Russia in a $270 billion oil deal with China

Rosneft, Russias biggest oil company and world No.1 by output, agreed to double its oil supply towards China for the next 25 years, starting in 2015. The company, 75% of whose capital is government owned, will deliver 300 000 barrels per day more to the world No.2 economy, following Russias trend to shift focus to Asia, away from the crisis-hit Europe. Russia has been deviating huge volumes from Europe for the last five years.

And although analysts expressed doubts the federation can quickly boost exports to China from the depleted fields in West Siberia, a source familiar with the deal said the deal was timed with the launch of new flows of East Siberian oil in order to avoid redirection of already existing streams.

Rosneft might secure $30 billion as prepayment from China as part of the new deal and it could even double. The Russian oil company has already received $25 billion as upfront payments from China in 2009 by pre-selling oil, which was used to finance new construction projects and growth. The total value of the deal is estimated at $270 billion according to Rosnefts Ceo Igor Sechin.

J.P. Morgan analysts commented on the topic: “If confirmed, this would be a transformational event for the companys balance sheet: Rosneft could even potentially be able to show a net cash position, though working capital would be negative. The prepayment could minimize financing risks for the leveraged state-controlled oil company.”

Rosneft acquired TNK-BP for $55 billion in 2013. It was Russias third-largest oil producer and among the ten largest private oil companies in the world. The acquisition caused the companys debt burden to surge. According to Standard and Poors, Rosneft is expected to meet large debt maturities of $6.6 billion, $15.9 billion and $16.2 billion in 2013, 2014 and 2015 respectively.