The Russian Oil & Gas Producers - Rosneft.

With a crude oil output of about 1.5m b/d, Rosneft is Russia's third biggest oil producer. The state-controlled firm raised its profile in late 2004 as it acquired YuganskNefteGaz (YNG), the main oil E&P unit of Yukos with an output of 1.06m b/d being pumps out of swamps around NefteYugansk - a town of 100,000 people near Surgut.

In its $10.4 bn initial public offering (IPO) on July 14 in Moscow and London - the biggest in Europe in seven years - Rosneft allocated the China National Petroleum Corp (CNPC) 66.22m shares in it worth over US$500m. CNPC bought those shares at the offer price of $7.55. CNPC said Rosneft had proven oil reserves of almost 19 bn barrels. CNPC had been seeking a bigger stake to gain more influence over Rosneft's E&P plans. Rosneft also sold shares worth US$1 bn to BP and US$1.1 bn to Petronas of Malaysia.

Shares in Rosneft had been initiated with a "neutral" recommendation and a US$7.60 price target at UBS. The Swiss broker said Rosneft had the highest production growth potential of all the Russian majors and the IPO showed the willingness of investors to buy into Russian resources. UBS said Rosneft was trading at a premium to all other Russian players and said it preferred LUKoil and TNK-BP.

Founded in 1992 and in operation since April 22, 1993, Rosneft was first intended to become the state's NOC in charge of the oil sector and associated gas and of the government's interests in joint E&P ventures involving foreign companies. On Sept. 29, 1995, Rosneft was re-organised as a joint-stock firm. Under a presidential decree, most of its valuable upstream and downstream assets were transferred to Sibneft, LUKoil and other groups. Its privatisation was delayed, while Rosneft was left with relatively smaller oil producers and three refineries.

The privatisation was approved in early 1998 and the government quickly prepared the sale of a 75+1% equity in Rosneft with an asking price of $2.1 bn. Western majors including Shell and BP and integrated Russian oil companies like LUKoil found the price far too high, as crude oil prices collapsed, and the sale was cancelled twice, in May and July of that year.

Under Putin's Presidency since 2000, however, Rosneft has been reinvigorated as a NOC and its CEO, Sergei Bogdanchikov, has increased investment for the firm to raise its oil production capacity from 265,000 b/d in mid-2000 to 330,000 b/d in mid-2002 and 440,000 b/d in 2004, compared to 1.6m b/d in 1993 when its upstream assets were much larger. Rosneft's second biggest producer after YNG is PurNefteGaz (PNG). Now PNG and smaller producers can pump up to 500,000 b/d. Rosneft still has over 120 oil and gas fields to be developed in various parts of Russia. Rosneft is a big producer of associated gas, with a notional capacity of 12.6 BCM/year. It intends to build up gas production to 50 BCM/y and looks set to become the first oil company to win prized access to Gazprom's jealously-guarded pipeline system for the local market and for export to Europe. Production would include non-associated gas to be extracted from huge fields in the far north. Rosneft is closely linked to the Kremlin.

On July 27, 2004, Igor Sechin, a Kremlin deputy chief of staff, became Rosneft's chairman of the board. His deputy on this board is Sergei Oganesyan, head of the Federal Energy Agency, a regulatory body responsible for the petroleum sector. Sechin is one of the most trusted political allies of President Putin and shares Putin's background in the security services. He is a key member of the formidable Kremlin siloviki that has occupied more and more places of strategic importance in the economy under Putin's reign. Sechin is one of the co-architects of the law enforcement drive against Yukos and its largest shareholders (see background in Vol. 63, OMT 7 & 8).

Rosneft has stakes in several ventures on and off the Far Eastern island of Sakhalin. In early August 1998 Rosneft secured a 33.3% interest in the Sakhalin-III venture which improved its position. Rosneft also has 20% in the ExxonMobil-led Sakhalin-1 JV, having sold half of its 40% stake in 2001 to India's ONGC-Videsh. (For background of the Sakhalin JVs see Vol. 55). BP and Rosneft on June 30, 2004 signed a shareholders' and operation agreement that gave the green light to the Sakhalin-V venture to develop oil and gas fields off Sakhalin. As part of the deal, BP funds some of Rosneft's development costs. Sakhalin-V holds 5-6 bn barrels of oil and 450 BCM of gas.

SevmorNefteGaz, a JV of Rosneft and Gazprom set up in 2001 to operate the 4.3 TCM gas giant Shtokmanovskoye (Shtokman) and the 2.78 bn barrel Prirazlomnoye oilfield in partnership with the Arctic JV RosShelf, is still working on development of these structures. Its contractor Sevmash (a former military shipyard). Shtokmanovskoye is being discussed with US and EU majors as a possible source of gas to be supplied to the US in LNG form (see Part 3).

Gazprom, Rosneft and SurgutNefteGaz (SNG) signed an accord on Jan. 24, 2004 to set up a consortium to develop big oil and gas fields in east Siberia. This is where petroleum production will shift from west Siberia in future. The group is to set up a system to supply gas to consumers in east Siberia and Yakutia. TNK-BP wants to join this group.

Rosneft and Gazprom are partners in the Kharampur gas field in west Siberia. Containing 757 BCM, the field is to be developed under PSA terms. Rosneft and Total are jointly exploring the Tuapse prospect and other blocks in the Black Sea. The Tuapse field is believed to have 1 bn tons (7.3 bn barrels) of oil.

RosNeft has an efficient network for the sale of oil products stretching from the Far East to European Russia and the far north. This includes 17 territorial oil products associations, 223 POL sites, and 1,580 service stations. Its refinery at the Tuapse terminal on the Black Sea is an important asset for export. The company has developed oil markets in other CIS countries and on the Black Sea and the Baltic basin.

RosNefteGaz is a state holding company. Among other things, it extracts and collects associated gas from Russia's oil fields. Its output will fall to 15 BCM/year by 2010.