TB0455

Kannan Ramaswamy

Rosneft: An Oil Major Rises in Russia

Russia’s oil and gas giant, Rosneft, had reported a 22% drop in net income for the sec nd quarter f 2015. It had
been a tumultuous year for the company to say the least. The impact of U.S.-led economic sanctions were
beginning to take a bite out of revenues, and the fall in the value of the Russian ruble only made things worse
for the company. Rosneft had just announced a strategy that would pivot it towards Asia. In one of the first
steps in that direction, it had announced the purchase of a 49% stake in Essar Oil, an up-and-coming Indian oil
company. It had also sold a 15% interest in its giant Vankor field to India’s Oil and Natural Gas Corporation
(ONGC), a move that was seen as cementing historical ties between the two count ies. However, despite the
best of efforts, it was doubtful whether these moves were enough to counte balance the declining production
from some of Rosneft’s largest fields in Russia and the global changes wr ught by the emergence of shale oil
and gas in the U.S. Its bold strategy to explore in the Arctic was cut sh rt when its partner, ExxonMobil, was
forced to stop its activities on account of U.S. economic sanctions, and there were rumblings that Rosneft
might be falling out of favor in the Kremlin. The government had denied Rosneft’s application for a loan
package that would have helped it tide over debt servicing challenges originating in steep revenue declines.

While the clouds did appear to darken over the horizon, there was also an air of confidence behind the
statement by Igor Sechin, CEO of Rosneft. Responding to the inability of ExxonMobil to continue the drilling
program in the Arctic, Sechin had said, “We will continue drilling in any case, on our own, always and
everywhere. If partners can take part, that’s good. If they can’t, we will carry on alone.” 1 The company was no
stranger to the wild swings of the industry. Rosneft had been left for dead several times, been resuscitated
several times, and had vaulted to the top ranks f il and gas c mpanies worldwide, all in the span of a single
decade. In 1993 when it was first created, it was the largest il company in the country, controlling 60% of
domestic production. However, by 1998, when many f its assets were privatized, it controlled only 4% of
Russia’s oil output. It had risen from the ashes yet again and by 2006 it was not only Russia’s largest oil
producer but also one of the top ten producers globally. The company had bet on second and third acts and
surprised critics and naysayers each time. Would the pivot towards Asia help Rosneft shore up its prime
position as one of the world’s largest publicly traded oil companies? Would it be able to weather the economic
sanctions that have crippled its tactical advantages? How could Rosneft effectively address the emerging power
of shale in North America? Given Rosneft’s reliance on Russian reserves, would the alliance with ExxonMobil
finally give it the opportunity to emerge as an interna ional NOC supermajor? These were a few questions
facing Rosneft as the first snows of winter emerged in Moscow in 2015.

Rosneft: The Early Years

Rosneft was b rn in September 1991 as a voluntary organization comprising all of Russia’s oil companies
following the break-up of the Soviet Union. In about a year, the Yeltsin government had passed a Presidential
Decree that set in motion a process of privatization in the oil sector. Three integrated oil companies—Lukoil,
Surgutneftegas, and Yukos—emerged from the privatization process. These firms, however, only accounted for
42 constituent companies of the 301 that made up Russia’s oil infrastructure. Rosneft was hastily constituted as
a staging company that was to oversee the remaining 259 companies as they were prepared for privatization.
While it had a long list of chartered responsibilities, two primary ones seemed to be the focus to (a) ensure
stable deliveries f oil, gas, and petroleum products as needed by the State, and (b) assist in operational and
financial restructuring of constituent companies that may be marked for privatization 2. Its operational domain
spanned the entire c untry from the Sea of Okhotsk in the east to Kaliningrad in the west. Given the voluntary
nature of its organization, Rosneft could not enforce control over the independent companies that had obviously
grown to enjoy their independence. The administrative complexity was accentuated by the fact that Rosneft also

Copyright © 2016 Thunderbird School of Global Management, a unit of the Arizona State University Knowledge Enterprise. This
case was written by Professor Kannan Ramaswamy for the sole purpose of providing material for class discussion. It is not
intended to illustrate either effective or ineffective handling of a managerial situation. Any reproduction, in any form, of the
material in this case is prohibited unless permission is obtained from the copyright holder.
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 dissolution after privatization of the companies it oversaw, Putilov pushed ve y haPostdtoensureaviablepath
forward for Rosneft as an independent company. Things came to a head when he had a difference of opinion
inherited a grab bag of assets ranging from research institutes, refineries, gas processing plants, distribu ors, and
even machine builders. By 1993, after a second wave of privatizations that created new integrated companies,
Rosneft was left to preside over a much smaller slice of the oil sector. When it was converted to an open joint stock
company in 1995, it controlled only eight oil-producing subsidiaries, four refineries, and 17 marketing
companies, contributing a mere 4% of Russian oil output, a number that held steady for the re of the decade.

Despite its relative youth, the company had witnessed epic battles among its leadership ranks, often
protracted affairs that involved implementation of shifting mandates from the federal g vernment that was trying
to navigate its way out of economic chaos. After a short period at inception when it was led by the last U.S.S.R.
oil minister, Lev Tchurilov, Rosneft had been led by managers with experience in Russia’s oil industry. Alexander
Putilov, a member of the inner circle of West Siberian oil men and director of Ukraine Naftogaz, a company
to implement. Unwilling to let go of Rosneft, he resisted the privatizationefforts, which immediately brought the wrath of the government. He was replaced.
that was subsequently subsumed by Lukoil, was the first CEO of Rosneft. While Rosneft seemed destined for

with the chairman of the company over an impending privatization prog am that the federal government wanted

A New Leader Arrives

The government named Sergei Bogdanchikov, an oil industry professional, to head up the company. The choice
was a bit perplexing at the time because Bogdanchikov was leading a small operation at the periphery of the
Rosneft empire, a company called Sakhalinmorneftegaz, located on Sakhalin island off the coast of Eastern
Russia. He had been elevated to the rank of General Director of the company in 1993, the very year when
Russia signed two crucial production-sharing agreements with Shell and ExxonMobil for producing gas and oil
off the island. Thus, by the time he was tapped to lead Rosneft, he had already gained considerable experience
dealing with International Oil Companies (IOCs), although it was not even clear whether Rosneft would
survive long enough to benefit from the Sakhalin-I project with Exx nM bil. It was widely believed that he was
chosen for the top job at Rosneft because he was a technically c mpetent, well-experienced oilman with no
affiliation either to the oligarchs or the West Siberian oil bureaucrats fr m the Soviet era known as the
neftianiki, the two groups who were battling for control of Russian assets.3

He could not have arrived at a worse time because Rosneft had lost control of another 19 of its subsidiaries to
privatization, and its burgeoning debt had forced its banks to freeze the accounts of five of its major operating
companies. Rosneft had also lost control of its promising upstream company Archangelskgeoldobycha (AGD), which
had 21 oilfield licenses, o a banking entity which in turn sold the assets to Lukoil. This was followed by the loss of
Purneftegaz (PNG), he upstream producing company that accounted for 60% of Rosneft’s entire crude production.
Much of its exports were handled independently by its constituent companies, often through murky commercial
structures c ntr lled by the oligarchs. Rosneft had also lost control over its refining assets serving the lucrative M sc w
market as a result of a political power play involving the powerful mayor of Moscow, Yuri Luzhkov. Rosneft’s d
wnstream operations were in acute failure mode, accounting for less than half its crude production. 4 The Yeltsin era
had hardly been kind to the company, and it was only the economic crisis of 1997/8 that slowed down the aggressive
actions of the dark business interests to usurp control over prime state assets.

Sergei Bogdanchikov set about working through the challenges with focused efficiency. 5 In his first six weeks,
he had managed to persuade some of the banks to unfreeze subsidiary accounts after he convinced the Minister of
Tax Collections about his Rosneft revival plans. He was also able to get a new line of credit through western bankers
and, using the new cash infusion, he was able to pay delayed wages to employees. Even the pliant Yeltsin
g vernment, which had supported the oligarchs, was outraged over the transaction price for PNG (roughly $10 milli
n f r an asset that generated revenues of over $600 million at that time). His government sought legal intervention to
scuttle the sale and the production assets of PNG reverted to Rosneft. While these were, indeed, hard-fought
victories that took delicate maneuvering through the political landscape, Rosneft was far from being on steady
ground. The Yeltsin government was unsure about what it ought to do with the three large remaining pieces of the oil
infrastructure that were still in government hands: Rosneft (100%), Slavneft (75%), and Onaco
(85%). A plan was floated to merge all three entities into a super-NOC to be called Gosneft (State Oil). Thankfully

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 for Bogdanchikov, this was a fight that fought itself. The Yeltsin presidency was winding down and he
focus shifted to finding a successor. After Putin was chosen as the heir apparent, Sergei Bogdanchikov
was summoned for a meeting with the new prime minister. Expecting to be fired from his post given the
con olidation plan , Bogdanchikov came away surprised because Putin had told him “Don’t worry—carry
on.”6 He began building a management team composed of close allies, all technocrats from Sakhalin.

A Workman’s Approach to Stabilizing Rosneft

Bogdanchikov quickly endeared himself to Putin by playing a critical role in Chechnya. Within a month of his coming
to power, Putin launched a new wave of interventions in the region. Oil production in the region
had plummeted by 97.5% (from 80,000 bpd to 2000 bpd) over the last decade. Rosneft chose five fields to
for

rebuild as a first step toward generating local revenues that would pay Putin’s plans. Bogdanchikov found
the government very willing and generous in providing loan guarantees the investments, and also allowed
Rosneft to export 100% of its production. The process of restoring p oduction and transporting crude oil for
exports proved to be a very long drawn-out process that gave Bogdanchikov impo tant insights into the power
of the local warlords and the difficulties associated with maintaining power from a distance. The arduous tasks
in Chechnya ostensibly won him support in Moscow as his netw rk f influence began to expand. Commonly
referred to as administrative support, the backing of the political p wers c uld hardly be taken for granted, even
if the enterprise was owned by the state. Such support had to be earned. The timing was, indeed, opportune
because when Putin came to power in 2000, he openly despised the oligarchs and wanted to bring them to
heel. Sergei Bogdanchikov offered Rosneft as a tool to balance the power of the oligarchs who had
stripped away state assets through dubious deals. Starting in 2000, there were plans afoot to regain control
over the recalcitrant subsidiaries that had fallen out of the Rosneft orbit.

Bogdanchikov proved to be adept at navigating through the morass of minority shareholders, much to their
dismay. Starting with the refining assets in Tua se on the Black Sea, he was able to drive hard bargains to buy out
minority owners as a means of consolidating his power. Soon he had bought control of three major subsidiaries.
There were widespread accusations that he was instrumental in spreading rumors that lowered the value of the
subsidiaries ahead of their repurchase, leaving min rity shareholders to suffer losses. The government did not seem to
be opposed to these moves. R sneft then engineered a string of acquisitions to break free of distribution control,
especially with respect to its exports. Things seemed to be on track once again for the company. However, in July
2004, Putin proposed a merger between Gazprom, the state-controlled gas giant, and Rosneft. Gazprom, at that time,
was majority owned by private shareholders, a position that Putin did not find comforting. The plan was to sell 100%
of Rosneft to Gazprom in exchange for a 10.74% stake. This ownership increase together with the holdings of the sta
e would have given the government the monopoly control it desired.7

The Yukos affair, however, in ervened and perhaps saved Rosneft from an almost certain death. Yukos had been
privatized in the first wave and was then controlled by Mikhail Khodorkovsky, one of the original oligarchs. He
harbored p litical intenti ns and launched a blistering attack against Putin in a live television program in February
2003 and pr ceeded to tell Putin, “Your bureaucracy is made up of bribe-takers and thieves.” 8 As an example, he
offered Sergei B gdanchikov who, he claimed, had overpaid for the acquisition of Northern Oil to the tune of $662
million, double its actual worth, as a means of funneling state funds into private hands. Putin responded by insisting
that Rosneft “is a state company and needs to increase its insufficient reserves,” and since private companies such as
Yukos seemed to have all the reserves, “We will have to investigate how they obtained them.” 9 This public display,
many believe, triggered the demise of Yukos. By July 2004, Yukos was facing bankruptcy proceedings initiated as a
consequence of a huge tax bill that appeared out of nowhere. In short order, Yuganskneftegaz (YNG), the prime
producing asset of Yukos, was up for auction. It seemed that Gazprom
w uld be a key bidder for the assets and its CEO, Alexei Miller, was touting the evolution of a powerhouse
should Gazpr m win the bid. The Putin government appeared to be in support. However, Bogdanchikov pulled
out yet an ther miracle by suggesting to Igor Sechin, the chairman of the board of Rosneft and powerful Putin
ally, that Rosneft was far better suited to revive YNG because it had strong technical skills in oil production, an
area of weakness for Gazprom. Combined with its potential to negotiate an export-backed loan given its
prominence as an oil exporter, Rosneft could attract much-needed capital, something that Gazprom couldn’t.
The business logic must have convinced the Russian government. Gazprom withdrew from the auction.

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 A company named Baikal Finance bid for the assets of Yukos and won the auction paying $9.35 billion.
The provenance of the group was indeed perplexing at the time because its registered office address was raced
to a dilapidated residence in the Siberian city of Tver. Four days after the auction, the true victor emerged from
the shadows. Rosneft announced it had purchased Baikal Finance. One newspaper cited an unnamed ource
suggesting that Rosneft had paid the princely sum of 10,000 Russian rubles ($350) to Baikal Finance, the paid-
up capital of the finance company, for the purchase and paid the Russian tax authorities $9.35m. 10 The story had
unfolded the way Putin had envisaged. In talking to the press after the auction of YNG to Baikal Finance, Putin
had remarked, “That company [Baikal Finance Group] has only individuals as its h lders, inv lved in the power
business for years. As far as I know, they intend to build up relations with other power companies of Russia,
which are interested in the asset. As to the chances of a state-run company to acquire such asset, it may, of
course, do it, like other market players.” 11 Rosneft had financed the purchase of YNG through loans from Russian banks
and refinanced these loans via a forward sale of oil deliveries paid forbythe Chinese NOC, CNPC. The
acquisition of YNG proved to be a game changer for Rosneft. It signaled the gove nment’s commitment to
help Rosneft stabilize operations as a tool of the state. Bogdanchikov had been able to win administrative
support, although it was a long drawn-out process. The modern Rosneft was just eme ging.

Bogdanchikov soon began augmenting his core group of veterans fr m Sakhalin with a more professional
crew, often vetted by western-style headhunting firms. In creating a new c re f talent for the company, he
brought managers from a diverse range of industries such as investment banks, Russian il companies, and large
banking corporations. Reflecting on this influx of new talent, one executive observed, “Unlike Khodorkovsky,
whose hiring of foreigners always had something of a public-relations aspect to it, and who never really
surrendered control to the foreigners he hired, with Bogdanchikov it was a s stematic commitment to get the
best.”12 The veterans continued to oversee important functions that had a strong political component such as
capital construction, social services, and marketing operations, while the new rofessional crew handled
upstream operations, refining, investor relations, finance, and legal affairs. 13

Rosneft was able to bring to bear its technology prowess and operations acumen to reignite YNG. It
drew drilling crews from its other upstream subsidiaries, slashed spending on other projects to focus
capital on reviving YNG, and reestablished relationships with Schlumberger, the French oilfield services
company which had been instrumental in production improvement pr grams. The revival of YNG
provided adequate cash flows that Bogdanchikov used to fund growth opportunities elsewhere, a luxury
that Rosneft had not been able to afford until then. It acquired the license to drill in Vankor, a promising
giant field in East Siberia, an asset play that subsequently brought 1.4 billion barrels of reserve additions.
Eventually, Vankor became the main producing asset for Rosneft.

Bogdanchikov’s crowning glory came in 2006 when Rosneft undertook a bold IPO (initial public
offering) and raised $10.6 billion in the international equity markets. The move was fraught with risks because
the controversies surrounding the acquisition of YNG had lingered and Rosneft was seen as one of the least
transparent companies in Russia. Anticipating the turbulence, Bogdanchikov hired Peter O’Brien, a veteran of
Morgan Stanley’s Russia perati ns, to take charge of Rosneft’s IPO and gave him free rein to navigate the process.
The successful culminati n f the IPO, however, signaled the end of the Bogdanchikov era. The historically
good relationship between Rosneft CEO Bogdanchikov and the chairman of the Rosneft Board, Igor Sechin,
showed fissures. Sechin saw Rosneft as a tool of foreign policy and was of the opinion that it should invest in
the Middle East, Latin America, and the Arctic. Bogdanchikov was of a different persuasion. He had publicly
remarked, “We have a strict rule not to buy assets with an internal rate of return of less than 20%. There aren’t
that many overseas plays that meet that requirement…. We have no intention of buying assets that would lower
those metrics. We don’t need deals that bring nothing except press items.”14 Although Bogdanchikov put on a
brave fight to keep his job, it was clear that his role had been reduced to a ceremonial one, with the chairman of
the b ard taking a keener interest in the operations of the company. Bogdanchikov was wistful at the prospect f
leaving the company that he had essentially built, remarking to a journalist, “I have a special relationship to
the company. Sometimes I can’t sleep at nights. I just can’t sleep. Then I turn on my computer—I have a special
program on it—and I can see the picture from observation cameras set up all over the country. And I just sit
there and watch what’s going on at Vankor or some other place.” 15 Bogdanchikov was replaced in 2010 and Igor
Sechin became the CEO of Rosneft while retaining the chairmanship of the board.

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The Igor Sechin Era: Rosneft’s Second Act
The Deputy Prime Minister of Russia, Igor Sechin, was an enigmatic character inPostpoliticswhoepa was intertwined with that of Russian President Vladimir Putin. He had worked closely with Putin during the St. Petersburg era when Putin served as the mayor of the city. Unlike his predecessors at Rosneft, he was not an oil industry veteran but a political operative who had a murky past that might have included stints in Ang la and Mozambique in Russia’s
espionage service as a translator. He was one of the siloviki, the p werful nes, who believed in restoring Russia to the greatness of its past by building stronger institutions that w uld all w the State to retake reins of economic power in the country. He belonged to the faction that was pitted against Dmitry Medvedev whose presidency had focused on privatization and the implementation of economic reforms to open markets to competition. The appointment of Sechin
16

as the CEO cemented his grip on power in multiple ways. Since he was the only person to run a large, state-controlled, oil and gas company while at the same time serving as the deputy prime minister, he was able to influence the strategic direction of not just Rosneft but the entire Russian oil and gas sector. The path, however, had not been that easy.

Sechin had demonstrated his political savvy when the Putin government was w esting control of
Yukos back from the oligarch Mikhail Khodorkovsky. He had deftly engineered the deal that culminated
in the auction of Yukos assets and their subsequent purchase by Rosneft. Sechin denied any str ng-arm
tactics and reiterated that “Rosneft bought these assets. It didn’t repossess anything from any ne. It paid a
huge sum. The valuations were conducted according to market methods… nothing was received as a
gift.”17 While the Yukos deal had laid the foundations for the rise of a Russian oil and gas giant, the TNK-
BP deal cemented the ascent of Rosneft. It was to become one of Sechin’s signature victories.

TNK-BP was set up as a 50-50 Russian joint venture between BP and Alfa Axis Renova Partners (AAR), a
banking consortium that controlled TNK assets. The asset ortfolio comprised six onshore prospects, five refineries, a
network of 2,100 petrol stations, and 9.4 billion barrels of proven reserves, including the supergiant Samotlor. BP
had originally contended that the fields were oorly managed and some were beyond redemption.
Internal estimates suggested that the value f the fields was close to zero. BP had tried to negotiate a low-
ball offer, but AAR was not willing to budge and maintained that the assets were quite productive and it
was just a question of whether BP had the ability to pr duce them. After a series of tough negotiations, BP
decided that it had more to lose if it walked away from the deal and, hence, had invested $6.8 billion in
establishing the joint venture in 2003.

Relations between the partners started to deteriorate almost right from the beginning. While indulging BP
its contractually guaran eed right o management decisions, the oligarchs behind AAR Partners were never too
thrilled by what they saw as excessive reliance on systems and processes of corporate governance. They
demanded more by way of dividends and did not seem to appreciate retained earnings that would be reinvested
in the company. They also felt that BP was treating them as a junior partner, the cumulative result of several
perceived slights and misunderstandings. The acrimony was accentuated by news that BP was aligning its
interests with Gazprom Chief Alexei Miller to buy out AAR with the support of the Russian government. After
a long drawn-out period of Kremlin intrigue, BP thought that the matter was settled when it agreed with AAR to
appoint an independent Russian CEO to run the company and to float 20% of shares to the public, giving AAR
control of the venture. However, things started to sour again when BP approached Igor Sechin to explore a
venture that would jointly develop the Arctic shelf. This would be a partnership between BP and Rosneft and
not involve the T K-BP entity. AAR did not appreciate this move and challenged its legality, winning a court
decision in its favor. The rancorous situation was settled when Rosneft offered to buy out BP’s interests in
TNK-BP for $22 billion plus a 20% stake in Rosneft, a deal totaling $28 billion. BP was required to vote its
Rosneft shares in c ns rt with the Russian government. AAR also sold its share to Rosneft for a cash price of
$27.7 billion. Ig r Sechin had maneuvered his way to strike a deal by raising suspicions in both camps, BP and
AAR, about the c ntinued support of the Russian government. Reflecting on the success, Sechin remarked,
“You need to understand how challenging that job itself was and how different the interests were. Everyone was
standing their ground. We did have some rough moments and we did have some discussions but that did not
lead to any tensions in terms of personal relationships.” 18 It had taken only a decade for the promising BP-TNK
partnership to disintegrate. Commenting on the fate of BP in Russia, President Putin remarked, “One who has
been beaten is worth two who haven’t.”19

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 The relatively progressive Dmitri Medvedev administration had demandedPostthatallexecutiveswho
The acquisition of TNK-BP and the alliance with BP marked a crucial turning point at Rosneft, and
Sechin was able to capitalize on the momentum by unleashing important changes within the company. The
TNK-BP deal had brought with it a cadre of well-trained professional managers and technical experts who
were immediately pressed into service at fairly high levels with the company. Given their exposure to
global be practices at the BP-operated joint venture, the induction of this new talent signaled that Rosneft
was serious in pur uing its globalization goals.

Igor Sechin had already set his eyes on the next big prizes by then: the Arctic, where R sneft had extensive
acreage, and the Bazhenov shale in Western Siberia, which was believed to hold enormous tight oil deposits. Given
the murkiness of the protracted battle for BP-TNK assets, Sechin sought to burnish Rosneft’s credentials
in the international markets first. He methodically emphasized that the deals that Rosneft had completed
were all above board and market-based. However, he was faced with more in-fighting at home.

simultaneously hold political appointments must relinquish the chairmanship of the companies that they were
running. Soon Sechin was forced to settle for the title of CEO. Gazprom, Russia’s state-controlled gas giant, seemed
to be gaining greater support from the Medvedev government. Sechin and Alexei Miller, the CEO of Gazprom, had a
very public disdain for each other. Miller considered Sechin to be nothing more than a political apparatchik who had
risen to the top of the Russian oil and gas industry s lely based on his connections. These personal animosities
bubbled to the surface when Rosneft was repeatedly denied permission to export its very nominal gas production.
Gazprom, under presidential decree, was the only company with the license to export gas from Russia, and it was not
about to concede its monopoly position that easily. Although Rosneft was effectively stopped from leveraging the
economic value of its gas production, Gazprom had succeeded in entering the oil business with the acquisition of
Sibneft, a renationalization roject initiated by the Putin government. Sibneft, which was owned by the oligarchs
Berezovsky and Abramovich, was acquired by Gazprom for $13 billion, allowing Gazprom to become Russia’s
fourth largest oil roducer. Competitive parity between the two companies remained an elusive target at home. It was
against this backdrop that Rosneft initiated its globalization strategy.

The Globalization of Rosneft: Sechin’s Third Act

While the foreign placement of Rosneft shares, the acquisition of TNK-BP, and the subsequent ownership
participation of BP in Rosneft were all key waypoints in the journey toward globalization, the Arctic deals
engineered by Sechin were widely seen as the moves that clearly cemented Rosneft’s intent. No other NOC had
managed to successfully internationalize its operations, especially along the same scale as Rosneft. Sechin made
bold moves to rewrite that his ory. Once he TNK-BP deal had been sealed, attention shifted to the Arctic, widely
seen as the next frontier. Sechin engineered a strategic alliance with ExxonMobil, Rosneft’s partner in the Sakhalin-I
project. The partnership agreement created a new ventures organization that would explore in the Arctic waters and
the Black Sea. ExxonMobil received favorable tax treatment, a seat on the board of Rosneft, and access to
extraordinary reserves f il and gas that the Arctic region was thought to contain. In return, Rosneft gained access to
advanced ice-class drilling rig technology, state-of-the-art complex project execution abilities, project financing and
investment, a $450m Arctic research center in St. Petersburg, and the prospect of joining ExxonMobil in overseas
exploration projects. ExxonMobil agreed to a minority control position holding 33% of the venture. Robin West, of
PFC Energy, described the tie-up as a “marriage made in heaven. It’s the internationals that need access to the
resources. The national oil companies need access to technology and management skills. One of the real competitive
advantages of the majors is they know how to run large, complex projects. And the projects in Russia are going to be
huge.”20 The terms of this agreement seemed to suggest that Rosneft was well on its way to globalization, and even
had the support of established super majors to help navigate the treacherous path.

R sneft’s frame of reference changed dramatically in 2014 when the United States government, along with EU
nati ns, imposed economic sanctions on Russia following Russian actions in Ukraine and the annexation of Crimea.
Igor Sechin was one of a handful of individuals who were declared targets of personal sanctions and denied travel
permits to visit the United States. The imposition of sanctions coincided with the triumphant news from the Kara Sea
where Rosneft and ExxonMobil had completed drilling an exploratory well that had provided promising results.
Based on the analysis from this well, it was estimated that the Universitetskaya field contained 100 metric tons of oil
(over 700 million barrels) and 340 billion cubic meters of natural gas. Commercialization

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 of this field would have to await changes in the sanctions regime and, more fundamentally, an increase in
energy prices to make it more economical. In commenting on sanctions and the prospect of delays in the Kara
Sea projec , Sechin had stated, “If Exxon is forced to stop its work, it does not mean that we will no longer
cooperate with Exxon. Of course, we will do it on our own and attract necessary technologies and different
partners who don’t have limitations on cooperation. Unlike politicians, corporations act on the basis of
contracts. The contract for the development of the deposits in the Kara Sea is signed by Rosneft and Exxon. It
seems to me that’s enough for understanding. Here in the Kara Sea, we work through our operating company in
which the shareholders are Rosneft and Exxon. There isn’t anyone else there.” 21 This seemed to underscore the
extent to which the two partners were committed to the project. Reflecting the continuing spirit of cooperation,
Rosneft and ExxonMobil had jointly bid for licenses in Mozambique despite the prevailing U.S. sanctions on
Russia. Some analysts saw this move as a potential means of continuing to build links and grow resource
portfolios while developing goodwill and working relationships while sanctions remained in effect.
reserves in the Orinoco belt. “This tentative MOU is a major step inorglobalizing Rosneft’s business. If Rosneft joins the project, it will gain access to the rich deposits of the Orinoco Petroleum Belt, a resource base that could become
an important driver of additional growth in the compan ’s output after 2015 and transform Rosneft into a major player in this very promising region of Latin America,” 22 remarked Eduard Kudainatov, Rosneft’s president, upon signing
the deal at the Kremlin. It remained to be seen whether these developments in the global arena would allow Rosneft to cut its dependence on Euro ean revenues, which accounted for slightly over 50% of its total revenues. It appeared
like Rosneft was going after every small increment that could help it reduce its reliance on Europe. It was in this context that it had announced its pivot to Asia, a region that accounted for a mere 12% of its sales.

Rosneft had obtained some international exposure in the upstream end of its value chain by virtue of its
acquisition of the assets of TNK-BP. The production operations in Vietnam ep esented a very small footprint in a gas
condensate and transport operation. The Cardium project in Canada, a tight oil project, was a joint venture
with ExxonMobil (Canada) that was in the development phase. Additi nal pr jects were ongoing in Algeria
and Kazakhstan, both in fairly early stages of the exploration pr cess. R sneft had also signed a memorandum
of understanding for a 40% stake valued at $1.1 billion with PDVSA f the j int development of heavy oil

Pivoting to Asia
Because of falling oil prices, combined with the grim prospects of a sanctions-hit Russian industry, Rosneft felt
it prudent to woo partners in Asia, both as investors as well as potential buyers. China and India were important
consumer countries, although they too were being buffeted by the economic slowdown that was crawling across
emerging markets. Rosneft signed a preliminary deal with China’s CNPC (China National Petroleum
Corporation) that offered a 10% in erest in he huge Vankor field in northern Siberia. “Overall, we take a
cautious approach to letting in our foreign par ners, but we of course set no restrictions for our Chinese
friends,”23 Putin had said in sounding his approval of the overture. This was one of many similar moves that
Putin had ordered to dampen the impact of Eur pean and U.S. customers who were legally bound by the
economic sanctions that were in place. China had l ng eyed a p tential alliance to gain access to Russian
reserves and, hence, the invitation to CNPC seemed liked a sure bet. Although China had a strong economic
rationale for the investment, history showed that sometimes politics trumped economics when it came to
relationships between the two neighbors. Despite the clear economic rationale, a similar deal for exporting gas
to China had been buffeted by changes in both economic and political contexts. CNPC and Rosneft had not
been able to agree on the valuation of the stake, and the invitation languished in uncertainty as 2015 drew to a
close. Sechin, however, seemed much more sanguine. “We have the goods. Asian markets are prepared to pay
good compensation for that and this is the reason we are directing our commodities there. We have big
consumers there, and the growing Asia Pacific regi n markets are very attractive for us.” 24

Turning its attention to India, Rosneft had engineered a deal with India’s national oil company, ONGC (Oil
and Natural Gas Corporation) for a 15% share of the Vankor field for a reported price of $1.5 billion. ONGC and
Rosneft were partners in the successful Sakhalin-I project which was operated by ExxonMobil, which held a 30%
stake. The preexisting relationship might have eased the Vankor deal. Sechin saw this as a victory, albeit a small one,
because it added legitimate Asia Pacific credentials to Rosneft’s portfolio of business relationships. In late 2014,
Rosneft had also concluded a deal with Essar, an Indian refining group, for a 49% stake. The deal

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 was motivated by the need for an assured crude supply that the Indian partners desired (rumored to be
around 400,000 barrels per day), and a secure market for Rosneft’s production, a primary goal for the
Russian par ner. In August 2015, Rosneft announced plans for a giant cracker complex to be established in
Southea tern Ru ia along the Sea of Japan. It had entered into a joint venture with Mitsui, the Japanese
trading conglomerate, and Far East Petrochemical as the investment vehicle to realize its integration
aspirations. Feed tock for this $37 billion complex would be supplied by Rosneft’s Eastern Russian
refineries. The outputs fr m this c mplex, primarily ethylene, propylene, and butadiene, would be shipped
to Southeast Asian markets. It was expected to come online by 2020.

The Challenges Ahead

Geographic realignment of Rosneft’s preferred output destinations, resource plays, and partners were all key
elements of the strategy that Sechin had to contemplate as 2016 dawned. While these decisions would certainly
have long-term consequences for the company, there were several othe s of an immediate nature that demanded
attention. Rosneft had a very significant debt overhang, and the servicing costs on that debt were rising. With
limited prospects for immediate recovery in oil prices, Rosneft had to seek alternative sources of funding to
keep the company stable. Its attempt to secure a rescue package from the Kremlin was rebuffed when Putin
suggested that Rosneft ought to look internally at its own operations, run things m re efficiently, and live within
its means. Rosneft caught a break when some of its key customers, such as China, were willing to prepay part
of their contracts as they negotiated better prices. Thus, Rosneft had been able to meet its debt obligations.
However, it reported that profits had dropped by 16% in the third quarter of 2015, signaling grim times ahead.
Its capitalization on the London Stock Exchange had dropped to $38 billion compared to $56 billion when it
acquired TNK-BP. It had to sell 20% of its Eastern Siberian field, Taas-Yur akh, to BP at $2/barrel of reserves
against the $4.50/barrel of reserves that it had paid to acquire TNK-BP. BP’s resident, David Campbell, was
obviously delighted at the deal and remarked, “I am pleased we have been able to conclude this transaction.” 25

The threat of privatization still loomed on the horizon. Saudi Arabia had announced that it was exploring
the partial listing of its flagship oil and gas c mpany, Saudi Aramco, to rein in the declining fortunes resulting
from low oil prices and weak demand. Russia was also reviving talk about a sale of its ownership position in
Rosneft for the same reasons. Rosneft, after all, had experienced a much steeper fall than most its peers after it
was initially listed and was trading at less than 50% of its 2006 initial listing price. Russian Finance Minister
Anton Siluanov said that the Russian government wanted 500 billion rubles ($6.68 billion) for a 19.5% stake in
Rosneft.26 Even if such a sale were to go through, the government would still retain control of the company
since it would still hold 50% plus one share of the company. However, it could raise new complexities for Igor
Sechin and the Rosneft hat he had helped shape.

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 Endnotes
1 Anonymous. 2014. Russia’s Rosneft to Continue Arctic Oil Drilling Without Exxon. The Moscow Times. October 24.
2 Poussenkova, N. 2007. Lord of the Rigs: Rosneft as a Mirror of Russia’s Evolution. Paper presented at the James A.
Baker III Institute for Public Policy at Rice University, Houston, TX. March 2007.
3 Gustafson, T. 2012. The Wheel of Fortune: The Battle for Oil and Power in Russia. The Belknap Press of Harvard
University: Cambridge, MA.
4 Poussenkova.
5 This segment of the case study borrows heavily from Gustafson, T. 2012. The Wheel of F rtune: The Battle for Oil
and Power in Russia. The Belknap Press of Harvard University: Cambridge, MA.
6 Ibid.
7 Henderson, J. 2012. Rosneft—On the Road to Global NOC Status? Working Paper 44. The Oxford Institute for
Energy Studies. University of Oxford.
8 Goldman, M. 2008. Petrostate: Putin, Power and the New Russia. Oxford University Press: New York, NY.
9 Ibid.
10 Anonymous. 2004. Russia’s State-Owned Rosneft Bought Baikal Finance G oup for $350. December 29. http://
cbonds.com/news/item/306146
11 Anonymous. 2005. Rosneft Backed Up Baikal Finance Group at Yuganskneftegaz Auction, The Annual Report Says.
Kommersant. August 26.
12 Gustafson.
13 Ibid.
14 Ibid.
15 Ibid. Copy
16 Brown, H. 2009. Igor Sechin: The Kremlin’s Oil Man. Forbes. November 11.
17 Clover, C., Gardner, D., and Belton, . 2010. Russia: The Third Man. Financial Times. June 21.
18 Armitage, J. 2015. Igor Sechin: The Oil Man at the Heart of Putin’s Kremlin. The Independent. February 13.
19 Anonymous. 2011. How Bad is BP?: Doing Deals in Russia. The Economist. January 22, pp. 16-18.
20 Crooks, Ed., and Courtney, W. 2011. Measured A roach Pays Off for Exxon. Financial Times. August 31.
21 Anonymous. 2014. Rosneft CEO Speaks on Arctic Find with Exxon, Sanctions. BloombergBusiness. October 3.
22 Anonymous. 2015. Rosneft, PDVSA Sign Deal for Venezuela Heavy-Oil Block. Latin American Herald Tribune.
December 15.
23 Farchy, J., and Hille, K. 2015. Moscow Offers Bigger Stakes in Energy Projects to Lure Chinese. Financial Times.
May 5.
24 Anonymous. 2015. Rosneft Spells Out Its Asian Piv t Strategy. Livemint. September 9.
25 Anonymous. 2015. Russia Oil Giant Selling Assets. The New York Times. October 5.

26 Bershidsky, L. 2016. Russia and Saudi Arabia Bet on Risky Oil IPOs. BloombergBusiness. January 8.

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Exhibit 1a. Comparison of Rosneft to Its Peers—Financial Metrics

Market Revenues Rev/Emply
Capitalization (billion (Million Debt/ Asset
mpanyC Employees (billion USD) USD) ROA ROE ROI USD) Equity Turns
International Oil Companies
Royal Dutch Shell 93000 99,330 265 0.56 1.16 1.79 2.849 0.36 0.79
ExxonMobil 73,500 366,436 269 4.71 9.36 10.79 3.660 0.23 0.78
BP 79,800 47,834 223 -2.37 -6.21 -5.46 2.794 0.55 0.83
Mean 82,100 171,200 252 0.97 1.44 2.37 3.10 0.38 0.80

National Oil Companies

Petrobras 78,470 26,457 97 -3.19 -9.31 -0.3 1.236 1.93 0.37
Gazprom 459,500 51,016 95 1.11 1.66 11.09 0.207 0.27 0.39
Rosneft 261,500 50,553 70 3.86 12.33 11.34 0.268 1.15 0.56
PetroChina 548,355 12,151 368 4.51 9.28 10.16 0.671 0.46 0.96
Sinopec 351,019 78,482 311 2.24 5.12 6.24 0.886 0.38 1.39
CNOOC 19,681 50,241 44 9.37 16.69 16.35 2.236 0.36 0.43
Mean 286,421 44,817 164 2.98 5.96 9.15 0.92 0.76 0.68
or

Source: Mergent Online. Data as of year-end 2015 for all firms except Gazprom and PetroChina where 2014 data is reported.

Exhibit 1b. Comparison of Rosneft to Its Peers—Operational Metrics

Hydrocarbon Production per Production Reserves replacement
Company reserves (boe) day (mboe) costs ($/boe) ratio (%)
Rosneft 129 5.1 4 158
ExxonMobil 79 4 16 102
Royal Dutch Shell 65 3.1 15 76
BP 54 3 13 90
Chevron 49 3.2 18 98
Petrobras 46 2.6 14 119
PetroChina 40 4 14 104
Lukoil 28 2.3 6 103
Eni 23 1.6 12 122
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Exhibit 2. ricalHist Performance of Rosneft (In US$ billions)

Metric 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006
Operating Revenue 70,661 97,817 143,419 101,703 83,923 63,047 46,826 69,013 58,222 33,102
Net Income 4,883 6,186 16,774 11,952 9,815 10,400 6,514 11,080 12,862 3,533
Cash flow 11,195 14,558 28,904 19,195 16,617 15,997 10,864 15,063 16,148 5,171
Total Assets 132,240 155,283 230,100 130,742 104,888 93,829 83,232 77,513 74,805 46,790
Total Equity 40,188 51,210 96,825 76,450 64,262 55,504 45,537 38,903 28,440 21,875
Employees 261500 248900 228000 166110 160837 159771 n.a 161,912 106,000 74,200

ROE % (PBT basis) 15.71 16.59 20.07 20.20 19.58 23.99 18.71 33.72 62.55 19.04
ROCE % (PBT basis) 7.83 10.40 11.26 13.76 14.31 16.92 13.07 24.20 36.56 13.64
ROA % (PBT basis) 4.77 5.47 8.45 11.81 11.99 14.19 10.24 16.93 23.78 8.90
Profit Margin % 8.93 8.69 13.55 15.18 14.99 21.12 18.19 19.01 30.55 12.58
Gross Margin % 89.71 91.01 90.80 89.67 88.97 96.22 95.96 95.74 97.24 96.01
EBITDA Margin 22.68 19.34 20.28 20.14 24.13 30.29 28.78 24.64 39.57 21.94
EBIT Margin % 13.75 10.78 11.82 13.01 16.03 21.41 19.49 18.87 33.92 16.99
Enterprive value /EBITDA 4.41 4.89 4.96 5.70 4.37 4.97 8.15 3.67 5.52 n.a.
R&D Exp. / Sales % 0.25 0.35 0.36 0.75 0.48 0.70 0.69 0.36 0.28 0.58
or

Proved Reserves (th.boe) 34,465,000 33,977,000 24,163,582 23,351,558 22,764,611 22,858,303 22,307,304 21,698,567 20,089,087
Reserve Replacement % 124 156 182.1 162.2 89.8 163.4 171.8 300.8 273.1
Crude oil production (th. 4,116.0 4159 4196 2,439 2,380 2,322 2,182 2,121 2,027 1,596
Gas production (mcmd) 104 94.7 56.53 44.9 35.0 33.8 34.7 33.8 43.0 37.2
Hydrocarbons (th. Boed) 5,159.0 5,106.0 4,873.0 2,702 2,586 2,521 2,386 2,320 2,281 1,815
Source: Mint Global, Rosneft Annual Reports, and Rosneft’s Analyst’s Databook.
11
 Exhibit 3. Rosneft’s Key Assets Across the Globe

Source: Rosneft Annual Report 2014.

12 A08-16-0007
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