Daily analyst comments

On September 18, VP of Rosneft (RTS: ROSN) Dmitry Bogdanov announced the oil company's ambitious plans in the downstream segment. Rosneft will refine around 38-39 mln tons of oil in 2007 and 48-50 mln tons in 2008. As a result, the refined output will account for nearly 50% of aggregate production, which will make the company's product range more balanced.

In H107, Rosneft refined 15 mln tons of crude, including 9 tons at in-house facilities and 6 mln tons at Yukos refineries. In July-December 2007, the company plans to refine 25 mln tons of oil at the same refineries which Rosneft owns after a string of acquisitions at auctions to sell off Yukos assets. Rosneft plans to ramp up volumes to this level as part of a program to enhance the efficiency of the company's refineries. By November 2007, the company will work out a restructuring concept for five ex-Yukos refineries (Angarskaya Petrochemical Company, the Achinsk refinery and three Samara-based refineries). As a result of restructuring, Rosneft plans to improve the depth of oil processing from 66% to 90% as rapidly as possible. The company has also revised COGS at the acquired refineries and reduced this indicator 3-fold. Restructuring plans for the Komsomolsk and Tuapse refineries have already been prepared.

What's more, the company's spokesperson unveiled plans to build the first stage of the East Refinery in the Primorsk region with annual capacity of 10 mln tons by 2012. The company plans to build the refinery in two stages with 10 mln tons each. This facility will be constructed as part of the East Siberia-Pacific Ocean (ESPO) pipeline system. Although the company has ambitious expansion plans for the downstream segment, Rosneft does not rule out purchasing new refining capacities. Rumors circulate on the market that Rosneft could be a potential buyer of the Bashkir refineries.

In our opinion, Rosneft's intention to roll out the downstream segment is attributable to lower margins of crude exports due to high export duties. Meanwhile, development of the downstream segment will make the company's product range more balanced and diversify risks of lower crude prices.

At present, we have no recommendation on Rosneft shares.