Field/project development

Rosneft Eyes Major Role in LNG as It Sheds Redundant Oil Assets

Russia’s largest oil company is moving quickly to shed underperforming brownfield assets to raise capital and transform itself into a major LNG player this decade. The state-owned giant is making the move as natural gas positions itself for a growing role in the energy transition.

Sovcomflot’s LNG carrier Christophe de Margerie completed the world’s first-round trip transit in January of the Northern Sea Route (NSR); a voyage considered historic given that the NSR opens only in July and closes in November when ice obstructs sea-lanes. The Russian LNG carrier delivered cargo from the Kara Sea to China earlier this year.
Source: Sovcomflot.

Rosneft’s planned sale of three underperforming oil assets by the end of May has a lot more to do with Russia’s desire to dominate future LNG markets globally, than it does any routine tweaking of the company’s portfolio.

Russia’s largest oil producer (in which BP holds a 19.75% ownership stake) has made no secret of its LNG ambitions. Rosneft and BP cooperate under a “Strategic Gas Partnership” created in 2017 to “jointly implement gas projects in both Russia and abroad, focused on gas exploration and production, LNG production, supply and marketing,” according to BP’s website.

The reason for cooperation is obvious as analytical forecasts are clear that, while oil is on the way out, the demand for natural gas in all of its forms—including as a feedstock to produce blue hydrogen—will grow and play the lead role (together with renewables) in powering the world economy by mid-century.

So it was no surprise when Rosneft announced in early March the sale of three mature, southern oil assets as part of a larger strategy to shed marginal brownfields and shift the company’s investment focus to its Vostok Oil joint venture with Neftegazholding – an Arctic play likely to cost upwards of $150 billion dollars in investment in a project comparable in size to the exploration of West Siberia in the 1970s or the US Bakken shale play of the last decade.

Global commodities trader Trafigura has taken a 10% stake in Vostok (“East” in Russian language) which Rosneft estimates could become one of the largest sources of LNG production globally.

On the oil side, Vostok’s crude is light and sweet, making it price competitive with Middle East grades and a far more profitable oil export for Russia, which currently relies on sales of the heavily discounted, high-sulfur West Siberian Urals Blend.

Rosneft’s first divestiture targets include its Stavropolneftegaz, Ingushneft and Dagneft assets in Southern Russia, with combined oil output of only 1 million tons per year (a fraction of the 205 million tons that Rosneft produced in 2020 and thus financially insignificant), Reuters reported.

Cengeo (Central Geological Company), a private Russian company which focuses on turning mature oil fields around, has already bought a 51% stake in Ingushneft and was expected to buy Stavropolneftegaz and Dagneft by the end of May, Reuters said.

But while the buzz seems all about oil, Rosneft CEO Igor Sechin made it clear in autumn that LNG is the end game. The company envisions producing LNG from Vostok – possibly in six to eight years - and shipping the commodity west to Europe and east to Asia via the Northern Sea Route (NSR).

What must happen first is the development of the resource base and the raising of investment capital; though a significant milestone was reached in January when the Russian Arctic-class LNG carrier Christophe de Margerie completed the first-ever round-trip along the NSR from the Kara Sea to China, thus proving navigation is possible year round.

Russia’s largest oil company had long wrestled with the country’s gas monopoly, Gazprom, for the right to export gas. While Gazprom retains monopoly rights to export Russian gas via pipeline; Rosneft and Russia’s second largest gas producer, Novatek, won the rights to ship LNG by sea and hence compete with Gazprom in global gas trade.

Sechin has said that plans for Vostok Oil include construction of an LNG liquefaction plant on the Yenisey Gulf, not far from Novatek’s cluster of LNG plants on the Gulf of Ob. Rosneft has also long-lobbied—so far unsuccessfully—to build its own LNG facility (together with ExxonMobil) on Sakhalin Island so as to complete with Gazprom’s existing plant that currently ships from Sakhalin to Asia and North America.

Gazprom holds a 50% plus-1 controlling share in Sakhalin Energy which operates under a production sharing agreement (Sakhalin-2); partners include Shell at 27.5%, Mitsui, 12.5% and Mitsubishi, 10%. The consortium has been shipping LNG to Asia and North America since 2009.

Rosneft holds a 20% interest in the Sakhalin-1 project. The project’s operator, Exxon Neftegaz Ltd., a subsidiary of ExxonMobil Corporation, which controls 30%; other partners are Japan’s SODECO Consortium at 30% and India’s state-owned ONGC Videsh Ltd. at 20%. Gas from Sakhalin-1 is delivered by pipeline to domestic customers in the Russian Far East.