Western companies know that partnering with Russian state-backed oil and gas producers carries political and reputational risks that must be weighed against access to the country’s natural resource wealth.
But for Trafigura, becoming Rosneft’s essential commodities trader has a more tangible expense: 1.5 billion euros of its own cash flow, injected into a 7.3 billion euros deal for a 10% stake in a gargantuan arctic oil project supported by President Vladimir Putin.
The scale of Trafigura’s investment in Vostok Oil, the largest ever, illustrates efforts to solidify its relationship with Rosneft and secure millions of barrels of crude for its huge business activity.
As US sanctions restricted the Russian group’s access to credit, Trafigura competed with rival Glencore to become the preferred partner of the world’s second-largest oil producer and win valuable supply deals.
But investing in a large project in an environmentally sensitive area, at a time when Trafigura faces pressure to adapt its business model as developed economies begin the long transition away from fossil fuels, raised questions.
It comes as the company, which is owned by 850 employee shareholders, plans a multibillion-dollar push in renewable energy with an Australian partner and has just announced its first emissions targets. But it is far from turning its back on the oil trade.
“When traders look to buy stocks in a project, it’s normally to create a certain degree of ‘stickiness’ with the commodities they produce and the partner,” said Roland Rechtsteiner of consulting firm Oliver Wyman. He added that there had been “a growing tendency to buy assets” to secure “off-take” supply agreements and “long-term relationships with the biggest oil producers.”
“The levy is where the money is,” said a senior commodities banker, noting that while Trafigura’s investment was “a lot. . . the case washes its face on the profit of the volumes of collection ”.
Vostok Oil will develop a new oil-producing region on the Taymyr Peninsula in Siberia to compete with the US Permian Basin and the Ghawar oil field in Saudi Arabia. It will bring together the existing production of around 370,000 barrels per day and exploration assets and connect them to markets in Europe and Asia via the Northern Sea Route, a fine-weather shipping route between the Atlantic Oceans and Peaceful.
“This is a long-term investment for the group in an exciting oil and gas company with a liquid hydrocarbon resource base of 6 billion tonnes, including confident recoverable reserves of around 3 billion tonnes. “said a spokesperson for Trafigura. “The oil production potential of the project’s open and promising fields is comparable to the largest projects in the Middle East.”
The project, which will cost up to $ 150 billion to develop, includes building 15 cities to house the thousands of workers needed to drill the oil wells and operate the infrastructure.
But analysts expect it to produce 1 million barrels of oil per day by 2028 and more than 2 million b / d by 2035 – the equivalent of about 2% of supply. global – while favorable fiscal conditions should boost yields.
Trafigura is the top investor, but Rosneft is also expected to seek support from China and India at a time when US sanctions have restricted its access to Western funding. Having a large international trader such as Trafigura on board is seen as a step in making the project more attractive. Other trading houses approached by Rosneft have been cautious about investment.
Trafigura already has a strong relationship with Rosneft, which has been the subject of US financial sanctions since 2014, after helping it raise funds through authorized short-term oil prepayment agreements. It was also part of the Consortium led by Rosneft which in 2017 took control of Nayara, formerly Essar Oil, including a large refinery in India.
Data from Petro-Logistics SA, a consulting firm that monitors oil flows, shows that Trafigura shipped around 400,000 barrels per day of Rosneft crude in 2019 and 250,000 b / d last year, up from 280,000 b / d and 140,000 bpd respectively for Glencore. Trafigura declined to comment on the figures.
Although the investment in Vostok Oil is allowed under existing US sanctions, Jason Hungerford, partner at the law firm Mayer Brown, said there was a risk that Joe Biden’s new US administration would take a more stance. warmongering towards Russia.
“The United States has always avoided directly sanctioning Rosneft’s oil exports because of the disruption this could cause in global energy markets,” Hungerford said. “But the travel management suggests that stricter penalties in the future are possible.”
He added that “it might only take one incident – like the arrest of [Alexei] Navalny this week – to raise the temperature between Washington and Moscow, and Rosneft is clearly seen by the United States as a pressure point that they can target ”.
Trafigura invested in a Singapore registered special purpose vehicle called CB Enterprises, financing the transaction through debt and equity.
Documents filed by the companies in Singapore show that the € 5.775 billion syndicated credit facility was arranged by the Credit Bank of Moscow, a fast-growing lender linked to Rosneft and its managing director Igor Sechin – one of Mr. Putin’s closest allies.
The loans, without recourse, have a maturity of 13 years and a grace period of five years on repayments. They would be repaid with dividends generated by Vostok Oil, the Moscow Credit Bank said in a statement.
In addition to the loan, Trafigura said it is investing 1.5 billion euros from its own cash flow,
This makes it the largest acquisition in Trafigura’s 27-year history and values Vostok Oil at nearly 73 billion euros. To put these numbers into perspective, Trafigura Group’s equity stood at $ 7.8 billion (€ 6.4 billion) at the end of September while Rosneft’s market capitalization stands at $ 70 billion ( 55 billion euros).
The investment follows a successful year for Trafigura, which took advantage of the market chaos sparked by the coronavirus pandemic to report a record profit before interest, taxes, depreciation and amortization of $ 6 billion, up from $ 2.1 billion in 2019.
This reduced Trafigura’s total adjusted debt to $ 2.76 billion from $ 5.3 billion, giving it the confidence to move the deal forward, according to people familiar with the deal.
The deal has some similarities to the 2016 deal in which Glencore and Qatar’s sovereign wealth fund joined forces to buy an $ 11 billion stake in Rosneft. But while Glencore sold its stake after 20 months, retaining a five-year supply agreement of 220,000 barrels per day, Trafigura has no plans to return its stake in Vostok Oil.
The key price will be increased access to Rosneft crude, including cheap barrels from arctic development. It would be a light, smooth crude with a relatively low carbon footprint that won’t require any domestic blending, analysts said.
Trafigura declined to comment on the size of the supply deals, but bankers believe the volumes are significant – an initial 10 million barrels of oil per month (around 330,000 barrels per day) and more once Vostok Oil production increases. This would strengthen Trafigura’s position as the dominant exporter of Rosneft crude.
Trafigura sees Vostok Oil as an important project for an industry that has been deprived of investment due to the low prices and the pivot towards renewable energies by the Western oil majors.
“We anticipate that new sources of low-cost oil will continue to be needed to meet basic human needs for some time,” Jeremy Weir, managing director of Trafigura said this month.