Petrodollars: how the 3 will maintain investment levels and meet refinancing obligations ?

Yamal, Russia's gas megaplan, becomes symbol of sanctions defiance Fri, Sep 19 07:09 AM EDT image 1 of 3 By Katya Golubkova and Dmitry Zhdannikov MOSCOW (Reuters) - Dozens of Russian energy ventures are in jeopardy due to Western sanctions on technology and funding. Looming over them all, a giant project the Kremlin is bent on saving no matter what. The Yamal plan, a $27 billion investment to tap vast natural gas reserves in northwest Siberia, aims to double Russia's stake in the fast-growing market for liquefied natural gas. If it stays on track, it will also show the West that the world's largest energy industry is not cracking under sanctions. Russia has said it will make sure Yamal has the resources it needs to keep building. But that pledge will be tested: Yamal's gas is so far in the Arctic North that it requires specialised technology often provided by Western partners - many of which will not be able to operate because of the restrictions. And while Yamal's shareholders have already invested $6 billion in it, U.S. and EU action has now effectively cut off the Russian energy firm's access to Western lending. Nonetheless, bankers and analysts returning from a recent trip to Yamal said they were impressed by the project's status. Some said it was hard to tell that Yamal's controlling shareholder, gas firm Novatek, and its billionaire co-owner Gennady Timchenko were subject to some of the most severe U.S. and EU sanctions targeting Putin after he annexed Crimea in eastern Ukraine and lent backing to pro-Russia separatists. "I was astonished by the pace and amount of work that has been done," said Maxim Moshkov, oil analyst at UBS. Some 6,000 people are currently working on the project and the number will rise to 15,000 next year. "They work day and night... Having been there, I realised the project will most likely become a reality," Moshkov said. Andrey Polishchuk from Raiffeisen bank said: "They are building a new airport, storage tanks. Ships are coming to a nearby port one after another. Some are unloading goods, some are waiting to unload". POWERFUL PARTNERS Yamal has powerful partners - French oil major Total and China's CNPC. Total said this week that despite the sanctions it would not be stopping work on Yamal and has suggested that, given Europe relies on Russia for a third of its gas, it would be risky to slow down the project. Yamal will start exports from 2018 and has already pre-sold most of its future output to buyers in Europe and Asia. It will ultimately export 16.5 million tonnes of LNG a year - equal to 6 months of French gas consumption. Novatek, along with gas monopoly Gazprom, has so far escaped European sanctions, but the fact that it is on the U.S. sanctions list makes it almost impossible for it to raise money for the project. So Total is still clear to participate in Yamal. But its ability to finance its share in it through U.S. or European banks has been drastically limited. "Can we live without Russian gas in Europe? The answer is no. Are there any reasons to live without it? I think - and I'm not defending the interests of Total in Russia - it is a no," Total boss Christophe De Margerie told Reuters. Timchenko, co-owner of Novatek, is also a force to be reckoned with - his closeness to Russian President Vladimir Putin giving him heft even as it makes him a target for sanctions. In March 2014, the United States slapped the first round of sanctions on him, explaining: "Timchenko's activities in the energy sector have been directly linked to Putin". Putin subsequently made Timchenko Russia's point person for business relations - including the development of key gas projects - with China. Timchenko has said China, which has a 20 percent stake in Yamal through CNPC, has agreed to lend $20 billion before the end of 2014. But there is still work to do to win that loan. "We have had communications from higher management over compliances that we shall strictly follow international rules," a Chinese banking executive told Reuters on condition of anonymity given the delicate nature of the negotiations. "Basic principles are - we shall not deal with entities that are sanctioned...We don't want the U.S. to find excuses to give us trouble." SUPPORT FROM HOME If China can't put up the money, Putin is likely to. The Russian government, which has accumulated the world's third largest forex reserves of $460 billion, has said it will invest money in profitable projects which can guarantee hefty payouts to state coffers in the future. Various officials have pledged support to Gazprom, state oil firm Rosneft and pipeline and railway monopolies Transneft and RZhD. And Prime Minister Dmitry Medvedev told Novatek's chief and co-owner Leonid Mikhelson that Russia would support other companies too, irrespective of their ownership structure. "Should (their Chinese lending) plan fail, they can count on state support. The government has made it clear it will not allow it to fail," said a Western oil executive close to the project. The crunch point for Yamal will come next year when France's engineering firm Technip needs to deliver the core liquefaction plant - technology that Russia is lacking. Technip told Reuters this week it was moving forward with the project. It had earlier warned about the risks to its income from sanctions on Russia. If Technip should run into difficulties - the pace at which sanctions have evolved in the past months suggests more could yet be in the offing - Russia might be able to source the technology from China, which has in recent years become able to design and build large LNG plants. "There might be an opportunity lurking in terms of supplying our own gas liquefaction technology," said an engineering executive at CNPC. (Additional reporting by Aizhu Chen, Vladimir Soldatkin, Denis Pinchuk and Sandrine Bradley; Editing by Sophie Walker) ============ Sanctions against Russia could spur $150 oil – Former BP chief Published time: September 15, 2014 08:53 Edited time: September 15, 2014 11:53 Get short URL Reuters/Stefano Rellandini Oil, Russia and the global economy, Sanctions Western sanctions against Russia, coupled with ongoing political instability in Libya and the advance of ISIS militants in Iraq, could leave the global oil supply exposed and push up oil prices to $150 per barrel, former BP chief Tony Hayward has warned.

The former CEO of BP and now chairman of Glencore Xstrata said the recent boom in US shale production has painted an unrealistic image of the world’s global oil supply, and created a false sense in energy security. “The world has been lulled into a false sense of security because of what’s going on in the US,” Hayward said in an interview with the Financial Times. The hydraulic fracturing boom in the US began in 2008 and has increased US crude output by 60 percent, but Hayward warned it could wane. “When US supply peaks, where will the new supply come from?” Hayward said. Instability in oil producing countries in the Middle East, such as Libya and Iraq, in theory would have driven up oil prices to $150 per barrel, had it not been for the new supply from North America.

So far, Brent crude has fallen from about $108 a barrel at the start of the year to about $97 today. Hayward said oil supplies from the North Sea and Alaska are nearing maturity, and the world oil supply is dependent on new wells in places such as Russia, Iraq, and Canada. Rosneft's Bazhenov field may be even larger than the North Dakota Bakken shale shelf, which currently produces 1 million barrels of oil per day and has brought about the shale revolution in the America. Sanctions may stymie output Russia, the world’s second-largest oil producer, outputs about 10.5 million barrels of oil per day, shy of the record from the Soviet era. His comments followed decisions from the EU and US to widen sanctions against Russia on Friday, targeting state-run and private oil and gas companies, including Gazprom, Rosneft, Transneft, and Lukoil. They can no long obtain US or EU technology or equipment for extracting deep water, Arctic, or shale oil. Analysts believe there will be no sudden shock to the Russian oil and gas industry, but that future projects and long-term development are at risk. “Because of financial sanctions, the big gorillas are going to start cutting their activities,” Hayward said, speaking about Russian companies. The sanctions will also create problems for Western companies like Exxon Mobil, BP, Shell and others, who have joint ventures worth billions in Russia. ExxonMobil, for example, has a joint venture with Rosneft to explore Russia’s Arctic, and also owns a 19.75 percent stake in the company. ======== Petrodollars: What do Russian oil companies do in the wake of sanctions? By Rosemary Griffin | September 15, 2014 12:01 AM Comments (0) Sanctions against Russia are moving closer to the country’s big oil companies. In this week’s Oilgram News column Petrodollars, Rosemary Griffin looks at the choices that companies such as Rosneft face. ——————————- EU sanctions introduced Friday limit some state-owned Russian oil companies’ access to European financing in a move that could drive Rosneft, Transneft and Gazprom Neft to look to alternative sources. The US added to the Russian oil sector’s woes later in the day, by further restricting Rosneft’s access to US financing, as well as blocking its four biggest crude producers from accessing technology essential to Arctic, deepwater and shale oil technology. In the short term, analysts see the latest measures as unlikely to significantly change the financial profile of the big three oil companies targeted, as previous sanctions had already seriously restricted Russian companies’ access to Western capital markets. But the measures have fuelled debate on how the three will maintain investment levels and meet refinancing obligations going forward. Company representatives declined initial comment, but analysts’ see Rosneft, with its significant debt portfolio as the most exposed to the latest restrictions. Rosneft has been on something of a spending spree in the past two years, most significantly swallowing up what was Russia’s third largest crude producer TNK-BP in 2013, in a mega-deal which saw Rosneft hand over a combined total of over $30 billion to former shareholders AAR and BP. Analysts estimate that Rosneft needs to refinance around $29 billion over 2014 and 2015. It has around $18 billion in cash to cover refinancing this year if necessary, and is expecting its cash flow to be boosted by pre-payments coming in next year. Rosneft holds a key position in the Russian economy, with the government highly likely to intervene if it seems to be in any kind of trouble, something officials have confirmed in recent weeks. Russian Prime Minister Dmitry Medvedev said that the government is looking into ways to support the company to maintain investment and production levels. Rosneft already asked for a massive Rb1.5 trillion (around $42 billion) injection from the state’s national welfare fund in mid-August, but whether the government will stretch quite so far, or promise to underpin all of the company’s ambitious capex plans, remains to be seen. ——————————- Meanwhile, analysts estimate that Transneft needs to refinance around $3 billion of debt in 2014/2015. The company has around $10 billion on its books, and some analysts have pointed to its smooth repayment schedule of around $1.4-$1.5 billion/year over the next few years, as well as its relative flexibility to cut investment compared to most other majors, as key advantages in dealing with the latest restrictions. If it does get into trouble, Transneft is likely to follow Rosneft’s approach. As the company responsible for crude and oil products shipments across Russia, it is a priority for the Russian government to build out infrastructure, particularly to boost crude movements to China. If the government balks at direct cash injections, it could also grant the company greater flexibility in imposing tariffs on its transportation services, although the government has attempted to limit state-owned companies’ tariffs in recent years. The two state-owned giants could also look to Asian partners to meet any shortfall in financing. Rosneft has already offered Chinese partners a direct stake in its most promising greenfield project in East Siberia Vankor, which analysts see as a direct consequence of financial pressure from Western sanctions. Asian investors are already present in many Russian projects and have said they are interested in opportunities arising from Russia’s shift in focus to Asian markets. They are likely to drive a hard bargain though, if Russian companies seem desperate to sell off stakes in their prize assets in return for financing. For Gazprom Neft the situation is slightly different. Some analysts see the company as less exposed as its refinancing requirements in 2014/2015 are estimated to be the smallest of the three, at $2 billion. The company has an estimated $3 billion in cash. Furthermore Gazprom was planning to scale back its investment program from next year, initially by around 10% year on year in 2015. There are indications that company is concerned about how sanctions could impact its financial operations, however. Gazprom took a significant hit from currency conversion rates this year, suffering a Rb5.3 billion (around $143 million) loss on its dollar-denominated debt in the first half, more than double equivalent losses in the same period of 2013. Some analysts believe restricted access to Western capital markets could drive the company’s bid to raise the proportion of its ruble-denominated debt and turn to domestic lenders. In the summer it was also the first Russian oil company to raise the prospect of shifting supply contracts away from the dollar to other currencies, such as the ruble or the euro if the situation continues to worsen.— Rosemary Griffin in Moscow