LONDON – Rosneft’s new joint venture in Venezuela is a step towards strengthening its international upstream operations, which could help improve the company’s operating profile in the long-term, Fitch Ratings says.
International growth will be important if the group is to offset falling production at its principal brownfield sites in Western Siberia and Central Russia. Joint ventures abroad could also provide Rosneft with valuable technical expertise.
Rosneft reported a 1.6% quarter-on-quarter fall in oil production in Q113 to 2.35 million barrels per day (bpd), excluding equity affiliates and TNK-BP. Virtually all of this production came from Russia, with 56% from one subsidiary in Western Siberia, where output dropped 1.7% on the previous quarter. We therefore consider Rosneft’s involvement in the oil-rich Orinoco Belt projects, with 195 billion tons of estimated oil resources, as an important long-term driver for its upstream operations and expansion abroad.
Rosneft already has upstream assets in Venezuela through a 24% stake in Junin-6 block, jointly developed with Petroleos de Venezuela (PDVSA), and through TNK-BP’s 16.7% stake in PetroMonagas S.A. in the Orinoco Basin. These projects don’t make a significant contribution to Rosneft, but Junin-6 plans to increase production to 50,000 bpd by mid-2013 and 450,000 bpd in 2018. The new joint venture agreed last week with PDVSA to develop a large hydrocarbon field in the Orinoco Basin is expected to produce 120,000 bpd by 2016 and eventually reach 400,000 bpd.
Russia and Venezuela have maintained good relations over the last decade. Some Russian companies, including Rosneft, have received access to assets that are out of reach of international peers. As Venezuela’s hydrocarbons are mainly sold onto international markets in U.S. dollars, Fitch does not see the possible further devaluation of the bolivar as a risk to Rosneft’s investments in the country.
The group’s other upstream plans abroad include greenfield gas projects on the Venezuelan shelf and a 30% interest in 20 ExxonMobil deepwater exploration blocks in the Gulf of Mexico. These projects, if successful, could provide the company not only with additional barrels of output, but also with valuable international experience, in particular in unconventional and deep water hydrocarbon exploration and production.
In a separate deal, Rosneft is reported to have agreed to pay $3 billion to take full control of Russian gas producer Itera, in which it already has a 51% stake. This demonstrates that the company is also keen to develop its gas business in Russia as part of a target of achieving 100 billion cubic meters (bcm) in gas production in 2020, up from the expected 41 bcm in 2013. Fitch rates Rosneft BBB/Rating Watch Negative and will resolve the rating watch once the agency has clarity on the capex plans of the combined Rosneft/TNK BP, as it stated in April. If Fitch anticipates net leverage will remain below 2.5x it will probably change the rating to BBB/Stable.