Russia Monitor is a review of the most important events related to Russian internal and external security, as well as its foreign policies.
Date: 15 February 2021
A Record-Breaking Deal in the Russian Oil Sector
Only recently has it been made public that Rosneft and NNK, a firm owned by Eduard Khudainatov, were involved in a deal to purchase oil fields in the Taymyr peninsula. In fact, it is all about swapping oil-rich deposits of crucial importance for Rosneft’s flagship project and already drilled fields elsewhere in Russia. While Rosneft is building up its Vostok Oil project, NNK becomes one of the Russian top oil producers. Both the current CEO of Rosneft (Igor Sechin) and its former president (Eduard Khudainatov) can be satisfied with the deal. Sechin purchases oil deposits far below their actual value – and so does Khudainatov.
It is the biggest transaction since the sale of TNK-BP was sold in 2013. Rosneft will pay $11 billion to its former president to purchase oil-rich fields in Taymyr. In its financial report for 2020, the biggest Russian oil company wrote it would buy from Khudainatov companies with licenses to produce oil in some fields with total proven deposits estimated at 1.2 billion tons. It is about purchasing Taymyr Neftegaz and other companies having drilling rights at the Payakha and Irkinsk oilfields and some others. The deal is complex and provides that Khudainatov will spend part of $1.4 billion that Rosneft paid on its already developed mining and service assets. Most settlements were made back in 2020. In consequence, Rosneft has a 90 percent stake in Taymyr Neftegaz. In 2021, the state-run firm should pay the remaining $1.4 billion to the Independent Oil Company (NNK), a business owned by Khudainatov, and sell its assets for $1.1 billion. $11 billion is a considerable sum for Rosneft. Where did it get the funds? Possibly the Russian oil giant got the money after trading a 10 percent stake to the oil trader Trafigura in December 2020, a deal worth some $8.5 billion. Buying oil assets from Khudainatov fits into implementing the Vostok Oil project. Oil deposits in the Payakha field will serve as the source of raw material for Rosneft’s flagship project. Rosneft has estimated its proven resources at 6 billion tons. The expected oil production capacity is 100 million tons per year. For this, Rosneft secured tax reliefs upon Sechin’s request to the Kremlin for tax deductions for developing the oilfield. Vostok Oil is worth some $70 billion, according to the estimates from Bank of America.
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Interestingly enough, the four largest accounting firms (PWC, EY, Deloitte, and KMPG) estimated the value of the assets sold by Khudainatov at between $30 and $40 billion. Allegedly, however, Khudainatov gave a massive discount, arguing it was a “country-related risk,” as Russian oil assets are cheaper than elsewhere in the world. The deal must come as a surprise. The reason behind selling Taymyr assets three times cheaper than its market value is the second part of the deal between Rosneft and Khudainatov. With it, Rosneft can trade some of its unwanted assets, though also below their value. Only two of them – Varyeganneftegaz and NNP – were earlier estimated at between $3.5 billion and $4.5 billion. NNK paid roughly $1.4 billion to purchase all these from Rosneft. All businesses that Rosneft sold to Khudainatov are said to hold 1 billion tons of oil, with their annual production standing at between 10 and 14 million tons of oil and 4 billion cubic meters (bcm) of gas, according to Rosneft officials. Once Rosneft sold them, its output of liquid hydrocarbons is likely to shrink by some 5 percent compared to 2020. At the same time, the Independent Oil Company will tremendously boost its production that now stands at 2 million tons of oil per year. If the oil company manages to restore output in Varyeganneftegaz, which dropped fourfold in 2020 amid OPEC+ curbs, its total production could grow from 2 to 21 million tons of oil. Otherwise, this would mark a boost from 2 to 11 million tons. Thus, Khudainatov’s NNk will earn a market position similar to that of Mikhail Gutserev whose Russneft and Neftis have a joint annual output of 14 million tons.
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