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ANALYSIS: What's up with Rosneft?

Chevron is the latest IOC to part ways with the state-backed firm

Chevron's exit follows similar breaks with BP and ExxonMobil. GETTY IMAGES
Chevron's exit follows similar breaks with BP and ExxonMobil. GETTY IMAGES

Rosneft's hopes of building an international reputation through partnerships with supersized IOCs was dealt another blow on Saturday as Chevron confirmed its exit from their joint $1bn project with the Russian state-back firm in the Black Sea. Rosneft cited a "categorical disagreement with Chevron's geologists," accoring to AFP.

Chevron's exit follows abortive exploration deals with Exxon and BP.

Andrew Neff, Russia and CIS energy analyst at IHS Global Insight, examines the fallout from the latest abortive Rosneft partnership.

State-run Russian oil giant Rosneft held its annual general meeting (AGM) on Friday (10 June) in the city of Krasnodar, and while shareholders carried out a modest agenda in conducting company business, it was the comments made after the AGM by Eduard Khudainatov, Rosneft's president, that generated the headlines.

In particular, Khudainatov acknowledged that Rosneft's partnership with Chevron to develop the Val Shatsky ridge in the Russian sector of the Black Sea was essentially dead.

Reports in March suggested that the partnership was "on the rocks", but Khudainatov clarified that Chevron has now pulled out of the project altogether following what he termed "some disagreements" between the two companies (see Related Articles).

Rosneft and Chevron inked the exploration agreement for Val Shatsky last June, but as much as Chevron was keen to make the partnership work—given the United States' supermajor's miniscule portfolio in Russia relative to its peers—the two sides failed to see eye-to-eye on the size of the resource base at Val Shatsky.

The Wall Street Journal, citing a source familiar with the issue, reported that Chevron cooled on the project after realising that the geology of the Val Shatsky reservoir was more challenging than the company initially had thought.

Moreover, Chevron, which was only slated to have a 33% stake in the operating company for the project, was not happy with the commercial arrangements for the USD1-billion venture, under which Chevron was to carry all of the exploration costs.

Khudainatov said that "Chevron still wants to work with us on offshore projects", but it appears that Rosneft will be looking for a new partner to develop Val Shatsky, which is estimated to contain 6 billion barrels of oil.

ExxonMobil, which earlier this year signed an exploration agreement with Rosneft for the adjacent Tuapse Trough, is one possibility, as is France's Total, which lost out to Chevron last year in the competition for Val Shatsky.

In the wake of Rosneft's failed attempt to complete a share-swap and Arctic exploration alliance with BP, however, news of Chevron's withdrawal from its Black Sea exploration partnership with Rosneft could not have come for a worse time for the Russian oil firm as it attempts to build up its offshore expertise and cement its credentials with foreign players.

Rosneft Undaunted

Nevertheless, Rosneft is not backing down from its ambitious plans for international expansion. Even as the Russian firm's efforts to establish lasting partnerships with multi-national oil firms at home have faltered over the past month, Rosneft's top management is confident that the company can find new partners and realise an audacious goal of adding USD100 billion in market capitalisation within three to five years.

Khudainatov said that Rosneft believes this is achievable with the successful introduction of several strategic initiatives to improve the company's efficiency and develop more of its untapped resource base, which is among the largest in the world.

Khudainatov said that Rosneft, which has reserves of 22.765 billion barrels of oil equivalent as of end-2010 and has a current market valuation of approximately USD95 billion, is seriously under-capitalised now and plans to take measures to significantly boost its market value in the next few years.

Outlook and Implications

To that end, Rosneft plans to continue to look for partners to help the company develop its Arctic licences. It does not appear that BP is one of the options for partners any more, however, as Khudainatov—echoing comments made by BP's CEO Bob Dudley last week—said that Rosneft no longer sees any potential to resuscitate the moribund deal that expired last month when BP was unable to buy out its Russian partners in TNK-BP.

Khudainatov said that Rosneft is looking forward, not back, and that the Russian oil firm—while disappointed in the failure of the BP deal—has no plans to take legal action in court against BP over the USD16-billion share swap that was not completed.

In another sign that Rosneft is turning over a new page, the company's board of directors on Friday formally replaced Russian deputy prime minister Igor Sechin as the oil company's chairman.

Sechin, Russia's top energy policymaker and one of the main proponents of the BP-Rosneft deal, stepped down as Rosneft chairman in late March in compliance with Russian president Dmitry Medvedev's call for top government officials to exit the boards of directors of state-run firms.

To replace Sechin, the Rosneft board unanimously elected Alexander Nekipelov as chairman of the board. Nekipelov, a vice-president of Russia's Academy of Science, had taken over as acting chairman of Rosneft's board in April.

Nekipelov, highlighting Sechin's influential role in the development of Rosneft, said that the Russian deputy prime minister's departure from Rosneft's board would create "risks" for the company.

After the failures of the BP and Chevron exploration deals, however, the Russian company and its reconstituted board of directors will be looking to focus more on the opportunities ahead of them.

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