Prime-TASS reported on November 26 that Rosneft (RTS: ROSN) and Chinese National Petroleum Company (CNPC) agreed to build a 10 mln ton refinery in Tianjin (northern China). This project is being implemented as part of a framework agreement to establish a joint venture to roll out oil and gas cooperation between CNPC and Rosneft. The two companies incorporated JV East Energy, approved the board and management on November 22, 2007.
Two months ago Rosneft announced its plans for the downstream segment. The company intends to refine around 38-39 mln tons of oil in 2007 and 48-50 mln tons in 2008. As a result, around 50% of aggregate output will be processed, which will make the company's product range more balanced. Also, in 2007 Rosneft will work out a restructuring concept for the five Yukos refineries (Angarskaya Petrochemical Company, the Achinsk refinery and three Samara-based facilities). As a result of revamping, the company plans to improve the depth of oil processing from 66% to 90-95% overall for the company as rapidly as possible.
Rosneft's Chinese refinery will be its first facility abroad and second refinery construction project. The first stage of the East Refinery in the Primorsky region with 10 mln ton capacity is slated for commissioning in 2012 as part of the East Siberia-Pacific Ocean (ESPO) pipeline. Even though the company has such ambitious plans to build new facilities in 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 Bashkortostan refineries.
The company will significantly outpace its main rival in Russia, Lukoil upon implementation of its projects. After completion of the project in China and the East Refinery, Rosneft's capacities will rise to at least 75 mln tons by 2012, while Lukoil's capacity, In line with the intensive growth strategy, will amount nearly 65 mln tons by 2012.
The oil company is looking to roll out the downstream segment due to softer crude export margins as a result of high export duties and consistently strong refining margins. The developed downstream segment will make the company's product range more balanced, diversify risks of lower crude prices and bolster Rosneft's margins. We view as especially successful the location to construct new refineries, focused on the APR markets, which currently account for the bulk of the company's incremental crude oil production strategy.
We have no formal recommendation on Rosneft's shares.
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