the RUSSIA oil & gas competitive intelligence report - Report Buyer

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Russia Oil and Gas Competitive Intelligence Report 2010 Russneft Company Analysis SWOT Analysis Although a relatively small producer by Russian standards, Russneft is well integrated with upstream oil assets, two refineries, service stations, and a fuels terminal. While this means the company is relatively safe from crude oil price fluctuations, the company’s main challenge during the late 2000s has been dealing with state influence and legal disputes. Following its acquisition by Sistema in 2010, these problems now appear to be over for Russneft, giving it the chance to stabilise its declining crude production. With the threat of a merger with Bashneft in the future, the company’s independent existence seems to be at risk. Strengths: Integrated upstream and downstream Diverse upstream oil portfolio Financial Statistics Revenue: • RUB116.14bn (2009) • RUB137.10bn (2008) • RUB113.70bn (2007) • RUB102.45bn (2006) Net Profit : • RUB15.57bn (2009) • RUB10.58bn (2008) • RUB12.25bn (2007) • RUB9.94bn (2006) Operating Statistics Refining Capacity: • 132,594b/d (2009) Oil Production: • 254,942b/d (2009) • 286,082b/d (2008) • 281,260b/d (2007) • 296,328b/d (2006) Weaknesses: Declining oil production Oversupply in CEE refining capacity Opportunities: Growth in Russian oil production Rise in CEE regional oil consumption Threats: Vulnerable to state influence Large state-run competitors Market Position Russneft, one of Russia’s largest privately owned energy companies, was formed in 2003 when its owner Mikhail Gutseriyev left Slavneft and purchased some of its assets. Russneft produced 255,000b/d in 2009. It has 30 separate upstream operations split into four groups – West Siberia, Ural, Povolzhsk and central Siberia – and has recoverable reserves of 4.6bn bbl. In the downstream, Russneft also owns two refineries: the 132,594b/d Orsknefteorgsintez plant in Orsk (Orenburg) which produces fuels and the Neftemaslozavod plant which it acquired from TNK-BP in 2005 and is dedicated to producing lubricants and protective rustproof compounds. In 2009 the Orsk refinery © Business Monitor International Ltd Page 53
Russia Oil and Gas Competitive Intelligence Report 2010 processed about 105,000b/d, giving it a utilisation rate of less than 80%. The company also owns a network of 96 petrol stations (end-2009) and a crude oil terminal producing 140,000-b/d in the Bryansk region. Russneft was breaking the mould of an increasingly state-dominated industry, until its shares were frozen by a district court in August 2007, after owner Gutseriyev was charged with tax evasion. Gutseriyev then sold the company to a Basic Element (Basel) investment vehicle controlled by Oleg Deripaska, a major businessman generally seen as a Kremlin ally. The Kremlin's removal of an international search warrant for Gutseriyev in November 2009 enabled Russneft’s founder to resume ownership of the company. In January 2010 Gutseriyev agreed to take over Russneft from Deripaska, in return for assuming the company's US$6bn worth of debts and US$600mn in cash. Strategy Now that Gutseriyev's relations with the government have apparently been mended at present, we expect the businessman's extensive experience in the oil sector to spur Russneft's development in the next few years. Following his return, Gutseriyev agreed to farm out 49% of Russneft to conglomerate Sistema for an undisclosed amount. The Russneft stake will allow Sistema to balance out its downstream-heavy portfolio, helping it fill its refineries. In May 2010 Gutseriyev said Russneft was considering merging with Sistema subsidiary Bashneft in two to three years. According to Gutseriyev, the merged company would then conduct an IPO. He added that Russneft intends to increase its annual oil production to 400,000b/d of oil in the next few years and to make an annual profit of US$1.5bn (RUB45.9bn). Recent Developments In September 2010 Sistema announced the process of restructuring Russneft’s debt was nearly complete. The announcement followed remarks by Sistema President, Leonid Melamed, in May 2010 that once Bashneft covers debts of US$7bn, Sistema would allow the two companies to merge. In August 2009 Russneft and its partner MOL settled an internal dispute over the jointly operated Zapadno-Malobalykskoye (ZMB) field in West Siberia. According to the Interfax news agency, Russneft agreed to pay RUB6.3bn (US$201mn) debt for the oil it bought from ZMB. Although the settlement has diffused internal tensions, Russneft's stake in the project remains threatened by a competing ownership claim from Rosneft. Gazprom Neft suspended talks over the purchase of Russneft in April 2009. Gazprom Neft appears to have baulked at Deripaska's reported valuation of the company, according to Vedomosti’s sources. Gazprom Neft wanted to buy Russneft by assuming its debt, which is estimated at US$5.6bn, while Deripaska valued the company at US$7.5-8bn, excluding debt. The negotiations broke down after the © Business Monitor International Ltd Page 54
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