exxon - especially given the US major has been at loggerheads with the Kremlim for some time over where, China or Gazprom, the gas from its Sakhalin-1 venture should go. And Deputy Prime Minister Igor Sechin said the terms offered by Exxon were "significantly better" than those offered by BP.
Tempted by Russia's huge reserves, Exxon has agreed JVs to explore the East Prinovozemelskiy Blocks 1, 2 and 3 in the Arctic Kara Sea, and the Tuapse License Block in the Black Sea, reports RIA Novosti. Joint operations to develop oil deposits in West Siberia have also been agreed. As is the norm now, Rosneft will hold 67.7% in the ventures, a split which will rule out the PSA squabbles that have blighted so many deals with international majors in the past few years.
Although the deal does not include an equity swap like the aborted BP one, Sechin said he did not rule out the possibility in the future. Thanks to the likely resistance in Washington, few analysts expect to see Rosneft offered a slice of the US major, but Maximov points out that it means, "ExxonMobil may be well positioned to participate in Rosneft's slated privatisation, when and if it takes place."
In addition, Rosneft will have access to Exxon projects in the US Gulf of Mexico and Texas, as well as in third countries. That option for international access has been a vital element for the Russian company in discussing these mega-deals recently, given the opposition to Russian ownership of strategic resources in much of the world.
As much as the value addition, the international projects will offer Rosneft essential technology and experience to help it exploit offshore projects at home, which represent the bulk of Russia's untapped reserves. "The deal is a win-win," reckons Ron Smith at Citigroup Global Markets, "with Rosneft... gaining access to technology and project expertise to tackle both deepwater Black Sea and the Arctic offshore opportunities, as well as tight oil plays in West Siberia already in its portfolio, all of which would have difficult to impossible to tackle without a Western partner. ExxonMobil will gain access to reserves heretofore off limits to it."
In the know
The only dampener on proceedings was suggested by a trader at Citigroup, who noted that Rosneft's shares had gained 11% in the two days proceeding the announcement, which came out of the blue without media reports of the negotiations.
In fact, trading volumes in Rosneft stock on the RTS look to have picked substantially starting in June, peaking on July 8 on volume of RUB2.23bn - or around three times the average in the last 12 months - in just 72 deals, suggesting someone was buying some unusually large batches. "So much for ban on insider trading," lamented the Citigroup trader, adding, "I think we will start seeing sellers on the news soon, as analysts unlikely to massively up their estimates on the back of this."
However, Zabotkin suggests that the deal itself could offer an additional boost for sentiment for oil stocks at large. "This event will be well received by global markets as new horizons will open," Putin said at the signing, while failing to offer any specifics on the "scary" $500bn figure he volunteered for the eventual investment volumes between the two companies. However, his main hope is that it will make investors into Russia feel safer.
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