March 26, 2013 / 10:56 AM / in 5 years

RPT-Fitch: New Deals with China Positive for Gazprom and Rosneft

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March 26 (Reuters) - (The following statement was released by the rating agency) New deals to supply hydrocarbons to China that were signed last week during the visit to Moscow by Chinese President Xi Jinping are positive developments for Gazprom and Rosneft, says Fitch Ratings. We believe that diversification of Russian oil and gas exports to the Asia-Pacific region will further strengthen Russia’s position as a key energy supplier in the region while improving the business profile of the two companies. Gazprom and China National Petroleum Company (CNPC) last week signed a 30-year memorandum to supply 38 billion cubic meters (bcm) to 60bcm of natural gas from Eastern Siberian fields from 2018. This represents a major step forward even if there are still tough negotiations ahead: a legally binding agreement must be signed by June and final documents by the end of the year, covering pricing and prepayment terms. To start gas supplies to China, Gazprom would need to complete significant additional investments, including a full field development of Eastern Siberia’s Kovykta and Chayanda and construction of a gas pipeline to the Chinese border. The agreement with CNPC is the latest in a string of investments by Gazprom that will dramatically improve its position in Asian gas markets, which is currently represented only by a 50% share in the 9.6 million tons per annum (mtpa) Sakhalin-2 project. Earlier this year, Gazprom approved a decision to construct a three-train, 15mtpa LNG plant in the Russian Far East near Vladivostok, with the first train to be commissioned in 2018, and plans to supply LNG from there to Asian markets. Rosneft, which last week completed the acquisition of TNK-BP, has negotiated an increase in its oil shipments to China from the current 15mtpa to as much as 31mtpa in exchange for a pre-payment, and agreed on a number of joint projects in exploration, refining and chemicals production with China National Petroleum Company and Sinopec. The company also announced that it raised an additional USD2bn loan from the China Development Bank under the existing 25-year agreement signed in 2009. Rosneft is said to be considering various shipment options for additional volumes of crude oil, including transits via, or swaps with, Kazakhstan. We view higher expected sales of Rosneft’s crude oil to China as yet another sign of its improving business profile through better diversification. However, the nearly USD35bn in new borrowings raised to finance the acquisition of TNK-BP remains a concern. We would need to ascertain that Rosneft has a clear plan to reduce leverage over the next two to three years to remove its ratings from Rating Watch Negative.

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