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July 17, 2014 6:02 pm
When you go drilling in a Russian Arctic oilfield as big as the city of Moscow, you need lots of money. You should also pick the right moment. For 300 days of the year the Kara Sea is covered in ice – which is why ExxonMobil starts operations there next month. Its Universitetskaya well will rank among the most expensive the company has drilled. Its partner, of course, is Rosneft.
Yes, picking your moment matters. Sanctions that the US Treasury aimed at Rosneft on Wednesday do not prevent all business transactions with the company by US persons, and Exxon’s dreams of eventually extracting an estimated 100bn barrels from the Kara Sea are therefore unaffected for now.
Instead the sanctions stop US banks or US investors dealing in future debt issued by Rosneft, alongside its fellow Siberian producer, Novatek, and Russia’s third-biggest lender by assets, Gazprombank. Unlike Rosneft, however, those companies do not have $20bn in cash stored up. Nor did they produce 200bn roubles ($6bn) of free cash flow last year.
Those two facts might tempt a foreign investor to hang in with Exxon by buying Rosneft’s shares. A third and a fourth fact: these shares trade below book value, and at two times Rosneft’s immense oil and gas reserves (Exxon is 17 times). About $14bn in debt is coming due this year, $19bn the next. Rosneft may pay it off by continuing to sell its oil – in US dollars. Sanctions still allow it access to US dollar clearing.
But a buyer of the shares here must be ready for the day when dollar-clearing becomes the next area to be frozen over by the ice of sanctions. Already, no further “pre-pay” deals for Rosneft to raise money backed by future oil sales seem possible: it has borrowed $30bn in this way over recent years. Even with its present cash, developing future cash flow in the Arctic depths will not come cheap. Beware the freeze.
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