Chinese expansion plans cover upstream, refining and distribution
Rosneft's CEO Sergei Bogdanchikov revealed further details of the company's plan to expand its business in Asia during a press conference in Beijing on Friday, Interfax reports. According to the CEO, developing the strategic partnership with Chinese state-owned CNPC and utilizing the recently formed Rosneft/CNPC joint venture Vostok Energy, the companies could produce at least 10mn tons of oil (73mn bbls) per annum in three to five years, using the new East Siberian prospects as the main oil source and the East Siberian Pacific Ocean pipeline as the major transportation route.
Bogdanchikov also noted that a new JV aimed at creating a refining and distribution chain in China may be formed later this year. The yet-unnamed venture would focus on building a 10mn ton capacity refinery and more than 300 retail stations in mainland China, bringing Rosneft closer to end consumers and allowing the company to capture retail margins.
Friday's comments by the Rosneft CEO also highlighted the company's potential to raise its crude exports to China from the current 13mn tons to more than 20mn tons per annum using oil produced at Sakhalin-1, the Kazakhstan pipeline Atasu-Alashankou (4.5mn tons estimated annual capacity), and railroad transportation through Mongolia. Bogdanchikov stated that any increase in crude flows to Chinese markets would hinge mostly on the economic viability of the sales and be based on the competitiveness of crude pricing and other costs. An optimal choice of the direction of sales between Asian and European markets could boost the company's margins and raise its profitability, although the current economic impact remains vague.
In other news, Rosneft's share in Yukos' debt increased by $129mn, following the Moscow Arbitration Court's approval of the additional claim submitted by Rosneft. The company's total debt stake approved by Russian courts is now estimated at $9.7bn, with $450mn more confirmed in Europe, which is 1.3% higher than previous estimates. We see the news as slightly positive for the company.
While the exact economic impact of the Chinese expansion remains unclear, the recent statements confirm Rosneft's expansionary drive. In combination with the implicit and explicit support of the state, this to us implies that in a few years' time the company could materially boost its scale and value. Our recommendation for Rosneft is Buy, with an end-2007 fair value of $10.4.