Western companies know partnering with Russia’s state-backed oil and gas producers carries political and reputational risks that must be weighed against gaining access to the country’s bounty of natural resources.
But for Trafigura, becoming Rosneft’s go-to commodity trader has a more concrete expense: €1.5bn of its own cash, injected into a €7.3bn deal for a 10 per cent stake in a gargantuan Arctic oil project backed by President Vladimir Putin.
The full extent of Trafigura’s investment in Vostok Oil, its largest ever, illustrates the lengths to which it will go to cement its relationship with Rosneft and secure millions of barrels of crude for its huge trading business.
As US sanctions have squeezed the Russian group’s access to credit, Trafigura has vied with rival Glencore to become the favoured partner of the world’s second-largest oil producer and win prized supply agreements.
But investing in a vast project in an environmentally sensitive area, at a time when Trafigura faces pressure to adapt its business model as developed economies start the long transition away from fossil fuels, has raised questions.
It comes as the company, which is owned by 850 employee shareholders, is planning a multibillion-dollar push into renewable energy with an Australian partner and has just announced its first emissions targets. But it is far from turning its back on the oil trade.
“When traders look to buy equity in a project it’s normally to create a degree of ‘stickiness’ with the commodities it produces and the partner,” said Roland Rechtsteiner at consultancy Oliver Wyman. He added that there had been “a growing trend of buying into assets” to secure “offtake” supply deals and “long-term relationships with the largest oil producers”.
“The offtake is where the money is,” said one senior commodity banker, noting that while Trafigura’s investment was “a big number . . . the deal washes its face on profit from the offtake volumes”.
Vostok Oil will develop a new oil-producing region on Siberia’s Taymyr Peninsula to rival the US Permian Basin and Saudi Arabia’s Ghawar oilfield. It will pull together existing production of about 370,000 barrels per day and exploration assets and link them to markets in Europe and Asia via the Northern Sea Route, a fair-weather shipping lane between the Atlantic and Pacific oceans.
“This is a long-term investment for the group in an exciting oil and gas company with a resource base for liquid hydrocarbons of 6bn tonnes, including confident recoverable reserves of about 3bn tonnes,” a Trafigura spokesperson said. “The oil production potential of the project's open and promising deposits is comparable to the largest projects in the Middle East.”
The project, which will cost up to $150bn to develop, includes the construction of 15 towns to house the thousands of workers needed to drill the oil wells and operate the infrastructure.
But it is expected by analysts to produce 1m barrels of oil per day by 2028 and more than 2m b/d by 2035 — the equivalent of roughly 2 per cent of global supply — while favourable tax conditions should boost returns.
Trafigura is the first investor but Rosneft is also expected to seek support from China and India at a time when US sanctions have restricted its access to western financing. Having a large international trader such as Trafigura onboard is seen as one step to boost the project’s appeal. Other trading houses approached by Rosneft have been cautious about investing.
Trafigura already has a strong relationship with Rosneft, which has been the subject of US financial sanctions since 2014, having helped it raise funds through permitted short-term prepayment oil deals. It was also part of the Rosneft-led consortium that in 2017 took control of Nayara, formerly Essar Oil, including a big refinery in India.
Data from Petro-Logistics SA, a consultancy that monitors oil flows, show that Trafigura shipped roughly 400,000 barrels a day of Rosneft’s crude in 2019 and 250,000 b/d last year, compared with 280,000 b/d and 140,000 b/d respectively for Glencore. Trafigura declined to comment on the numbers.
While the investment in Vostok Oil is permitted under existing US sanctions Jason Hungerford, a partner at law firm Mayer Brown, said there was a risk that the incoming US administration of Joe Biden could take a more hawkish stance towards Russia.
“The US has always avoided directly sanctioning Rosneft's oil exports because of the disruption it could cause in global energy markets,” Mr Hungerford said. “But the direction of travel suggests that stricter sanctions in the future are possible.”
He added that “it might only take one incident — like the arrest of [Alexei] Navalny this week — to raise the temperature between Washington and Moscow, and Rosneft is clearly seen by the US as a pressure point it can target”.
Trafigura made its investment through a Singapore-registered special purpose vehicle called CB Enterprises, financing the deal with debt and equity.
Corporate filings in Singapore show the €5.775bn syndicated loan facility was organised by Credit Bank of Moscow, a fast-growing lender with ties to Rosneft and its chief executive Igor Sechin — one of Mr Putin’s closest allies.
The loans, which are non recourse, have a maturity of 13 years and have a five-year grace period on repayments. They would be paid back through the dividends generated by Vostok Oil, Credit Bank of Moscow said in a statement.
In addition to the loan, Trafigura said it was investing €1.5bn of its own cash,
That makes it the largest acquisition in Trafigura’s 27-year history and values Vostok Oil at almost €73bn. To put those figures in perspective, Trafigura’s group equity was $7.8bn (€6.4bn) at the end of September while Rosneft’s market capitalisation is $70bn (€55bn).
The investment follows a blockbuster year for Trafigura, which cashed in on the market chaos unleashed by the coronavirus pandemic to report record earnings before interest, tax, depreciation and amortisation of $6bn, up from $2.1bn in 2019.
That cut Trafigura’s adjusted total debt to $2.76bn from $5.3bn, giving it the confidence to push ahead with the deal, according to people with knowledge of the deal.
The transaction has some similarities with the 2016 deal in which Glencore and Qatar’s sovereign wealth fund joined forces to buy an $11bn stake in Rosneft. But while Glencore disposed of its stake after 20 months, holding on to a five-year, 220,000 barrel per day supply agreement, Trafigura has no plans to flip its stake in Vostok Oil.
The key prize will be increased access to Rosneft’s crude, including low-cost barrels from the Arctic development. This would be a light, sweet crude with a relatively low carbon footprint that will not require any domestic blending, analysts said.
Trafigura declined to comment on the size of the supply deals but bankers think the volumes are significant — an initial 10m barrels of oil per month (about 330,000 barrels per day) and more once production from Vostok Oil ramps up. That would cement Trafigura’s position as the dominant exporter of Rosneft’s crude.
Trafigura sees Vostok Oil as an important project for an industry that has been starved of investment because of low prices and the pivot to renewables by western oil majors.
“We expect that new, low-cost sources of oil will continue to be required to support essential human needs for some time,” Jeremy Weir, Trafigura’s chief executive, said this month.