Gazprom Neft’s Expansion Plans Costly
24.06.2008 (16:25) | RBC
Gazprom Neft is considering the possibility of buying foreign oil companies and refineries, the company’s President Alexander Dyukov said at the company’s annual shareholders meeting.He said Gazprom Neft intended to develop its oil refining business, eying up “interesting” opportunities in Europe. Dyukov did not specify the location of the planned acquisitions, only noting that Gazprom Neft was interested in all three of the main export routes: Burgas, Primorsk and the East Siberia-Pacific Ocean pipeline. The company is also considering projects in Iraq, Venezuela and Africa. Gazprom Neft’s priorities, Dyukov said, would be outlined in the company’s development strategy up until the year 2020, which will be drafted before the end of this year.
In August 2008 Gazprom Neft will decide in principal whether or not to participate in Iran’s North Azadegan field. It has been proposed that the Russian oil company act as the operator for the North Azadegan field, taking a share in oil production. Gazprom hopes to receive a 60 percent stake in the project, while also being prepared to foot the bill for the entire investment. Dyukov refused to announce the project’s cost estimates, saying it would be announced once the feasibility study has been completed. He added that “it will be more than hundred million dollars.”
The idea to buy foreign oil companies and refineries is not in itself a bad one, but, with oil prices at their all-time high, Gazprom Neft will find it difficult to locate assets that are for sale. Even if it does succeed in this, the price of a buyout will be too high. The company has to weigh the risks and perhaps wait until oil prices subside. The result being,the news is unlikely to affect Gazprom Neft’s stock price in the short term.
According to Vitaly Kryukov, an analyst at Kapital Investment Group, Iran’s oil reserves have high sulfur levels and are of low quality. To operate effectively in Iran, Gazprom Neft will need different technology to produce the heavy oil, in which case the company will have to adapt its methods of oil production to Iranian conditions. In addition, Iran’s geopolitical situation is far from perfect. Yet, the project is attractive in terms of potential reserves and production, Kryukov believes.
Dmitry Lyutyagin, of Veles Capital Investment Company, agrees that if Gazprom Neft gets access to North Azagedan, this will have a positive effect on Gazprom Neft’s development . Iranian experts estimate North Azadegan’s reserves at 4.5 billion tonnes of oil, while Gazprom Neft’s reserves stood at 953 million tonnes as of January 1, 2007, according to Society of Petroleum Engineers (SPE) standards. Obviously, Gazprom will not get the whole of the field, but it is likely to get a significant portion, which will boost the company’s stock..
Lyutyagin also noted that the expected terms of Gazprom Neft’s participation in the Iranian project are similar to the terms of product sharing agreements applied in some oil producing countries. He assessed the terms as quite acceptable for the company, given the current situation on oil markets. “Selling up to 40 percent of its oil, the Russian oil company could earn $28 to $30 per barrel, or a little less if we take into account investment costs, but still earnings will be high enough,” Lyutyagin said.
North Azadegan’s oil field, with proven oil reserves of 26 billion barrels, was discovered in 1999. It is located 80km west of Ahvas in south-western Iran and ranks among the world’s largest. During the first phase of the project, 52 months from the start of operation, it is expected to produce 150,000 barrels of oil a day, rising to 260,000 barrels during the next stage (another 8 years).
Gazprom Neft (former Sibneft) is the oil production arm of Russian gas giant Gazprom, which has a 75 percent stake in the company. Another 20 percent is held by a consortium of Italy’s ENI and Enel (Enineftegaz). Gazprom possesses an option to buy that stake should it wish to do so. Gazprom Neft’s authorized capital of RUB 7,586,079 (approx. $321,444) is divided into 4,741,299.6 common shares with a nominal value of RUB 0.0016. The company holds over 60 licenses for exploration and production in the Yamal-Nenets and Khanty-Mansiysk autonomous regions in Western Siberia; alongside projects in the Omsk and Tomsk regions; Yakutia; the Evenkia autonomous region; and Chukotka.
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