CEFC buys into Rosneft in landmark US$9.1bn deal

14 September 2017, Week 36, Issue 660

CEFC China Energy, a Shanghai-based oil and financial conglomerate, has snapped up a stake in Russia’s biggest oil producer, Rosneft, in a deal worth US$9.1 billion.

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The agreement will see CEFC take a 14.16% position in the Russian major from Qatari state fund QIA and Swiss trading giant Glencore, leaving them with 4.7% and 0.5% shares respectively. In a statement, Glencore said it would receive a premium of around 16% to the 30-day volume weighted average price of Rosneft shares. A spokesman for CEFC told Reuters that the company would pay a total of US$9.1 billion to the pair of sellers. According to the Chinese firm, Beijing’s state economic planning agency, the National Development and Reform Commission (NDRC), has already given its preliminary approval to the purchase. Russia’s Federal Anti-monopoly Service (FAS) is currently reviewing the deal, although opposition is viewed as unlikely. Neither Rosneft, CEFC, Glencore or QIA have said when they expect the deal to close.

Deepening ties

The purchase will mark China’s biggest energy investment in Russia to date, and its second biggest internationally after CNOOC Ltd’s US$15.1 billion purchase of Canada’s Nexen in 2013.

Little is known of the buyer’s ownership structure and, while CEFC is listed as a private company, it has often aligned itself closely with Chinese government policy.

“We closely follow the national strategies. So we’ll map out our corporate strategy according to the national ones,” chairman Ye Jianming, who founded the group in 2002, said in a 2016 interview with Fortune.

From humble beginnings as a minor fuel trader, CEFC has evolved into a sprawling energy giant with interests in upstream projects, terminals and storage in Central Asia, the Middle East, Europe and Africa. Last year it posted more than US$43.7 billion in revenues and US$740.9 million in profit, according to Fortune.

The investment in Rosneft will grant CEFC access to around 840,000 bpd of oil production and 20 billion barrels of proven and probable oil and gas reserves. More broadly, the deal will deepen ties between the world’s biggest oil and gas producer and the second largest energy market. It is underpinned by a long-term crude deal struck between CEFC and Rosneft in September 2016. Moreover, the acquisition could serve as a springboard for further CEFC investments in Russia’s oil and gas industry.

In recent years, Rosneft has sought financing from state-owned China National Petroleum Corp. (CNPC) and Sinopec to bankroll its major oilfield projects in Eastern Siberia, including Vankor, Yurubcheno-Tokhomskoye and Srednebotuobinskoye. By and large, these efforts have failed, as have attempts to secure Chinese state support for key downstream developments.

In June, however, the Russian major managed to close the sale of a 20% stake in the Verkhnechonskoye field in Irkutsk Oblast to China’s state-run Beijing Gas Group (BGG).

“A direct stake in Rosneft will make CEFC China the main driver for the relationship of Rosneft with China, ahead of CNPC, Sinopec and Beijing Gas,” Wood Mackenzie analyst Christian Boermel said in an emailed statement. “CEFC China could soon take stakes in Rosneft projects, either in cash-intensive upstream projects or in the downstream.”

Rosneft dominates Eastern Siberia, home to many of Russia’s largest untapped oil and gas fields. CEFC could be invited to take a greater role at a number of these developments, as well as some of Rosneft’s leading downstream projects in the region.

The art of the deal

The decision by Glencore and QIA to roll back their position at Rosneft comes just nine months after the pair bought into the oil champion in a 10.2 billion euro (US$12.2 billion) privatisation deal.

Moscow was seen as rushing the sale of the 19.5% stake in order to help finance its 2016 state budget, which had come under pressure from shrinking oil revenues. In particular, the deal was criticised for its opaque and complex structure.

Italy’s Intesa Sanpaolo bank pledged a loan of 5.2 billion euros (US$6.2 billion) to fund the purchase, with Qatar contributing 2.5 billion euros (US$3 billion) and a further 2.2 billion euros (US$2.6 billion) arriving from undisclosed Russian banks. Glencore contributed only 300 million euros (US$359 million) of its own funds. But Intesa reportedly ran into trouble syndicating its loan in light of fresh US sanctions against Russia rolled out in August, which prompted many Western banks to steer clear of the deal.

Despite its hasty departure from such a major investment, Glencore appears to have come out on top.

Even after offloading most of its stake, the trader’s remaining 0.5% of Rosneft shares is worth around 250 million euros (US$299 million) according to the oil company’s current market capitalisation, only 50 million euros (US$60 million) less than its initial spend.

As part of the December 2016 agreement, Glencore also struck a lucrative five-year supply deal with Rosneft for 400 million barrels (220,000 bpd) of Russian crude. A senior source close to the transaction told Reuters this week that this supply arrangement would remain in force even after CEFC’s entry.

Essentially, Glencore was able to land a major supply contract at limited cost. In comparison, the trader and its rival, Vitol, had to lend Russia US$10 billion in 2013 in exchange for a deal for 490 million barrels over a five-year period. This agreement had been due to expire in 2018, and without a replacement, Glencore risked losing trade to its competitors.

Edited by

Andrew Kemp

Editor

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